If your clients are looking for ways to reduce their tax liability, you may want to help them explore the benefits of donating stocks to charity. This can eliminate capital gains taxes and earn your client a charitable tax credit. This form of donation also helps to put more money in the pocket of the charity.
Eliminates Capital Gains
If your client has a stock worth $5,000 and they sell it, they have to report any capital gains that they earn on the sale. For instance, if they bought the stock for $2,000 and sold it for $5,000, they have $3,000 in capital gains. The Canada Revenue Agency (CRA) requires taxpayers to include 50% of capital gains on their tax return and pay tax on that amount. In this situation, your client has to report $1,500 as income and pay tax accordingly.
That said, if your client donates those same stocks to charity, they don’t have to report or pay tax on the capital gains. The CRA has a zero percent inclusion rate for stocks donated to eligible charities, which means no tax liability for the capital gains on such stocks. If your client gives the stocks to a family member or to a non-profit that doesn’t qualify for the charitable tax donation, they still must report the capital gains as if they sold the stock for fair market value. As a result, giving to registered charities offers benefits that giving stocks to friends, family, or other organizations does not.
Provides More Money to the Charity
Additionally, when your client takes this approach, it also generates more money for the charity. Imagine that your client wants to sell stocks and give the proceeds to charity. To continue with the above example, imagine that your client sells the stock for $5,000, reports $1,500 as a capital gain, and pays $500 in federal income tax, based on a tax rate of 33 percent. Once your client subtracts the tax bill of $500, they only have $4,500 to give to the charity.
In contrast, if your client gives the stocks to the charity, the charity can sell the stocks for their fair market value of $5,000. The charity doesn’t have to worry about any capital gains, and all that money goes straight into its coffers.
Creates a Larger Charitable Tax Deduction
On top of those key advantages, your client also receives a larger charitable donation tax credit. As of 2017, the CRA offers a federal tax credit of 15 percent on the first $200 donated and a 29 percent credit on donations over that amount. Continuing with the $5,000 worth of stock example, your client earns a credit worth $1422 toward lowering their tax bill. Note that this tax credit is a non-refundable credit, meaning it can’t be used to reduce total tax liability below zero
In contrast, if your client sold the stock and made a donation worth $4,500, their tax credit would only be $1248. When you compound that with their capital gains tax, your client stands to lose hundreds of dollars by paying more in taxes. This doesn’t even take into account the provincial tax credits for charitable donations that can help your clients save even more money.
Your clients expect you to help them lower their tax liability. If you have clients in high tax brackets with lots of stocks, this can be a useful way for them to give to charity and also gain a financial benefit for themselves.