Month of Giving (Part 3): Donation of Securities

Instead of liquidating securities to fund donations, it may be more tax efficient to donate securities directly to charitable organizations.

If you sell a security to obtain cash to donate, you generally need to pay tax on the profit earned, also known as a capital gain.

When a security is disposed of for proceeds greater than its original cost , a capital gain is ‘realized’. The capital gain is calculated as the proceeds received on the disposition less the cost it was acquired at.

Typically, there is capital gains tax levied against 50% of the realized gain.

However, gains realized on the donation of securities are exempt from tax, regardless of whether the securities are donated using corporate funds or personal funds.

Therefore, if you donate a security, you do not need to pay tax on the unrealized capital gains when you dispose of it.

*The donation of securities has beneficial tax treatment only to the extent that the securities have unrealized gains.

Summary of Benefits:

No personal or corporate tax on the unrealized gain.

When you donate securities with unrealized capital gains to an organization, you do not need to pay tax on unrealized gains prior to making the donation. This means you can give the entire value of the security to the charity without of giving a portion to Canada Revenue Agency first.

No tax levied on the charity for the unrealized gain.

Charities are generally tax exempt. As a result, the unrealized gain is never taxed, and the charity gets the full benefit of the entire fair market value of the security.

100% of gain added to the Capital Dividend Account.

When you donate directly from a corporation, the capital gain contributes twice as much to the Capital Dividend Account (described in more depth below), allowing for the extraction of double the amount of tax-free dividends from the corporation.

Donation of Securities from Personal Funds (Top Personal Tax Bracket)

*50.4% is the highest tax rate in MB.

As shown above, donating securities directly can increase tax savings and reduce the overall cost of the donations.

Donation of Securities from Corporate Funds

Donating securities that have unrealized gains from a medical corporation can have additional advantages.

The medical corporation has a tax account called the ‘Capital Dividend Account’ or ‘CDA’. The non-taxable portion of gains are added to the value of the CDA. A positive CDA balance can be paid out as a tax-free capital dividend to shareholders.

Usually, 50% of a capital gain is taxable and the remaining non-taxable portion, also 50%, is added to the CDA.

When you donate securities with unrealized gains, none of the gain is taxable, and therefore, the entire gain is the non-taxable portion. This amount is all added to the CDA, which allows you to take out twice the amount of tax-free dividend.

Under this scenario, no corporate tax would be payable on the direct donation of the shares to the charity and an additional $4,000 would be added to the CDA balance to be withdrawn tax-free in the future.

Physicians are often in the highest tax bracket, so an additional $4,000 of tax-free money would save ~$4,000 in tax, if the amount would otherwise be drawn out as salary.

*To receive $4,000 of net pay from the corporation, a gross salary of ~$8,000 would be required, and $4,000 would be paid to Canada Revenue Agency.

In sum, the total tax savings from donation of securities instead of cash is as follows:

If you would like a consultation regarding tax for physicians, please contact us.

* This article was prepared on December 21, 2022. Content is for informational purposes only and is not intended to be used as professional advice. Each taxpayer’s circumstances are unique. Bokhaut CPA makes no representation as to the accuracy and completeness of the information in this article and will not be liable for any errors or omissions in this information.