Investors who Make a Social Impact

Ian Wood, CFP, RWM, MFA-P, FDFS

Some might think this is too good to be true:  the realized capital gain on some financial assets is not subject to regular income tax if the security is transferred to a charity.  That’s right, the gain is avoided entirely. . .almost.  Here is what you need to know to make a social impact throughout the tax year, and reap impressive tax benefits too.

Qualifying investments for the tax break include appreciated investments that are listed on prescribed stock exchanges (e.g. TSX), mutual funds, segregated funds, and a few lesser-known investments, which are held outside registered accounts such as RRSP/RRIFs.  The capital gain will be avoided when donations of these securities are made in-kind (i.e. not sold first) to a charity. 

But here’s where the almost comes in:  there may be situations with AMT (new Alternative Minimum Taxes) in which that gain will be taxable for high income earners.  This goes beyond the scope of this article, but you can learn more with professional education from Knowledge Bureau:

• The MFA-P™ Designation Program
• The Introductory Personal Tax Course in the DMA™ Tax Services Specialist Program
• The TaxTip Tookit™ which includes a donations tax software calculator and income tax estimator.

But the AMT proviso aside, DeWayne Osborn, head of Philanthropic Services at Cardinal Capital Management, provides some insight into this giving in-kind strategy. “Normally when you dispose of such an appreciated investment, you must report 50% of the capital gain on your tax return as income subject to your marginal tax rate.  Not so with gifting such investments in-kind.  Gifting in-kind can be thought of as getting a fair market value tax credit for a cost base rollover of the investment to the charity.”

So how does one donate securities in-kind?   The donor will need to complete the prescribed security transfer form, or a letter of direction, that contains the charity’s investment account information.  Once the form or letter is received in good order, the donor’s financial institution will send the security to the charity’s account. 

NOTE that this process can take hours or months, and so it is highly advisable that the donor “push” their institution to act quickly on the request, or, as Evelyn Jacks, DMA™, RWM™, MFA-P™, FDFS™ and President of Knowledge Bureau points out, “plan your strategic gifting in kind on a year round basis, as opposed to once a year at the end of the year.” 

Once received, the charity will issue a tax receipt for a fair market value as determined by their gift acceptance policy.   

If the donor does like to give at year end and wants a tax receipt for a particular year, it is best to initiate such transfers early (e.g. November at latest) for reasonable assurance that the gift will be made in time!  Donors are well advised to contact the charity ahead of processing a gift to review their gift acceptance policies, and ensure they are set up to process these types of gifts.

How to make a difference.  It is crucial for advisors to inform clients that while they can make their giving more tax-efficient, they should not expect to financially profit from their generosity. The emphasis should always be on the altruistic and societal benefits of charitable giving, rather than on personal financial gain. This approach aligns with both the legal framework and the ethical considerations of philanthropy in Canada.