Save taxes by donating securities "in kind"
When people make plans to support charitable causes, most focus on the amount of the gift — but how you donate matters, too. There’s a significant difference between giving after-tax cash by writing a cheque or charging a credit card and giving before-tax publicly traded securities.
Either way, you’ll get a tax credit for your donation. What changes is that when you donate stocks, mutual funds or exchange-traded funds directly to a charity (“in kind”), you don’t have to pay any capital gains taxes if those securities rose in value after you bought them.
Following changes to the 2024 federal budget, there were substantial changes to the taxation of capital gains realized on or after June 25, 2024, which were summarized in the following Raymond James Tax Planning article. For capital gains realized in excess of $250,000 on an annual basis, the inclusion rate has increased from ½ to 2/3. This can present an opportunity to realize even more tax savings by donating in-kind, as opposed to selling investments and realizing gains, for certain individuals.
How much is the donation tax credit worth?
Let’s start with the donation tax credit. You’ll get this whether you give cash or in-kind gifts to registered charities.
| Federal donation tax credit | Provincial donation tax credit (Ontario) |
|---|---|
| 15% on the first $200 | 5.05% on the first $200 |
| 29% above $200 |
11.16% above $200 |
| 33% with income above $246,752 (2024) | Slightly more with income above $90,599 (2024)* |
* Due to the Ontario surtaxes, the effective 2024 tax rate for donations over $200 is 13.39% for taxable incomes over $90,599, and 17.41% for taxable incomes over $106,732.
At a minimum, an Ontario resident who donates more than $200 will get back just over 40% of a charitable gift.
How much can you save by donating securities without selling them first?
Now assume you made a sound mutual fund investment some years ago. You’ve watched a $65,000 initial deposit grow to be worth $110,000 today. You’re thinking about selling to capture that growth and you also want to make a substantial gift to your favourite charity. This seems like the perfect source of funds for your donation.
Sell, then donate
If you’re an Ontario resident with taxable income of $250,000 and a marginal tax rate of 53.53%, and you already made a separate donation of $200 earlier in the year, selling the mutual fund units so you can donate cash will result in capital gains tax of just over $12,000.
You could donate the after-tax value of $97,956. However, if you want to give the whole $110,000 to the charity, the cost of your donation after the federal and provincial donation tax credits will be a little over $70,900.
Donate in kind
But wait – you can do better. Instead of selling your mutual fund units, you make arrangements to transfer them directly to the charity. This time, there’s no capital gains tax of $12,000 as such donations have a 0% inclusion rate on the gains.
The charity benefits from the whole $110,000 and the cost of your donation after donation tax credits is just over $58,000. Maybe you can even top up your donation with some or all of the amount you saved in capital gains taxes.
| Sell, then donate | Donate in kind | |
|---|---|---|
| Donation amount | $110,000 | $110,000 |
| Capital gains tax | $12,044 | $0 |
| Federal donation tax credit | $31,968 | $31,968 |
| Provincial donation tax credit (Ontario) | $19,131 | $19,131 |
| Cost of donation | $70,944 | $58,900 |
Donate strategically to do more good
The federal and provincial governments make it very cost-effective to donate to charities. That’s partly thanks to the federal and provincial donation tax credits. But you can also reduce the cost of your donation by directly gifting publicly traded securities that have appreciated in value. Your tax savings may even enable you to donate a larger amount – resulting in more donation tax credits for you and more capacity for the charity to fund its important programs.
