Tax-Advantaged Giving as a Force for Good
Charitable giving is becoming an increasingly important part of many peoples’ wealth management plans. If you are planning to do some charitable giving, one tax-smart strategy to consider is giving a gift of appreciated securities instead of cash.
To understand the potential benefits of this strategy, let’s look at what could happen in each scenario:
Giving $10,000 in cash
When you provide a gift to a registered charity, the federal government gives you a tax credit of 15% on the first $200 and 29% (to a maximum credit of 75% of your annual net income) for anything above that amount.
So, using round numbers, a $10,000 cash gift to charity will cost you a little more than $7,000 on an after-tax basis.
Giving $10,000 in shares
Now let’s say you have shares in a company that you bought long ago, which have since doubled in value. If you gave $10,000 worth of those shares to charity, you’d receive a tax credit of roughly $3,000 – exactly the same as if you had given cash.
But there is a second benefit in this scenario. Since those $10,000 worth of shares originally cost you $5,000, you have an unrealized taxable capital gain of $5,000. If you are in the top tax bracket, you’d owe around $2,500 in capital gains tax when you sold the shares. But since you gave the shares away, that tax liability vanishes.
Bottom line: the charity gets the same $10,000 whether you give cash or shares, but whereas the gift of cash would cost you roughly $7,000 on an after-tax basis, the gift of shares would cost you something closer to $4,500 when you factor in the tax savings.
The greater the unrealized capital gain, the greater the potential tax advantage. For example, if you have received shares at nominal cost after exercising stock options, almost the entire value of the shares could be considered a taxable gain. This strategy can offset that liability and serve to reduce the net cost of your gift even more.
You can look at giving securities as a way to reduce the net cost of your charitable giving or – if you prefer – you can see it as way to give more generously while maintaining the same net cost to you. It’s all a matter of your priorities and preferences.
This gifting strategy can also work in your favour if you want to continue owning shares of the company. Just keep the $10,000 you were going to give in cash, give the appreciated shares instead, then use the $10,000 to repurchase the shares or make another investment – and since you’re buying at current pricing, there is no embedded capital gains liability.
While we are examining the spectrum of in-kind giving alternatives, there is another consideration: you can either gift your shares directly to a charity, or you can gift them to a Donor Advised Fund (DAF) that you control, receive the full tax benefit in the current year, and then have the flexibility to make future gifts when and where you choose. For example, you could gift $50,000 worth of shares to your DAF now, and make five gifts of $10,000 to various charities in future years as long as you make the required annual minimum disbursement every year (the annual minimum is 3.5% this year and expected to increase to 5% in January 2023).
As with all tax planning strategies, there are some caveats. The charity needs to be set up to accept gifts of securities. There needs to be an unrealized taxable capital gain on the shares to make it worthwhile, which means they can’t be held in a TFSA or RRSP, as that would shelter the gains. And your mileage may vary depending on your tax bracket and other personal considerations. So in each of the above scenarios, you should consult your tax advisor before making your gift to make sure they are in fact suitable to your current situation.
If charitable giving is on your radar, an easy first step is to discuss the opportunities with your Cumberland Portfolio Manager. It just might be something that fits well within your overall wealth management plan.