For investors, the holiday season means it is time to position themselves to take advantage of potential tax breaks. One popular tax strategy in Canada is to donate shares of stock, mutual fund shares, or other marketable securities to a charity. It is important to plan this giving carefully in order to maximize benefits.
Why Donating Stock Makes Sense
Charities generally welcome donations of marketable securities. Investors who choose this option are typically in upper income brackets, so gifting stocks can result in significant tax savings. Charities have found that giving the opportunity to stock directly often leads to larger donations.
There is an additional incentive for investors who are considering donating shares of publicly traded mutual funds, that being when these shares are given to charity, the investor does not pay any capital gains tax. However, investors should be certain the shares qualify. Investments held in trusts such as RRIFs and RRSPs lose this tax incentive.
When Securities Are Best Donated
As a general rule, the best stocks or mutual fund shares for donation are those with large capital gains, as this maximizes the value of the tax savings. That being said, it is not necessary to take the tax break in the same year the donation is made. The rules allow the deduction to be carried forward for up to five years.
Timing is important, however. The value of a donation is the fair market value of the security on the date it is received by the charity. Investors need to allow sufficient time for the donation to be processed prior to the end of the tax year. For mutual funds, this may take several days, or even weeks.
The Donation Process
Many charitable organizations accept gifts of stock. In the event an investor selects a charity that does not, there are a few alternatives. The investor can give the shares to a group or community foundation. This organization then sends the donation on to the chosen charity. In order to do this, investors must complete an instruction form and give it to the financial institution where the shares are held. Upon receipt of the form and instructions, the financial institution will send the donated shares to the charity’s account.
Everyone’s financial situation is different. Wise tax planning requires that investors approach gifts of stock on a case-by-case basis. Although the value of donating stocks is clear, there are always special circumstances to consider. Investors would be wise to consult with a tax expert before taking action.