Donating Stock to Smaller Charities 

by: Arthur Drache

It has been more than a decade since the federal government embarked on a course of making it easier to donate significant amounts to charities with changes ranging from increasing the annual basic limit of donations from 20 percent to 75 percent and, more importantly, over time introducing many rules[1] to facilitate in kind transfers such as stock, stock options and certain types of real estate.

While major gifts (those in the millions of dollars) require sophisticated tax planning involving both the donor and donee, there are some basic types of gifts of a small scale which would be beneficial to both donor and donee. Indeed, we have to conclude that smaller charities (and those who would donate to them) often miss out on some very basic benefits simply because the organizations have not thought ahead.We were considering, in particular, the situation where a donor would like to donate listed stocks to a charity. To recapitulate, the tax rules have for many years exempted from capital gains tax the gain on a transfer of listed stocks to a charity.[2]

Consider the portfolio of a "small" investor who amongst other things has shares of Royal Bank which had an adjusted cost base of about $14 a share. They are now worth about $60 a share. He also has many other "safe" investments, blue chips, which he had held for stocks and oil stocks.

This year he has some cash flow problems but did not want to cut back on donations to some of his favourite charities. He would normally give between $1,000 and $2,000 to each of a half dozen organizations, including his church.

We pointed out that a gift of 20 shares of Royal Bank stock would be worth about $1,200. We used this simple example.

Example 1: Suppose that in order to give $1,200, he sold 20 shares of the stock. If he did this, we would get the following result.  

Assuming he gifted a full $1,200 to the charity,[4] the value in cash of the tax credit would be $552.[5] Thus, after the gift had been made, he would have $340 to offset other tax liabilities.

Example 2: All the facts are the same but he gifts 20 shares of Royal Bank stock to the charity. The capital gain is exempt from tax.

The value of the gift of course is still $1,200 but he ends up with tax credits of $552. And equally important, he has no cash flow problem because he needn't make up any shortfall in cash to give the charity the $1,200.The major problem we have found is that because many charities do not have investments of their own, they do not have a brokerage account to which the donated stock can be gifted. And as a consequence some of the charities simply did not want to take the gift of stock. This is not a unique situation but it helps to explain the genesis of the criticism that smaller charities do not benefit from the incentive. The fact is that many would and could benefit but for the fact that they are not cooperating with potential donors.

There is no doubt that a program which encouraged the smaller charities to become familiar with the incentive and to use it to enhance gifts and benefit donors would be desirable. This sort of education might be undertaken by gift planning organizations or even brokerage houses. It is not only the so-called "rich" who own appreciated shares and a lot of more modest givers can get significant tax benefits for comparatively small gifts if they have the opportunity and if the process were facilitated by the organizations which might get the gifts.