Charitable gifts of publicly-traded shares
Many people possess the intent to gift, but are, of necessity, cautious and prudent with respect to their personal financial resources. We all know that cash is extremely handy, easy to spend, and difficult to preserve - especially for persons on a fixed income.
Charitable gifts are generally thought of as something that you pay in cash - and therein lies the conundrum. How to preserve cash resources, and yet still realize your charitable objective?
It happens that some are fortunate enough to possess significant investment portfolios. Contained within those portfolios might be stocks which have been owned for decades - and, given the thriving stock markets of the past decades, and the simple effect of inflation, the current value of this corporate stock may be many, many times their original cost.
Thus is created an opportunity: a charitable gift may be made in kind, using these appreciated stocks, instead of precious cash.
It should be noted that, for income tax purposes, a gift of anything other than cash (such as corporate stock) deems the donor to have firstly disposed of the stock at its market value on the date of gift. This can be problematic, in that capital gains can then be triggered - if the donor is a person in the top tax bracket (that is, taxable income over $114,000), in B.C. the effective tax rate on the resulting deemed capital gain is 22% of that gain.
However, for capital gains arising in the circumstances of a gift of shares to a charity, the capital gain tax rate is cut in half (therefore, to a maximum of 11%). Many donors find that their taxable incomes are far less than $114,000 - thus, the tax on the deemed capital gain is even less - and in the context of the overall value of the stock being donated, possibly almost insignificant.
This makes it much easier for a donor to realize a substantial charitable bequest, using what is in essence the appreciated value of the stocks that the donor might very well consider to be a “free” source of funds. Combined with other relatively recent enhancements to the tax credit value of charitable donations, it is relatively common for donors to realize a perceived “profit” in the entire exercise: that is, the total value of the stocks gifted will yield a personal tax credit of close to 45% of the value of the stocks, yet the tax impact of the gift is likely to be less than a quarter of that. Thus, a significant personal tax refund, or at least a significant reduction in required tax payments for the year, can be realized through the tax benefits of a gift of securities in kind.
Remember: “profit”, in this context, is perceived rather than real, since, as with any gift, by making a gift of securities you are transferring a portion of your wealth to another party, irrespective of any tax benefits that may reduce the impact of this transfer.
However, with gifts of securities, many persons considering a significant donation will find this option much more attractive, and much easier to do, than a gift of cash.