Increasing the Value of Your Generosity with Strategic Financial Planning

Charitable donations can have significant financial and tax advantages when they are incorporated into a tax and estate plan. This article identifies one strategy you may wish to consider that could benefit you while alive and increase the generosity of your legacy.

The gift of investments can save you tax

Do you have a charity that you support regularly through donations?  Are there times when you sell investments and realize capital gains on which you have to pay tax?  If so, you may be able to reduce your capital gains tax by gifting all or a portion of these investments directly to a registered charity.

The May 2006 federal budget made it more attractive to gift investments to charities.  Now donations of investments to registered charities are exempt from capital gains taxation triggered by the gift.  Investments that are eligible for this tax treatment include shares, bonds, debentures, mutual funds and segregated funds.

Bear in mind that you will only benefit from this tax measure if the investments you are gifting have an unrealized capital gain.  If the investment has not appreciated in value you will still receive a charitable donation receipt, but you will not save any capital gains by donating them to a charity.

Here is an example of how it can work.

Let us assume that you want to make a gift of $10,000 to your favourite charity.  You are also planning to dispose of an investment that you have held for a number of years.  The investment currently has a value of $10,000 and was purchased for $4,000.  The unrealized capital gain is $6,000.  The combined federal and provincial tax rate and charitable tax credit are both 45 percent.

Here is an illustration of your tax situation if the investment was sold and the cash proceeds donated versus donating the investment directly to the charity:

*             Source: Canada Revenue Agency
**           Assumes 45% marginal tax rate in this example

By selling the investment and donating the cash, $1,350 is still owed in capital gains tax by the donor.  This amount is either paid out of pocket, or goes to reduce the amount of your gift.

By donating the investment directly, a $10,000 gift provides a tax credit to the donor meaning the cost of the donation is really only $5,500.

A simple decision such as donating the investment directly to a charity, as opposed to selling them then gifting cash can have significant implications on taxation and the actual amount of the donation. It's wonderful to be generous, and this strategy "increases" your generosity.

Before making a decision on any financial matters, you should obtain the advice of a financial services advisor and/or a taxation specialist. However, I hope that I got you thinking about how you can increase the value of your charitable giving with some guided financial planning.

-By Victor Pywowarczuk, BSc'79 & MBA'81

Victor is a McGill alumnus, with a Bachelor of Science degree and a Masters of Business Administration degree.  He is also a member of the Society of Management Accountants of Ontario.  Victor is a life & health insurance advisor and mutual fund representative with Desjardins Financial Security Independent Network and Desjardins Financial Security Investments Inc. in Richmond Hill, ON. He can be reached at victor.pywowarczuk [at] dfsin.ca.

This article is for general information purposes only and should not be construed as investment or tax advice. The rates and information contained herein are based on sources and materials believed to be reliable, but are not guaranteed.