In this video, we review the tax implications of donating publicly traded shares or bonds to a registered charity in Ontario. There is a significant difference between cashing shares and making a donation with the proceeds versus donating appreciated assets directly. A minor difference in process can have a major impact on your taxes.

Thanks to Christopher Carroll, CPA in Deep River for guiding us through a few different scenarios.

DISCLAIMER: This video is for educational purposes only and should not be used to make decisions about your personal finances. Please contact a financial professional if you have questions about donating shares or other assets. Every situation is unique.

Interview Transcript

James Thompson:

So today I am here with Christopher Carroll from Carroll CPA, and we're just discussing the benefits of stock transfers. Hi Chris.

Christopher Carroll, CPA:

Hello, James.

James Thompson:

Thank you very much for joining with me today and spending some time to answer some of my questions.

Christopher Carroll, CPA:

Happy to.

James Thompson:

So, as part of the Closer To Home campaign, I've been getting a lot of different requests from donors about how to make stock transfer donations. I try my best to answer the questions, but I thought it'd be great to have someone who has more experience and more knowledge on the topic to help give us some of the facts.

Christopher Carroll, CPA:

Sure. Well, I'll try.

James Thompson:

Okay, <laugh>. Great. So I think the easiest way to do it is to present a scenario. Let's say Mrs. Smith, she bought a stock, say 10 years ago for $10,000, and now today it is worth $50,000, and she's trying to decide with me what the best way to use that in a way that benefits our foundation and her from a tax perspective. Is this a good idea to, to make a stock donation in general?

Christopher Carroll, CPA:

Sure. It’s an issue that comes up at my office fairly frequently as well, and it does because the provisions around this have changed and changed for the better in the last number of years to make it more advantageous to do just that. In, in general terms, if one is simply just donating capital property, any property to a charity, you are deemed to sell that property at fair market value and trigger a capital gain for yourself. However, there's an exception to that general rule when it involves a donation to a qualified donee (such as the hospital being a registered charity) and the donation of what they term eligible property. So eligible property, in this case to your example, the most common one are publicly traded shares and, and bonds.

So if one has that and is considering making a donation to a charity and has publicly traded securities that have an accrued but unrealized gain, it's an ideal way to both benefit the charity, which is the person's ultimate goal, of course, and as well take advantage of the rules that are in place in the tax system. So for your example if the lady simply sold her shares and realized the proceeds of $50,000 and then just donated those shares, she would of course pay tax on the capital gain and then get a corresponding tax credit for the donation credit. But the provisions of the special election one can make when you're donating publicly traded shares is that in fact, if you make a direct donation of those shares to the charity, that is not cash them out, but rather actually transfer those shares to the charity you can get a double benefit, which is really, you still get the benefit of the donation credit, in this case, the $50,000, which is the fair market value of the transfer, but you don't end up paying tax on the capital gain that you otherwise would've on the sale of those shares.

So the benefit is significant in certain cases, especially depending upon how much the accrued gain is on the shares in question.

James Thompson:

Okay. So it sounds to me like the order of events is very important. The interest is this woman wants to donate, she wants to support a charity but if she were to just cash the stock on her own and then donate that money, it's a very different tax outcome than if she had donated the shares. It's kind of a minor difference in the order of things, but a big difference for her taxes.

Christopher Carroll, CPA:

For sure, if that individual was in a high tax bracket, let's say she was in the maximum tax bracket, which would be in Ontario, let's say she was in a marginal rate of 46% and did not make a direct transfer of the shares, but rather just do it the old fashioned way and sell those shares, she would end up paying tax on a capital gain. In your example, or our example here, you have a $40,000 capital gain of which 20,000 is taxable. So she'd end up paying little under $10,000 in tax $9,200 in tax, more than if she simply transferred the shares directly to the charity. So in effect, the difference is significant  and the difference is the ability to not pay or avoid paying tax on any triggered capital gains on those shares. So it can certainly add up depending on how much of a gain is in the shares themselves.

James Thompson:

Okay. So what if in the same scenario Mrs. Smith had a $10,000 share purchase she made 10 years ago, and today it's still worth about $10,000, let's say exactly $10,000. Would there be much of a benefit if she went through the process of donating the stock versus just cashing it out and donating the cash

Christopher Carroll, CPA:

In your example, no, there wouldn't be any difference because in that case, the individual's still getting a donation receipt from the hospital for $10,000, and that would happen regardless of whether she donated the stock or cash. But her selling those would not trigger any capital gain because there was no accrued gain on those shares. So there would really be no difference in terms of how she enacted that transaction. And the reason being is there is no accrued unrealized gains in those shares in question. That's really where it turns. One has to look at what their particular holdings are and, and what potential capital gain is on a sale of those.

James Thompson:

Okay. Okay. So the, the order of things is very important and also the actual gain in the stock is important. Okay, so what about one last scenario I'll present. Mrs. Smith again wants to donate her stock, she bought it for $10,000 a couple years ago. Now it's actually worth $8,000. Would there be any benefit to her donating that stock to a charity of her choice versus and then making up the difference of $2,000 from other cash versus just donating $10,000?

Christopher Carroll, CPA:

That's a particular type of example, something that happens typically at year end with people with investment portfolios where they have losses in their portfolio and then corresponding gains on other stocks. So often what people will do as they approach the end of the year where they're looking at stocks that have lost value, which they don't believe are going to come back in value, there is often a choice that people make to trigger losses in order to apply those losses against other capital gains that they have in the given tax year. That's regardless of whether they're going to donate stock or not, that's something that people often do, and it would be done if you were looking at a stock that you knew was not going to rebound or you didn't feel it was going to come back to your original price.

So you're sitting on unrealized losses, might as well trigger those losses and take advantage of those losses against other capital gains. Now, there is an advantage to your question. If someone is already going to do that and is considering making a donation to the hospital, you could donate those lose shares to the hospital. The same way we would've done on the other example. Of course, in that case, there's no capital gain that one is trying to shelter, but by the same token, this hospital would give a donation receipt for the fair market value of the shares in question. I think in your example it was $8,000, so they would get a charitable donation receipt for that. They still are able to recognize the capital loss on that whole transaction. So it potentially could benefit them. It's a unique situation where someone is, you know, hopefully that doesn't happen off too often, the people where they have these losers, but that could still benefit them, and then those losses are applied against other gains in their portfolio. So certainly that's another one for people to look at especially as they're approaching the end of the year is typically when you would be looking at something like that.

James Thompson:

Okay. Well, that, that's very good, and I think that's a very well-rounded look at the issue of donating stocks. And it sounds to me like it is a strategic decision and it, there are many different considerations, but that generally there's enough of a benefit in it that it's worth investigating <laugh>.

Christopher Carroll, CPA:

Yeah, yeah, for sure, James. I think, you know, like anything, and often when I talk with clients, every person's situation is different. Of course, their incomes are different and, and portfolios are different. So it's not a one size fits all solution for everybody, but it's something for people to keep in mind and for the right person in the right scenario. It definitely has its advantages and it's something that you should consider looking at if it, if it makes sense for you.

James Thompson:

Okay, perfect. Thanks again, Chris, for joining us to talk about this. Very much appreciated and I hope you have a wonderful day.

Christopher Carroll, CPA:

Okay, thank you, James.