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It has been more than a decade since the federal government embarked on a course of making it easier to donate significant amounts to charities, with changes ranging from increasing the annual basic limit of donations from 20% to 75% and, more importantly, over time introducing many rules to facilitate in kind transfers such as stock, stock options and certain types of real estate.
While major gifts often require sophisticated tax planning involving both the donor and donee, there are some basic types of gifts of a small scale which would be beneficial to both donor and donee. Indeed, smaller charities (and those who would donate to them) often miss out on some very basic benefits simply because the organizations are not familiar with the gifting options available.
We were considering, in particular, the situation where a donor would like to donate listed stocks to a charity. The tax rules have for many years exempted from capital gains tax the gain on a transfer of listed stocks to a charity, thus allowing donors to avoid capital gains tax while still receiving a donation receipt for the fair market value of the shares.
Consider the portfolio of a “small” investor who among other things has shares with an adjusted cost base of about $14 a share. They are now worth about $60 a share. He also has many other “safe” investments, blue chips, which he had held for about ten years including other bank stocks and oil stocks. This year he has some cash flow problems but did not want to cut back on donations to some of his favourite charities. He would normally give between $1,000 and $2000 to each of a half dozen organizations, including his church.
A gift of twenty shares in this example would be worth about $1,200. We use this simple example to illustrate the gifting options.
Example 1 Suppose that in order to give $1,200, he sold twenty shares of the stock. If he did this, we would get the following result. Cost of stock for tax purposes (20 times $14) $280 Proceeds of sale $1,200 Capital gain $920 Taxable capital gain (50% of full gain) $460 Tax liability (46% of $460) $212
Assuming he gifted a full $1,200 to the charity, the value in cash of the tax credit would be $552. Thus, after the gift had been made, he would have $340 to offset other tax liabilities.
Example 2 All the facts are the same but the donor gifts twenty shares to the charity. The capital gain is exempt from tax: Cost of stock for tax purposes (20 times $14) $280 Proceeds of sale $1,200 Capital gain $920 Taxable capital gain $0 Tax liability $0
The value of the gift of course is still $1,200, but he ends up with tax credits of $552; and equally important, he has no cash flow problem because he needn’t make up any shortfall in cash to give the charity the $1,200.
The major problem we have found is that because many charities do not have investments of their own, they do not have a brokerage account to which the donated stock can be gifted. As a consequence some charities simply do not want to take the gift of stock. This is not a unique situation but it helps to explain the genesis of the criticism that smaller charities do not benefit from the incentive. The fact is that many would and could benefit if they were aware of the options and took steps to accommodate different types of gifts.
There is no doubt that a programme which encourages the smaller charities to become familiar with the incentive and to use it to enhance gifts and benefit donors would be desirable. It is not only the so-called “rich” who own appreciated shares. More modest givers can get significant tax benefits for comparatively modest gifts if they have the opportunity and if the process were facilitated by the organizations which might get the gifts.
*A version of this article was originally published in the December 2011 issue of Canadian Not-for-Profit News