A Very Tax-Efficient Way To Make Substantial Charitable Donations

One challenge that older, better-off taxpayers have to deal with is managing their tax bill as they gradually dispose of their investments as they age. Another is deciding if, and how, to support favoured charities by donating surplus funds to them, again while alive or after death.

If you have significant stock, mutual fund or ETF holdings, at some point you (or your executor, ahem Ö) are going to have to dispose of them. There is an effective way to donate these kinds of securities to charities while reducing taxes.

(This discussion applies only to securities in your non-registered accounts ñ NOT to holdings in your TFSA, RRSP or RRIF. The fact these latter funds are registered means different rules apply. It can still be very beneficial to make charities beneficiaries of those funds, but that is a discussion for another day.)

You can, of course, just sell the securities for cash at any point, or your executor can do so ñ or you can give securities to family and friends, while alive or as part of your will. In each of these cases, you will be liable for capital-gains tax on the proceeds, of which half the proceeds is taxable. If you do this in a small window of years, or particularly if your executor does it all at once after your sad passing, there could be a large tax owing.

To my point: If you donate actual Canadian securities from your non-registered accounts to a registered Canadian charity (as opposed to selling the securities and then donating the cash), the capital gains on that deemed sale are exempt from taxation.

The process is not worth it for a $250 donation ñ it should be much larger than that, but you can do the ìwhat-ifî math on your tax return to see what size of donation is appropriate. But if you want to donate to preferred charities as your mortal clock starts ticking, you can get the extra benefit of the waived capital gains tax by donating the actual security, INSTEAD OF selling the security and donating the cash.

The charity(ies) involved have to create the process to do this, but any charity truly interested in fundraising should have done so. It has to set up an arrangement with a brokerage -- probably, for efficiency, the brokerage that is owned by its primary banking institution. The brokerage receives the securities in kind, then sells them and gives the charity the cash. The charity gets the same value of donation as if you had sold the stock first and donated the cash, but following this process means ñ I repeat myself ñ that you do not have to pay capital gains tax on the donation.

The charitable tax receipt you receive will include the amount of the donation, of course, but will also specifically state the number of shares of the security and the sale price. This sale is included in your yearly T5008 statement of security transactions but you also complete form T1170 as part of your tax return. On this form you specify the detail of the charitable donation/stock sale. (No, I was not previously familiar with T1170 either.) The T1170 effectively sets the capital gain from that stock sale to zero.

This wrinkle is intended to encourage better-off people to give to charity. I am not sure why the law insists that you have to donate the stock in kind, when the intermediary broker for the charity then sells it for cash anyway, but there you have it.

I did this process in 2022 for an environmental charity, and my donation was large enough that it almost totally eliminated my federal and provincial tax bills, and my taxable income was reduced because the taxable capital gain on that sale was not included. So, all the taxes that had been withheld from my pension payments, etc., became a refund.

Yes, I donated valuable stock and gave up its future gains, but I supported a charity I value and got an extra tax break, beyond the value of the donation, while doing so.

There are at least two practical issues to remember. 

In donating $X, choose the $X from the stocks that have the largest capital gain. There is little benefit to doing this with a stock with a small capital gain, and it is of NO use for a stock with no gain or a capital loss. Now, in choosing the stock with the largest capital gain, you may also be selling a stock with potentially a large future capital gain if you keep it. But the idea here is that you are winding down some of your investments for the greater good, so future gains are not relevant.

The limit on the amount of charitable deductions you can claim each year is the amount that reduces your federal or provincial tax to zero, whichever comes first. If your donations are greater than that amount, you can carry them forward for the next five years, but you cannot carry them back to previous years. So when you die, sad circumstances as they may be, you can only use the carry-forward amounts for the returns for that year, and any remaining carry-forward is lost. So, my point here: do not start this process when your health is failing and your sad demise is foreseeable ñ start it sooner rather than later, so you have the full opportunity to use up the carry-forward amounts. The best amount to donate in any year is the amount that will nicely reduce your federal taxes to near zero – so you have no carry-forward or just a small amount. 

You can get a reasonable estimate of the “best” amount by studying your most recent tax return. Almost all the charitable donations reduce your federal taxes by 29% of that amount, and your provincial taxes by 11 per cent. So if your federal tax owing was $10,000, say, then a charitable donation of ($10,000 / .29) or $34,482 would eliminate your federal tax. (As I say, this process is not for niggly little donations).

This approach is accurate enough if your next year’s return is fairly similar to the previous year’s. If your financial situations are wildly different, then you may have to make the best guess you can, since the charitable donation has to be made in the calendar tax year and you may not have a reasonable feel for your overall income until your T slips arrive in March and April 

SO: IF you wish to leave some of your assets to charity, it is beneficial for you to donate this way while you are alive and in good health, and to also direct your executor in your will to follow the same process ó donate securities in kind to your designated charities. You will avoid the capital gains tax on all of those transactions, although in the latter circumstance you may not get full deductions for your donations.

This process is fully legal and increasingly popular with charities. If you want to follow up, I suggest you identify a potential favoured charity and ask them if they are equipped for this process.

Doug Yonson, of Nepean ON, is definitely NOT a professionally designated accountant or financial planner. Like many Canadians, he has learned a thing or three about taxes while filing his own returns for 55 years, filing for family and friends for 30 years, and managing his own investments for 25 years. He completes more than 100 returns a year for low- and modest-income Canadians as a volunteer (for the last eight years) with the Community Volunteer Income Tax Program managed by Canada Revenue Agency. He also has a small private tax-preparation business. He is at YonsonDoug@gmail.com.

This article is in no way intended as professional advice but meant for informational purposes only. Please due your own due diligence when making any financial decisions or consult a professional.