Charitable Giving

The Financialist • Issue 97 • April 2008

BY ALAIN QUENNEC  BComm CFP FMA

Canadian taxfilers reported making charitable donations totalling $8.5 billion in 2006, up 8.3% from the $7.9 billion donated in 2005. The number of donors decreased 1.4% to 5.8 million.

(Among census metropolitan areas, donors in Abbotsford, British Columbia had by far the highest median donation at $620. Toronto donors were next with a median of $360, slightly ahead of Vancouver with $340. It was the fourth year in a row that Abbotsford and Toronto reported the highest median donations.)

Over the last several years, the number of donors has remained relatively static, while the amount donated has risen substantially.

Donor advised funds are the fastest growing charitable giving vehicle in the United States (National Philanthropic Trust, June 2007). These are funds whereby an individual can both make the donation to a foundation they create themselves (very inexpensively), and choose which charities will receive grants from the capital every year. 

This type of giving is also growing in Canada, and an added boost has been provided by more generous tax treatment of certain gifts.

TAX EFFECTS

The 2007 tax credit for charitable gifts (for BC residents) is 20.7% of the first $200 donated and 43.7% of the remaining amount.

There are some special rules about donating listed securities, such as mutual funds, stocks, bonds, etc. that provide an even greater incentive to give.

In May 2006, the federal budget called for the elimination of tax on capital gains on securities that are gifted “in kind” to a charity. This is a huge boon to charities.  An “in kind” gift is one where the asset is not sold for cash. Instead, the ownership of the asset is transferred to the charity.

EXAMPLES

If Bob makes a $10,000 gift of cash/cheque to charity, it reduces his income tax by $4,324, thereby “costing” him only $5,676.

If Mary instead chooses to gift $10,000 of stock for which she paid $4,000, it will result in the same tax credit, but also avoid any tax on the $6,000 of capital gains (which might otherwise have cost up to $1,300).
In essence, Mary has avoided $1,300 of income tax she was going to have to pay someday on the $6,000 of capital gains.

TAX ASSISTANCE FOR CHARITABLE DONATIONS BY INDIVIDUALS
Of Cash Compared to Donations of Publicly Traded Securities

While this type of tax treatment applies to public charities and donor-advised funds, it does not apply to private foundations.

A taxpayer is not allowed to gift so much money as to create a tax refund with their tax credit. If the gift is large enough that it might do so, then the excess donation can be used to create tax credits in the following five tax years.

In the case of BCE stock, where it is expected that the company will be purchased by the Ontario Teachers’ Pension Plan later this year, there will be many Canadians with capital gains as their stock is acquired.

If, instead of waiting for the takeover to be completed, they donated the stock to charity or to their donor-advised fund, they can avoid the capital gains tax altogether.

FLOW-THROUGH SHARES

Jane makes $50,000 as a legal secretary, and receives a $10,000 bonus in August 2008. She would normally pay about $3,000 of income tax on that bonus, leaving her $7,000 in hand.

With the assistance of her financial advisor, she buys $10,000 of flow-through shares in September 2008, and takes a resulting tax deduction that negates the income tax. The cost base of the shares becomes zero, and so a pending capital gain of $10,000 is created.

In June 2010, restrictions on selling the investment are lifted (which, for the purposes of this illustration, does not change the investment’s value), but instead she opts to donate it “in kind” to her favourite charity.
She avoids the capital gains tax and, what’s more, gets a tax credit of $4,324, which she gets in the form of a tax refund on her 2010 tax return.

Instead of having $7,000 in hand, she has $4,324, but has the satisfaction of having gifted $10,000 to those in greater need. In essence, it has cost her only $2,676, the difference between keeping the bonus and the tax refund after her charitable gift.

Gifting can be a complex area of financial planning. You should contact your financial advisor to make your gift in the most efficient way possible.