Do you make large charitable donations? Do you frequently sell and realize capital gains on which you have to pay tax? If so, you may be able to reduce your capital gains tax by gifting these securities directly to a registered charity.

How is this possible?

In the recent Federal Budget, the government announced that the tax on any capital gains, triggered on the gift of qualifying securities listed on prescribed stock exchanges to a registered charity, would be cut in half. This has been accomplished by reducing the taxable amount of the gain from 75% to 37-1/2%. This will apply to any donations of qualifying securities made between February 18, 1997 and the end of 2001.

Prescribed stock exchanges include all Canadian exchanges and certain foreign exchanges such as New York.

What's a qualifying security?

Investments that will be eligible for this special tax treatment include shares, bonds, bills, warrants and futures. And, as recently announced by the government, mutual fund investments will qualify (originally it was believed they would not qualify as mutual fund investments are set up as trusts and therefore the units are not publicly traded).

When does it make sense to gift securities?

There are two points you should keep in mind. First, you will only benefit from the budget change if you gift shares that have an accrued capital gain. If your shares have not appreciated in value since you purchased them or have even declined in value, you will not save any capital gains tax by donating them to a charity. You will, of course, still get a charitable donation receipt for the value of the shares but it would be no different than donating cash.

Also, you should only donate securities that you were otherwise going to sell. The tax on capital gains only applies when you sell your investment. Donating securities which you intend to hold long-term would only accelerate the payment of tax on the accrued gains on these investments.

If I donate securities, how will my taxes be reduced?

This is probably best explained by an example. Let's assume you wish to make a gift to your favourite charity of $5,000. You are also going to dispose of the shares of a publicly traded company that you've held for several years. The shares, currently worth $5,000, were purchased by you several years ago for $1,000 and therefore have an accrued capital gain of $4,000.

Let's compare the cost of the donation to you, assuming first that you sell the shares and donate $5,000 in cash and second, that you donate the shares directly to the charity.

Under both scenarios, you will have a disposition of your shares for tax purposes at their fair market value of $5,000. Assuming your marginal tax rate is 50% (this is the tax rate you pay on any incremental income you have), you would have to pay the following tax:

Tax on Capital Gain
	Sell Shares/ Donate Cash	Donate Shares To Charity
Proceeds of Disposition	$5,000	$5,000
Cost of Shares	($1,000)	($1,000)
Capital Gain	$4,000	$4,000
Taxable Portion of Gain @ 75%	$3,000
Taxable Portion of Gain @ 37.5%		$1,500
Tax @ 50%	$1,500	$ 750

The difference in the amount of tax you must pay is directly the result of the difference in calculating the taxable portion of your gain!

Under both scenarios you will still get a tax break based on the value of your donation. This tax break will be roughly 50% of $5,000 or $2,500. Therefore, your $5,000 donation will cost you the following:

Cost of Donation to You
	Sell Shares/ Donate Cash	Donate Shares To Charity
Amount of Donation	$5,000	$5,000
Add: Tax on Capital Gain	$1,500	$750
Less: Value of Donation Tax Credit*	($2,500)	($2,500)
Cost of Donation to you	$4,000	$3,250

*This includes: federal credit of 29% plus provincial tax savings
and surtax savings.

By gifting your shares directly to your favourite charity rather than selling the shares you will have saved $750 in tax on your capital gain. Generally, if you are going to make a donation and you are also selling securities, you should consider donating the securities to the charity instead.

How will the charity benefit from my gift?

We fully expect most charities to set themselves up to receive securities as gifts. Some charities may even actively pursue these gifts from donors. They will likely work with a brokerage firm to turn your gift into cash. Therefore, whether you give cash or securities, the charity will end up with the full amount of your donation to use in their programs.

We expect the government will closely monitor charitable donations in the next few years to see if this tax initiative increases charitable giving. If it does, it hopefully will become a permanent part of our tax system.

BDO Fast Facts are a publication of BDO Dunwoody on developments in the area of Taxation. This material is general in nature and should not be relied upon to replace the requirements for specific professional advice. Additional information can be obtained from your nearest BDO Dunwoody office or www.bdo.ca.

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Contact Us

If you wish to donate a security, please see our donation form. For more information, e-mail Lawrence Solomon, Energy Probe Research Foundation's Managing Director, or call 1-800-26-EARTH ext. 241 (in Toronto (416) 964-9223 ext. 241).

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