Gifts for the Future - Gift of Listed Securities
Your gift of listed securities means even more now!
Thanks to recent federal budgets, the capital gains tax on publicly listed securities has been eliminated for gifts to charities. Gifts of securities will generate a donation receipt for the full value at the close of business on the day of the transaction…with no more worries about capital gains! (Also, from 2017, based on budget proposals, capital gains tax on certain qualified property would be eliminated where an asset is sold and the proceeds donated to a registered charity within 30 days of the sale.)
To illustrate present rules:
Mike makes a donation of listed securities valued at $120,000. He first purchased the securities when the price was $20,000, so there is a capital gain of $100,000. There is no taxable capital gain upon the disposition of the securities. Therefore Mike receives a donation receipt for the full value of $120,000. Assuming a top marginal tax rate of 43 percent, this would result in a tax credit of $51,600.
If Mike were to sell the securities and then donate the cash proceeds to the Foundation, there would be a taxable gain of $50,000 (one-half of the capital gain). Income tax payable would be 50% or $25,000. So it is important to keep in mind that the tax benefits are significantly greater when the shares are transferred to the Foundation rather than being cashed in by the donor with simply the proceeds being donated. Beginning is 2017, the proceeds of listed securities donated within 30 days of sale will not be subject to capital gains tax.
Offering gifts of listed securities would go a long way towards providing wonderful and generous support for the many programs, activities and projects of the Foundation.
Planning Opportunities With Privately Owned Securities
Recent changes in tax regulations now also permit a lifetime exemption for sales or gifts of farms or shares in certain privately owned businesses of $750,000, up from $500,000, and the gain in a principal residence continues to be exempt from taxation. If any of these exemptions apply to you, you could use them to reduce tax liabilities when making your gift.
Your donation receipt will be issued for the full fair market value (FMV) of the securities on the date they are transferred to the Foundation. In computing the amount of your charitable tax credit, you receive the benefit of all the appreciation that can now be applied to reduce taxes payable on other income.
Planning Opportunities With Listed Securities
1. When it’s time to sell
You may own securities you don’t think will perform in the future as well as they have in the past, or maybe you expect a correction in the entire market. Nevertheless, you hesitate to sell because you don’t want to pay tax on the gain. If you have been planning to make a charitable gift, these securities could be the ideal asset to use for that gift. The net cost of the gift could be relatively low. Consider this example.
Conrad thinks it is time to sell some stock now valued at $10,000 with an adjusted cost base of only $2,000. He has also been thinking of making a $10,000 gift to the Foundation. His combined federal and provincial tax rate and charitable tax credit are both 45%. What is the real cost of giving the stock instead of selling it?
Option 1 — Sell stock
- Total gain $8,000
- Taxable gain (50% x $8,000) $4,000
- Tax on gain (45% x $4,000) $1,800
- Net after-tax proceeds ($10,000 — 1,800) $8,200
Option 2 — Donate Stock
- Tax credit (45% x $10,000) $4,500
- Total gain $8,000
- Taxable gain (0% x $8,000) $0000
- Tax on gain (45% x $0) $0. ....
- Tax savings realized $4,500
- Net cost of $10,000 gift compared to sale
- ($8,200 — 4,500) $3,700
It costs Conrad only $3,700 to give stock worth $10,000. Had he given $10,000 cash and sold the stock, the gift would have cost him $5,500. That is because he would have paid $1,800 more tax on the capital gain.
2. When you want to hold
Unlike Conrad in the previous example, you may have a stock you think has a great future. While you like the idea of exempting part of the gain from taxation, you don’t want to lose out on likely future appreciation. Thus, you are more inclined to hold the stock and make this year’s charitable gift with cash.
If you hold such stock, you might consider giving it and using the cash, which you otherwise would have given, to repurchase the stock on the market. Thereby, you would get a stepped-up cost base in the stock, and when you sell it in the future you will be taxed only on the gain accruing after the repurchase.
3. Bequest of Securities
The full exemption from taxable gain applies to charitable bequests as well as to lifetime gifts. Thus, if you intend to make bequests to the Foundation as well as to family members, it could be advantageous to fund your charitable bequest with appreciated, listed securities and your family bequests with other assets. You can do this either by making a specific bequest of certain securities, or by empowering your executor to select the assets for the charitable bequest.
Suppose, for example, that your estate consists of your principal residence, plus cash, plus $100,000 of listed stock with an adjusted cost base of $40,000, and that you want to leave $100,000 to the Foundation and the balance to your children. If the stock goes to the children, $30,000 of the gain (50% x $60,000) will be taxed, but if it goes to the Foundation, the full $60,000 gain will be exempt from taxation. Better, then, to give the Foundation your stock and the children your cash and principal residence, neither of which is taxable.
For gifts to registered charities such as the Foundation, the maximum amount of charitable contributions made prior to the year of death that can be claimed for credit in any one year is 75 percent of net income plus 25 percent of the taxable gain arising from the gift. Unused contributions can be carried forward and used for up to five years beyond the year of the gift. The contribution limit for gifts made in the year of death (including bequests) is 100 percent of net income reported on the terminal income tax return, with a one-year carry back.
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