Donation of appreciated stock to charity is one of the best and easiest ways of avoiding a big tax burden. Each year the Canada Revenue Agency has been tightening and closing loopholes which have been used by taxpayers to avoid paying taxes. Donation of securities or mutual funds directly to charities is always an attractive option for high net worth individuals finding some tax-reduction strategies. Some of the reasons why people donate stocks to charity could be stocks having appreciated enormously after having purchased them, a surge in the value of a holding that causes an imbalance to your portfolio, reducing your tax payments, or you want to change investment priorities. In almost all these instances, an individual will be looking at a donating stock to charity tax deduction strategy to help in reviewing their investment portfolio.
Donating stock to charity is effectively one of the smart tax reduction methods available since you can avoid sending your money to the CRA. Generally, the CRA will not levy capital gains tax on publicly donated securities which makes you fare way better financially if you give the securities directly rather than selling the securities and giving the cash. However, this method is not widely accepted and used. Only a small number of people who own appreciated assets including stocks, bonds and mutual funds have donated these assets to charity. Having to sell first and then donating the proceeds will simply mean you are giving twice – first to the tax authorities and then to the charity organization.
It’s all about giving more
Donating stock to charity is actually about giving more – about 20 percent more – compared to selling the stock and making the donation in cash. It is all about avoiding capital gains taxes. With the maximum capital gains tax rate capped at 20 percent for long term holdings in a taxpayer’s portfolio, you will be essentially giving up to 20% more to charity. By donating stock directly to a charity, you will not be paying any capital gains tax. Furthermore, you are allowed to deduct the full fair-market value of the donated asset from your income as per the regulations of the CRA.
Keep in mind that appreciated assets may also include assets not publicly traded such as restricted stock and cryptocurrencies. The securities must be held in non-registered portfolios which effectively means that the securities must not be held in registered, tax-sheltered holdings such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
Reduction of Future Capital Gains
A majority of investors have their favorite stocks that they would want to hold for the longest possible time. The continued appreciation of their stock’s value affirms their strong belief in it. However, the appreciation of the stock will lead to substantial capital gains at the point of sale. As a result, the donation of some of your appreciated shares will make a lot of sense. You can move ahead to buy new shares to help in resetting your cost basis using the current but higher price. In effect, you will be in a position to reduce capital gains tax if the stock appreciates in value in the future.
Perform a Health Check Your Portfolio
Your stock portfolio needs regular attention to keep it healthy. It can be likened to the effect of good diet and regular exercise on your overall health. You need to undertake a review of the gains and losses of your investments so that you know when the time is ripe to rebalance your portfolio to maximize performance and optimize for risk. Donating stock to charity offers a great opportunity to perform a health check on your portfolio. Learning more about the use of a good donation strategy will help in putting capital gains to philanthropy work. It is recommended that you work with a financial advisor to assess and improve your portfolio.
Donation of stock will lead to review of concentrated positions in your portfolio and commit them to a charitable organization. Some of the concentrated positions arise due to personal significance such as having worked at one company for 20-30 years. Donation to charity allows an individual to transfer the asset that has emotional attachment to a noble charitable works while at the same time reducing their capital gains tax.
There are donor-advised funds that can help people who are interested in donating stock to charity tax deduction but fear that it will demand a lot of paperwork and phone calls to relevant authorities. Alternatively, the chosen charity may not be in a position to accept an appreciated stock donation. They take away the hassle of completing the process from the individual donating their stock.
The donor-advised funds avail the option to make a single donation that is distributed according to your plan rather than donating multiple blocks of stock to multiple charities. It makes it easier since you will use a single form when filing tax returns. Yet another advantage is that you have time to decide which charity is going to receive your appreciated stock.
The donation of stock to a donor-advised fund also allows you to make a deduction for the current tax year. Eligibility for charitable deduction for a tax year is determined by time the donation of stock is received. Donation of stock to charity should be received before the end of the year therefore, you should take into consideration the different amounts of time for an asset to be transferred. You should strive to be effective, efficient, and able to give more to your favorite charitable organizations. Donating stock to charity provides wealthy Canadians with a way of leaving behind a legacy and reducing their tax burden while alive and even after death.