Investors looking to help their favourite charity may want to look at donating shares instead of cash in a move that could offer tax savings, experts say.
"I think a gift of securities is the best kept secret for many donors," says Owen Charters, chief of marketing and development officer at the MS Society of Canada.
"People think it is something for the wealthy and it is actually accessible and is something a lot of people don't realize they can use to unlock the tax benefits."
The advantage in donating shares directly to a charity instead of selling them and giving the cash is that there is no tax to pay on the capital gains.
Charters said a stock donation might be a little more complicated than cutting a cheque or charging it to a credit card, but the extra effort can yield tax savings. His organization receives about $500,000 a year in donated shares.
"There is no bottom limit to what you can do," Charters said. "You can do it with one, you can do it with 10 shares."
But the larger the donation, the bigger the tax saving may be.
Take, for example, $10,000 worth of shares that cost you $1,000 when you bought them. If you sold the shares and donated the $10,000, you would receive tax credit for the donation, but you would also have to pay tax on the $9,000 capital gain on the stock.
However, if you donate the stock directly to the charity, you will receive the same tax credit for the donation but you will not have to pay the tax on the capital gain.
To maximize the benefit of your donation, you will want to look for stocks that would trigger a large capital gain if you were to sell them.
This means donating the winners in your portfolio.
If you have a stock with a big gain, but still love it and believe it could go even higher, you may want to consider donating the shares and using cash you would have donated to buy more shares. But whatever you do, it should be within the context of your overall financial plan and in consultation with your adviser.
Donating stocks that are in a loss position won't generate the same benefit because there is no capital gains tax to avoid.
Donating the cash from selling a stock that is down, and taking a loss that could be used to offset other gains, may work as part of your overall financial plan, but you won't receive any extra benefit from doing so.
Also, donating shares that are held in a tax free savings account also does not generate any special savings as any capital gains in a TFSA account aren't taxed, although you will receive the regular tax credit.
Teresa Gombita, an associate partner at EY, noted some clients look to donate stock options that would generate a significant capital gain when they are exercised.
Donating the options avoids a big tax bill, plus generates a tax credit for the donor that can be used to offset what they may owe the government.
"You want to manage your tax liability, why not make it a donation?" she said.
Charters added that it can also be a powerful estate planning tool to minimize the tax that your estate will pay after your death.
If a donation to a favourite charity is part of your will, donating shares directly instead of selling them and donating the cash will save your estate on your final tax return.
"You can save an estate a lot of tax just by instructing the executor somewhere in the will that you want, where possible, that gift made through shares that have significant capital gains," he said.
This content appears as provided to The Globe by the originating wire service. It has not been edited by Globe staff.