Being Generous with your Investment Portfolio - Donating Securities in Kind

Beyond giving cash to charity, another donation strategy is to donate investments in-kind, i.e. give them directly, to registered charities. This strategy is incredibly tax efficient. This article will break down the nuts of bolts of this strategy.

What is it?

Donating securities in-kind refers to a strategy where rather than donating cash, you donate publicly traded investments. This would include the transfer of stocks, bonds, ETF units, or mutual fund units. In-kind simply means that you donate the security itself, rather than first selling it and then donating cash.

The key requirements for this strategy are that your investments have to be in a non-registered account (i.e. not RRSP, TFSA, or other registered plan), the investments have to have an unrealized capital gain, and the receiving charity has to be registered with the Canada Revenue Agency.

Why would you do it?

There are two main reasons:

1) Zero percent inclusion of the capital gain. In Canada, capital gains are typically taxed with a 50% inclusion rate. However, if investment units with a capital gain are donated directly to charity then this inclusion rate is dropped to zero percent.

2) The donor receives a donation tax receipt for the entire amount of the gift, based on the fair market value at the time of donation.

To illustrate this, let's refer to Table 1, which compares this strategy with donating cash.

By donating securities in-kind, both you and the charity benefit. The charity will receive more proceeds because if you had donated the net proceeds after selling the investment, the charity would have received less. Along the same lines, you benefit because you get a larger donation receipt than if you had sold the investment, paid tax, and donated the net proceeds.

How would you go about this strategy?

It is important to execute this strategy properly to ensure you receive the benefits. As discussed, we don’t want to sell our investments and donate the cash proceeds. Rather we need to follow a process to donate directly to the charity.

There are a few key ways to go about this. If you have financial advisors or other professionals in your life, they can assist with this process.

1. Donate directly to charity - This won’t be an option with all charitable donations, but some larger charities can accept donations of securities directly. The charity will have a brokerage account setup where the broker receives the security and converts it to cash for the charity’s use. From the charity perspective, they end up receiving cash which is ultimately what they want.
2. Use a third party - There are third-party providers that can help facilitate the transfer of securities in-kind to a charity. For example, in Canada there is an organization called CanadaHelps. There will be transaction fees to do this method, but all the other benefits still apply
3. Use a Donor Advised Fund - I previously wrote about donor advised funds here, but simply they are a structure to facilitate giving. Think of them like a private foundation, but much more simple to set up. Donor-advised funds can be funded from a variety of sources, including from a donation of securities. I also wrote about that exact situation here. Once the funds are in the Donor-Advised Fund, they can be distributed to charity as per your direction. Again, the benefits of zero percent inclusion of the capital gain and donation receipt for full market value still apply with this method.

Do you have a corporation?

If so, the same principle applies. If you have a non-registered corporate investing account, with unrealized capital gains, you can apply the same strategy.

If this method is utilized by a corporation, there is an additional advantage. The non-taxable portion of the capital gain is credited to the Capital Dividend Account (CDA), which can then distribute tax-free dividends to the corporation's shareholders. Since the non-taxable portion increases by donating the security in-kind, the CDA credit also increases.

Note: if the charitable gift comes from a corporation, the corporation receives a tax deduction rather than a tax credit.

Donating securities in-kind is truly a fantastic strategy to enhance the efficiency of your charitable giving. When utilized well, this strategy can magnify the benefit that both you and the charity receive.

Next time I will include some examples of how this works in real life.

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