Kevin Greenard: Using your stock portfolio to make donations

Kevin Greenard

With every new client we work with, we will have a discussion regarding making charitable donations. This is especially the case for clients who have a non-registered investment portfolio. For those that do make charitable donations, we have a discussion regarding the most tax efficient way of making those donations.

In our July 3, 2020 article “Accessing and sharing your tax information”, we noted how we are able to assist clients proactively by reviewing their tax information on the Represent a Client section of My Account with Canada Revenue Agency. The Represent a Client access allows us to see if a client has made significant donations in prior year(s). This will typically result in a discussion regarding whether this was a one-time donation or more periodic. For those that wish to give annually, we work with them to create a planned giving and tax efficient strategy. We will also mention that if they plan to do a larger one-time donation in the future to discuss this with us to pursue all options.

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Donations of Public Securities

A donation of appreciated public securities to a Canadian registered charity produces two tax savings. These are: 1) a tax credit that can be up to the highest marginal tax rate; and 2) no capital gains tax on the disposition. By contrast, a donation of cash is eligible for a single tax saving, the donation tax credit.

There are a number of publicly traded securities that qualify. The most common types are appreciated stocks and trust units, but it is possible to donate bonds, certain publicly traded contracts, and shares or units in mutual funds.

These tax savings may increase the amount you can afford to give, or simply reduce the out of-pocket expense of your gift. Corporations (which receive tax deductions, not credits) are also eligible for this incentive.

Procedure to Transfer Shares

We believe that many individuals do not consider stock transfers as they don’t know where to begin. We assist our clients with the paperwork to initiate the transfer of publicly traded shares.

The transfer of shares is best made electronically from the donor’s investment account to the charity’s brokerage account. To transfer securities electronically, an investor will generally have to provide the financial institution with appropriate written instructions that may be referred to as a letter of authorization (LOA). Different firms may have additional or alternative requirements. Most advisors will be able to assist you in drafting your LOA. Generally, the LOA includes the following:

  • Addressed to the firm holding your securities
  • Instructions to transfer the number of shares (i.e. 100 shares) of a company (i.e. ABC Company)
  • Your investment account number
  • The charity or foundation name and their account number
  • The address of the charity, administrator and contact information, if known
  • Signed and dated by you, the account holder

We have seen some situations in the past decade where clients would like to donate shares to a smaller charity that did not have an investment account set up. In order to facilitate the receipt of donation of securities, the charity must have an investment account.

Most well-established charitable organizations have an account with a financial institution and accept donations of securities (i.e. publicly traded shares or mutual fund units) – known as a gift in kind. Charities have realized that having an investment account is necessary to facilitate another method of receiving donations. Most of our large client donations to charities are facilitated through the transfer of shares of publicly traded companies. If certain types of capital property, including publicly traded securities, are donated to a registered charity, then it is eligible for an inclusion rate of zero on any capital gain realized on such gifts.

Let’s assume that an individual owns 1,000 shares of a company with significant unrealized gains. The individual may choose to donate only a portion of these shares, say 100 shares. Alternatively, the individual may decide to donate all their shares over a number of years. This provides the ability to support a charity on an ongoing basis while also dealing with a security that has a significant unrealized gain.

As a Portfolio Manager, we are periodically rebalancing individual holdings within a portfolio to manage risk. If a position has spiked up considerably, and becomes overweight in the portfolio, then it is prudent to reduce the position. Rather than sell the position in a non-registered account and trigger a significant capital gain, you could simply donate the portion that you would naturally rebalance. By combining both, you are reducing portfolio risk and making your planned donations at the same time.

Most financial firms will complete in-kind security transfers to a registered charity on a complimentary basis (with no fees or commissions). If you are planning to sell some stocks, and if you are also planning to make donations, it makes sense to consider contributing shares in-kind to your favourite charity. It is important to note that certain other types of property can be donated to charity and have the same tax preferred treatment. It is best to check with your tax advisor and Portfolio Manager prior to making the donation.

The process of donating securities in-kind takes a bit of time, unlike an online cash donation where your cash is transferred instantly and a receipt is emailed to you within five minutes. It is for this reason we ask clients to not wait until the very end of the year. Typically, when we are doing rebalancing trades, as a result of stock appreciating, we use this timing to suggest clients make their in-kind donations. This time frame will fluctuate from year to year. For all our clients that do this regularly, we will already have the template files for the charities that they support. For example, if a client annually likes to support six different charities, we will have notes on the approximate dollar amount they wish to give annually. This information gathered ahead of time enables us to be proactive in suggesting which holdings to donate and the best timing for the donation. In addition to rebalancing trades, we will also look at those positions with the largest percentage gain in the portfolio as a candidate for a donation.

Illustration

This table compares the tax consequences of donating cash proceeds of sold securities versus donating securities in-kind. The marginal tax and tax credit rates are assumed to be 50% for illustration purposes.

 

Sell Security & Donate Cash

Donate Security 

Value of security/donation

$10,000

$10,000

Cost of security 

$5,000

$5,000

Taxable capital gain @ 50% 

$2,500

$0

Tax on gain @ 50% 

$1,500

$0

Tax credit @ 50% 

$5,000

$5,000

Net tax savings 

$3,500

$5,000

As you can see from the above illustration, this individual would be $1,500 ahead on a $10,000 donation if they asked their Portfolio Manager to assist them with their donation. There is no additional charge to our clients for this service and we are happy to help our clients donate more to charity.

Kevin Greenard, CPA CA, FMA, CFP®, CIM®, is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138 and visit greenardgroup.com

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