If the markets have been good to you this year and you'd like to do something good in return, Friday is your last chance to donate winning securities and reduce your capital gains tax for 2010.
"If you've got stocks that have gone up in value, if you just cash those out, you're going to pay massive capital gains taxes on those securities," says Owen Charters, CEO of CanadaHelps. "If you donate them, not only do you get a tax receipt on your gift, but there is no tax on the capital gain."
Here's how the math works: Let's say you sell a stock that has doubled in value from $5,000 to $10,000, and you give the cash to charity. You'd be looking at a 50-per-cent taxable capital gain of $2,500. Assuming a 46-per-cent tax rate,* that would be $1,150 in tax. You'd receive a $10,000 tax receipt valued at $4,600, and save $3,450 in tax.
Now let's imagine you donate the security in kind, which erases the capital gains tax. You can now apply the full value of the $10,000 tax receipt - $4,600 - against your income tax. It's the gift that gives back to you.
Donating securities is becoming an increasingly popular way to give. In fact, the Salvation Army says it has seen a 44-per-cent increase in the total number of gifts of securities between 2009 and 2010 and a 26-per-cent increase in the total amount raised ($1.4-million).
"Even for small gifts, it's starting to make sense to look at giving gifts of stocks or mutual funds or even bonds," Mr. Charters says.
Before you donate stocks, make sure the charity is willing and able to receive the donated securities in kind. The United Way takes such donations, as does the Salvation Army, and CanadaHelps accepts donated securities on behalf of 83,000 Canadian charities. The website provides you with a letter of authorization to send to your broker, who then arranges the transfer. Ask your broker whether transfer fees apply.
* assumes combined federal and Ontario tax rates
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