How to: Offset your tax liability by donating shares to charity

When corporations go private, investors face really high capital gains taxes. The capital gains are often times even greater for stocks that have been owned for decades. For example, stocks like Bell (BCE) may have been purchased at a relatively low adjusted cost base. Unfortunately, investors have no say when corporations go private. The only thing that is certain is a large tax bill.

In this post, I will discuss a great technique that will help lessen the tax bill. A recent change in the Income Tax Act now makes donating shares instead of cash a much more worthwhile endeavor. Specifically, I will examine how many shares a person must donate to wipe out the tax on the capital gains on the other shares that one is selling.

For example, if a donation is valued at over $200, you can use the following basic formula to determine what fraction of shares should be donated in kind to 'zero out' the tax liability.



I will begin first by defining two ratios:

g = Gain in shares divided by total current value
m = marginal tax rate divided by the maximum marginal tax rate in your province.

With these two ratios defined, you should donate a fraction of your holding equal to
g*m / g*m + 2

The result of doing this will offset your entire tax liability on the sale of the remainder. In other words, your tax bill is $0 (as though the sale of the shares had not occurred)!

Note that in order for this technique to work properly, you must donate securities (shares, bonds, MF units) to charity. Selling the securities and then donating part of the proceeds from the sale in cash will result in much smaller tax savings. Also, you should check with the charity beforehand to make sure that they are able to accept donations in kind. Not all charities have an account or broker to accept transferred securities.

As you can see, there are two main benefits to doing this: You are lessening your tax bill and also donating to charity. In my books, these are two huge wins!