Most individuals are aware that making a donation to a charity provides a fairly generous tax break.  For high income taxpayers, a cash donation provides a tax reduction of 46.4% in Ontario and 48.2% in Quebec, for donations above the $200 annual threshold.  However, when securities with accumulated capital gains are donated directly to a charity, an additional tax saving is realized as accumulated capital gains on the securities are exempt from tax.

The original measure to provide a tax break on donated securities was introduced in 1997.  It provided for an inclusion rate of one half of the regular capital gains rate for securities that were donated.  The Federal budget of May 2, 2006 provided for a complete tax exemption on accumulated capital gains for securities donated to a charity.  A simple example will illustrate the additional tax savings realized on donated securities.  This assumes a 46.4% tax rate for an Ontario resident and securities with a market value of $10,000 and a cost base of $6,000.

For a Quebec resident, the net benefit of donating securities would be $964.

There are a couple of points that should be considered.  The above plan works when there are accumulated gains on securities.  There is no extra advantage to be realized by donating securities with accumulated losses to a charity.   In this case, the securities should be sold, the capital loss realized, and the cash proceeds donated to the charity.

Major charitable organizations and foundations have the facility to process such donations.  However, if you wish to donate securities to a small local charity, it is best to inquire if they can process a donation of securities, as they may not have a brokerage account to accept such a donation.  If such is the case, a donation of cash will be necessary.   There is also some paperwork that will have to be completed, such as a letter of authorization to allow the broker to transfer the shares to the charity.

Many individuals have taken advantage of the rules allowing for donation of securities, especially in cases where such securities have been held for many years, resulting in large accrued capital gains.  Making a donation of securities has proven to be a win-win strategy.