By Maria Kinkel

This article explains the benefits of donating stocks.

Are you considering a cash donation to a charitable organization? Do you own stocks in a corporation which you are contemplating cashing in to fund the charitable donation? If the answer to these questions is “yes,” there are potential tax benefits to directly donating the stocks to the charity rather than selling them and giving a cash gift from the proceeds.

What are the Tax Consequences of Selling Appreciated Stocks?

When the selling price of a stock is higher than the amount at which they were bought, the stock is said to have appreciated, which essentially means it has increased in value. The amount of the increase in value between the purchase price and the selling price in the tax world is referred to as a capital gain. Under the Income Tax Act (the “Act”), when you sell appreciated stocks, half of the capital gain must be added to your taxable income for that given year. For example, if you sell stocks worth $50,000 which you purchased for $10,000, $20,000 must be included as taxable income for you in the year the stocks were sold (half of the $40,000 increase).

What are the Tax Consequences of Directly Donating the Appreciated Stocks to a Charity?

In order to promote charitable giving, the Act provides tax incentives when stocks are donated directly to charitable organizations. Where the stocks are directly donated, the Act allows the capital gain to become tax exempt. In addition, the Act entitles the donor of the stock to a charitable receipt from the charitable organization in the amount of the fair market value of the stocks donated. The following example illustrates the potential benefits of these tax rules.

  Sell Stocks and Make Cash Donation from Proceeds Donate Stocks Directly to Charity
Purchase Price $10,000 $10,000
Selling Price $50,000 $50,000
Capital Gain (Selling Price Less Purchase Price) $40,000 $40,000
Taxable Capital Gain (50% of increase in value) $20,000 NIL
Income Tax Payable* $9,200 NIL
Donation to Charity $40,800 $50,000
Tax Credit to Donor** $16,320 (40% of donated amount) $20,000 (40% of donated amount)

*highest tax bracket assumed
**Ontario residency assumed

You will note that in the example above, donating the stocks directly to the charity results in a much higher net benefit to the donor as well as a larger gift to the charitable organization. The gift to the charitable organization increases by $9,200 (no taxes deducted from proceeds of sale of shares) and the net benefit to the donor increases by $3,680 (no taxes payable on the capital gain and larger charitable receipt because of the larger gift to charity). This is a net overall benefit between donor and charity of $12,880.

Maria Kinkel is a lawyer with the firm Cline, Backus, Nightingale, McArthur LLP, in Simcoe, Ontario. Maria attends Grace Free Reformed Church in Brantford, Ontario.

The material presented in this article is intended for information purposes only and does not constitute legal advice.

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