Why charitable giving is rising as it relates to wealth management strategies for many people.
The importance of charitable giving is rising as it relates to wealth management strategies for many people. Giving appreciated stocks as opposed to cash is one tax-smart option to think about if you intend to make charitable contributions.
Let's examine each conceivable outcome in order to comprehend the potential advantages of this tactic:
Giving $10,000 in cash
When you provide a gift to a registered charity, the federal government gives you a tax credit of 15% on the first $200 and 29% (to a maximum credit of 75% of your annual net income) for anything above that amount.
So, using round numbers, a $10,000 cash gift to charity will cost you a little more than $7,000 on an after-tax basis.
Giving $10,000 in shares
Now let’s say you have shares in a company that you bought long ago, which have since doubled in value. If you gave $10,000 worth of those shares to charity, you’d receive a tax credit of roughly $3,000 – exactly the same as if you had given cash.
But there is a second benefit in this scenario. Since those $10,000 worth of shares originally cost you $5,000, you have an unrealized taxable capital gain of $5,000. If you are in the top tax bracket, you’d owe around $2,500 in capital gains tax when you sold the shares. But since you gave the shares away, that tax liability vanishes.
In the end, the charity receives the same $10,000 whether you donate cash or shares, but when you account for tax savings, the donation of shares would cost you closer to $4,500 than the gift of cash, which would cost you approximately $7,000 after taxes.
The potential tax benefit increases with the amount of unrealized capital gain. For instance, if you exercised stock options and received shares at no cost, practically the whole value of the shares might be viewed as a taxable gain. This plan can help offset that obligation and lower the net cost of your gift even further.
Giving securities can be viewed as a strategy to increase your generosity while keeping your net cost of giving to charity the same, or, if you prefer, as a way to lower your net cost of giving. It all depends on your interests and priorities.
If you desire to keep owning stock in the company, this giving tactic may also benefit you. Simply keep the $10,000 you were intending to donate in cash, donate the appreciated shares in its place, and then use the remaining $10,000 to buy back the shares or make another investment. Since you're buying at market value, there are no embedded capital gains liabilities.
Another factor should be taken into account while we are looking at the range of in-kind giving options: you can give your shares directly to a charity or to a Donor Advised Fund (DAF) that you manage, receive the full tax benefit in the current year, and then have the freedom to give in the future whenever and wherever you like. If you make the required annual minimum disbursement every year (the annual minimum is 3.5% this year and is anticipated to increase to 5% in January 2023), you could, for instance, give $50,000 worth of shares to your DAF now and make five gifts of $10,000 to different charities in subsequent years.
There are certain warnings, as there are with all tax planning techniques. The charity must be configured to accept securities gifts. The shares must have an unrealized taxable capital gain in order to be worthwhile, thus they cannot be held in an RRSP or TFSA because doing so would shield the gains. Additionally, your distance may differ based on your tax bracket and other personal factors. In order to ensure that the aforementioned scenarios are appropriate for your current status in each of the aforementioned cases, you should speak with a tax professional before making your gift.
If you're considering giving to charity, a simple first step is to talk to your Portfolio Manager about the possibilities. It can be something that complements your whole money management strategy well.
Need help? Let’s book a quick call. 705.427.2006 or brenault@liahona.ca
