With just a few weeks left in 2016, now is a great time to remind clients about tax-gain donating.
If you’re not familiar with that concept, you’re not alone as most advisors are more used to tax-loss selling. This allows your client to crystallize an accrued capital loss in the current year to shelter capital gains they’ve realized in the year, or to apply it against realized capital gains in a recent previous year to generate a refund of taxes paid in one or more of those years.
As some stock markets recently hit all-time highs in late 2016, it’s more likely that your clients are sitting on some significant accrued capital gains rather than losses. If so, what a great time to remind these clients about the opportunity of donating appreciated publicly traded securities, mutual funds or segregated funds “in-kind” to the charity of their choice. Not only will the donor get a donation receipt for the fair market value of the security donated, but he or she will pay no taxes on the capital gains thanks to a special tax rule.
For example, let’s say your client wishes to make a $1,000 donation by the end of the year. The client can give the $1,000 in cash or by credit card — “to get the points,” as I’ve often been told — and get his or her receipt for $1,000, worth up to 50% or about $500 in donation tax credits, depending on the client’s province, total donations during the year and income level. (In Alberta and Nova Scotia, high-income donors actually get back 54%.)
However, if the client were to donate appreciated securities worth $1,000 that he or she had purchased years ago with a tax cost of $600 to the charity instead, not only would the client get the same receipt worth $500 or so, but save up to $100 of capital gains taxes, depending on his or her tax bracket [($1,000 – $600) x 50% x 50% tax bracket].
Even if the client wants to hold on to those securities in the hope of enjoying even further capital appreciation, the client can simply take the $1,000 that he or she was going to use for the donation and buy back the securities just donated. That way, the client gets the donation tax receipt, pays no taxes on the capital gain and bumps up the adjusted cost base of the security repurchased back up to fair market value, reducing the ultimate tax bill on a future sale.