Like clockwork and sleigh bells, every year investors chime in with seasonal questions about charitable giving. It's not just a matter of to whom to donate and how much, but how to gift in the most tax sensible manner, particularly when it comes to marketable securities.
We reached out to Kathy Hawkesworth, director of donor services at Edmonton Community Foundation (ECF) and current vice-chair of the Edmonton chapter of STEP (Society of Trust and Estate Professionals), for her expertise on charitable giving. As a former tax adviser practicing within a law firm and a national accounting firm, Ms. Hawkesworth offers a unique perspective on gift planning.
Since joining ECF, she has helped donors establish over 600 different endowment funds that provide meaningful on-going support to the charities and causes important to them. We asked her some of the most common questions we hear from clients around this time of year, knowing she'd be able to provide additional insight for investors looking to make the most of their charitable gifts.
What are the benefits of gifting marketable securities directly to a Canadian registered charity (a foundation or organization) instead of selling them and giving the proceeds?
The short answer is, with proper planning, you'll realize even more tax savings than you would with a gift of cash. Not only can the charity issue an official donation receipt (that can be claimed to save taxes) for the value of the publicly traded shares or mutual funds you transfer, you won't have to pay tax on any capital gains realized.
What are the benefits to the charity?
The ability to accept marketable securities opens the door to more gift givers, as well as larger gifts, to support the charity's important work. Most gifts of marketable securities are larger than the average cash gifts and the higher tax savings ultimately make charitable gifts less costly so donors are able to give more to their favourite charities.
How does it work to gift through a group foundation?
If your chosen charity cannot receive a gift of marketable securities, a number of charities exist that can help you support that charity. Each has its own unique processes, forms, costs, minimum gift amounts, and other conditions. Your local community foundation is a great resource to help you find a few choices to compare, all based on what you want to accomplish. For example, CanadaHelps is an online giving charity that supports a wide variety of Canadian charities and is able to accept marketable securities for your chosen charity.
How do you know if your charity of choice can accept share or mutual fund donations?
Many, but not all, charities that accept marketable securities donations will state that on their websites. A phone call or e-mail to the charity is the best way to confirm acceptance. If they do, they will be able to walk you through the process and get you the forms and paperwork you will need to provide to your investment adviser.
How does the process work when you decide to donate securities to a public foundation or charity?
Usually a securities gift will be done by way of electronic transfer from your account to the charity's account. The charity cannot "pull" the securities out of your account – they must be "sent." You will need to fill in the necessary forms that will instruct your bank or investment firm to send your gift to the charity's account. We have noticed that gifts of mutual funds generally take longer than gifts of shares. Sometimes securities gifts happen almost immediately, with others taking weeks to complete.
What date is the market value determined on?
The value of the gift is based on the fair market value on the day it is received by the charity.
Who issues the donor tax receipt and when do you receive it?
The charity that receives the shares will issue the donation receipt for that gift. Each charity has their own timelines for sending receipts. There are lots of very good reasons for the charity to issue the receipt just as soon as possible, not the least of which is donor satisfaction. However, it may take a bit of time for the charity to confirm the accuracy of all the information that must be included in the receipt.
How do I determine which securities or mutual fund units to donate?
Tax planning is important here, including who should make the gift (for example, you or your company). It's also important to be sure that the shares or mutual funds you want to transfer will qualify for the incentive (for example, not held in an RRSP, RRIF, or TFSA). Since the incentive relieves tax on capital gains, choosing securities with larger capital gains is a good strategy.
Timing is also important. As we approach the end of the year, a gift of mutual funds may be harder to complete in time than a gift of shares or cash. There may be other issues to consider as well so be sure to talk to your investment adviser.
Do I have to use the donation receipt in the tax year of my donation or can I carry it forward? If so, for how long?
No, you don't have to use it only in the year the gift is made. Under current tax rules, gifts made in life (meaning not in a will) can be carried forward for up to five more years.
Keep in mind there is no substitute for good tax advice, and as with most tax incentives, there are specific rules and conditions to follow, not all of which are mentioned here. In addition to Ms. Hawkesworth's insights, we encourage investors to follow up with their tax professionals and investment advisers in developing a charitable giving plan that makes sense for them and offers the most impact for the causes they care about.
Andrew Johnson, CFA, is an institutional portfolio manager at Mawer Investment Management Ltd.
Janelle Hart, CFA, is an associate investment counsellor at Mawer Investment Management Ltd.