How to Make a Charitable Donation and at the Same Time Increase Your Tax Deduction


Have you made money in the stock market this year and have some shares that you are thinking of selling? Did you know that it is possible to increase your tax savings when making a gift to a registered charity (the “Charity”) if you gift those publicly traded shares directly without selling them first.

Assume for example:

  1. you wish to make a gift to the Charity of $2,000;
  2. the shares have a fair market value of $2000 and a cost to you of $500;
  3. your marginal tax rate is 50%; and,
  4. you’ve already made charitable gifts of $200 this year.

If you sell the shares first to make the gift you would realize a capital gain of ($2000-500) or $1500 of which two thirds must be included in your income, that is, $1000 and subject to tax at 50% or $500. Your gift of $2000 would generate a tax receipt that would result in a tax saving of $1000 [$2000 X 50% (tax rate)]. The after tax savings would be $500 [$1000(tax receipt) less $500(tax payable on sale of shares)]. Or, put another way, the after tax cost of a $2000 donation would be $1000.

If, on the other hand, you were to gift the shares directly to the Charity, then the Charity would receive a charitable donation of $2,000 for which it would issue to you a receipt in that amount. The tax credit that you would enjoy remains unchanged, $1,000. However, because of amendments to the Income Tax Act introduced in the 1997 Federal Budget, if you transfer publicly traded shares directly to a registered charity other than a private foundation, you are only required to include one-third of the taxable gain realized on the shares rather than two-thirds. Accordingly, in calculating your taxable income you would include a taxable capital gain of $500 [$1,500 (amount of capital gain) X One third = $500] which would be subject to tax at your 50% rate, or $250. The after tax savings to you by making a gift of publicly traded shares directly to the Charity would be $750 [$1,000 (amount of tax credit on $2000 gift)– $250(tax liability from gain on disposition of shares)]. The after tax cost of a $2000 donation is $750.

New rules have been added by the recent Federal Budget to include the gifting of shares which have been received by an employee as a result of stock options. In this case the shares must be donated to the Charity within 30 day of the option being exercised. The shares must satisfy all of the previously noted conditions as well as satisfy the conditions for the existing stock option deduction.

Note that shares which trade on an over the counter bulletin board and not a stock exchange do not qualify for the preferred tax treatment. These tax benefits are applicable to gifts donated to the Charity before 2002.