The Power of Donating Securities to Charity
A 5-Win Strategy
Donating publicly traded securities (stocks, bonds, mutual funds, etc.) to a charity offers powerful tax advantages. Not only do you make a positive impact on a cause you care about, but you can also create significant tax savings for yourself and your business. Here are 5 key wins when you donate securities directly to charity
1. No Capital Gains Tax
When you donate securities to charity, you avoid paying taxes on any capital gains that would typically apply if you sold the securities. Normally, if you sell a stock for a profit, you are required to pay tax on 50% of the capital gain. However, when donating the securities directly, 100% of the gain is tax-free. This means that more of your donation goes to the charity instead of being eaten up by tax.
Example: If you donate $100,000 worth of shares that cost you $20,000 (resulting in an $80,000 gain), you avoid tax on the $80,000 in capital gains.
2. Full Tax Deduction for the Donation
The full fair market value of the securities you donate can be claimed as a tax deduction by your business. This reduces your taxable income, which ultimately reduces the amount of corporate tax you owe. This deduction is not limited to the original cost base of the securities; it applies to the current market value of the securities at the time of donation.
Example: If you donate securities worth $100,000, your business’s taxable income will be reduced by the $100,000, lowering your overall corporate tax liability.
3. Full Capital Gain Credited to the Capital Dividend Account (CDA)
One of the most powerful benefits of donating securities is that the full capital gain—not just the 50% typically taxed—can be credited to your Capital Dividend Account (CDA). The CDA is an account that allows tax-free dividends to be paid out to the shareholders of your corporation. By donating securities, you are increasing the amount available in your CDA, which can be used to pay tax-free dividends to you or other shareholders in the future.
Example: The $80,000 capital gain from your securities donation is credited to your CDA, allowing you to pay that $80,000 out as tax-free dividends.
4. Reduced Estate Tax Liability
Donating securities to charity also provides an indirect but significant tax benefit: it can reduce your estate tax liability. By donating securities, you reduce the value of your corporation, meaning there will be less value subject to capital gains tax when the shares are deemed disposed of at death. Lowering your corporation’s value means lower taxes when the estate is settled, making your legacy more tax-efficient.
Example: If you donate securities and lower your corporation’s taxable value, your estate’s deemed disposition will be based on a lower valuation, meaning less tax to be paid on the transfer of shares.
5. The Charity Wins Too!
Lastly, the charity benefits from the full market value of your donation, which is received tax-free. This means your donation goes directly to support the cause you care about, without the charity having to worry about taxes. Not only do you get the benefit of reducing your taxes, but you also help fund meaningful programs and initiatives with your contribution.
Example: The charity receives the full $100,000 donation—tax-free, maximizing their impact and helping them achieve their mission.
Maximize Your Giving with Tax Efficiency
By donating securities instead of cash, you create a win-win situation that benefits both you and the charity. Here’s how the 5 wins add up:
Avoid capital gains tax on the donated securities.
Lower corporate taxes by claiming a deduction for the full market value.
Lower corporate taxes by claiming a deduction for the full market value.
Increase your Capital Dividend Account with the full capital gain, providing you with tax-free dividends.
Increase your Capital Dividend Account with the full capital gain, providing you with tax-free dividends.
Reduce estate tax liability by lowering the value of your corporation.
Support your charity by providing them with the full value of your donation—tax-free.
This strategy not only saves you money but also amplifies the impact you can have by supporting causes that matter to you.
Reach Out to Learn More
If you want to explore how this strategy can work for you, reach out to Return on Life today. Our team of experts can help you navigate tax-efficient charitable giving and tailor a plan that aligns with your business and personal goals. Let us help you make a difference while maximizing your financial benefit!
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