Give more, pay less: the case for donating your winners directly to charity
Selling an appreciated investment before donating the proceeds can quietly cost you – and the charity – thousands. There’s a better way.
If you hold investments that have grown in value over the years – publicly traded stocks, mutual funds, or segregated funds – you may be sitting on a powerful, underused charitable giving tool. Most Canadians who want to make a significant donation sell the investment first and write a cheque. That order costs money. The tax rules strongly favour giving the asset itself.
The reason comes down to one critical rule: when you donate publicly traded securities directly to a registered charity, the capital gains inclusion rate on those securities drops to zero. You pay no capital gains tax – full stop. Sell those same securities first and donate the cash, and you trigger a taxable capital gain on half the profit.
“The tax rules strongly favour giving the asset itself – not the proceeds from selling it.”
A tale of two donations
Consider a straightforward example. You hold $100,000 worth of publicly traded shares you purchased for $40,000. Your capital gain is $60,000. You want to make a significant charitable gift this year. Here’s what happens under each approach, assuming a combined federal/provincial marginal tax rate of 50% and a capital gains inclusion rate of 50%:
| OPTION A | OPTION B | |
|---|---|---|
| Sell first, then donate cash | Donate shares directly to charity | |
| Proceeds of sale$100,000 | Fair market value of shares$100,000 | |
| Adjusted cost base$40,000 | Capital gain$60,000 | |
| Capital gain$60,000 | Capital gains inclusion rate0% | |
| Taxable gain (50% inclusion)$30,000 | Capital gains tax$0 | |
| Capital gains tax (~50% rate)−$15,000 | Donation receipt issued for$100,000 | |
| Cash available to donate$85,000 | Donation tax credit (~50%)+$50,000 | |
| Donation tax credit (~50%)+$42,500 | ||
| Net tax benefit$27,500 | Net tax benefit$50,000 |
The difference is substantial. By donating the shares directly, you receive a donation receipt for the full $100,000 fair market value, pay zero capital gains tax, and generate a tax credit worth $50,000. In the sell-first scenario, the government collects $15,000 in capital gains tax before the donation even happens, and the charity receives only $85,000. The direct donation approach produces $22,500 more in tax benefit – and delivers $15,000 more to your charity of choice.
Which investments qualify?
The zero capital gains rate applies to a broad range of publicly traded securities donated to registered Canadian charities:
| Investment type | Zero cap gains on direct gift? | Notes |
|---|---|---|
| Shares listed on a recognized stock exchange | ✓ Yes | Most common use case |
| Mutual fund units | ✓ Yes | Includes open-end funds |
| Segregated fund contracts | ✓ Yes | Treated as publicly traded |
| Government bonds (listed) | ✓ Yes | |
| Flow-through shares | ✗ No | Excluded from the preferential rule |
| Shares of a private company | ✗ No | Non-qualifying security; different rules apply |
| Real estate | ✗ No | Capital property rules apply; partial benefit only |
Three compounding benefits
- No capital gains tax: The inclusion rate on the donated securities is zero – a complete elimination of what could be a significant tax liability.
- Full fair market value receipt: The charity issues a donation receipt for the full market value of the securities on the day of the transfer, maximizing your tax credit.
- Larger gift, same out-of-pocket: By bypassing the capital gains tax, more of the investment’s value flows to the charity instead of the government.
How to actually do it
The mechanics are straightforward, though they require a bit of coordination. Contact your brokerage or investment dealer and request a “direct transfer of securities to a registered charity.” The charity must have a brokerage account set up to receive securities – most hospitals, universities, and established charities do, and many have dedicated gift administration teams for exactly this purpose.
The charity will provide you with its brokerage account information, including the account number and the CDS participant number. The transfer is initiated on your end through your dealer. Once the securities land in the charity’s account, they typically sell them immediately and issue you a donation receipt for the fair market value on the date of transfer.
Plan ahead – transfers typically take several business days. If you’re targeting the current tax year, initiate the transfer well before December 31. The date the securities arrive in the charity’s account determines the fair market value for receipt purposes.
Spousal and estate considerations
Either spouse can claim the donation tax credit for gifts made by the other – and it is generally optimal to pool all donations under one spouse’s return to avoid two separate $200 threshold amounts (the credit rate jumps significantly on gifts above $200). Only the spouse who actually has a tax liability in the year should claim the credit.
For gifts made at death or by estate, the rules have become more flexible since January 2016. An executor of a graduated rate estate can allocate a charitable donation credit to the year the gift was made, an earlier estate year, or to either of the deceased’s last two tax returns – whichever produces the greatest overall tax savings. This flexibility makes charitable bequests of appreciated securities particularly powerful from an estate planning perspective.
Important note: For donations of publicly traded securities, the zero capital gains inclusion rate applies only when the gift is made to a public charity or, since March 2007, a private foundation. For gifts from a Graduated Rate Estate involving publicly traded securities, the nil capital gains rate applies – but for non-GRE estates, the standard rules apply. Consult a tax advisor to confirm eligibility for your specific situation. This article is for general information only and does not constitute tax or legal advice.
A strategy worth revisiting every year
If you hold a diversified portfolio and charitable giving is part of your financial plan, it’s worth reviewing your holdings annually to identify positions with meaningful embedded capital gains. Donating those positions rather than cash – or rather than selling them – can produce substantially better outcomes for both your tax bill and your chosen cause.
The strategy also works for investors who intend to remain invested in similar assets anyway. After donating appreciated securities, you can simply repurchase the same securities with cash that would otherwise have sat earmarked for a charitable cheque – resetting your adjusted cost base in the process. The result: a larger charitable gift, a lower tax bill, and a portfolio reset at a higher cost base.
It is one of the more efficient intersections of tax planning and generosity available in the Canadian tax system – and one that remains chronically underused.
For informational purposes only. Not intended as tax, legal, or financial advice. Consult a qualified professional for advice specific to your situation.