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A Better Way To Give

By Robert Mulrooney

Avoid capital gains with a direct transfer of shares.

Winston Churchill famously said that we make a living by what we get, but we make a life by what we give away.” That doesn’t mean, however, that we can’t get strategic about the way we give – or plan to give in a way that’s most mutually beneficial.

If you’ve invested wisely and now own a portfolio of stocks, bonds, mutual funds or related segregated funds, you can transfer these securities to a registered charity and minimize your tax payable – without also transferring your tax obligation to the charity.

Making a donation using funds from investments the old-fashioned way (i.e. selling securities to fund the donation) means you incur capital gains tax on the amount the investment has increased in value. By arranging a direct transfer of securities, you avoid capital gains tax while also still benefitting from the full donation tax credit based on the current market value of the securities. The combined tax savings can be quite substantial.

To illustrate the tax effects for a BC resident, let’s look at the tax consequences of a $10,000 gift of publicly traded securities made in 2013. For the purposes of this example, we will assume:

  1. You paid $4,000 to acquire the securities and they are now worth $10,000. This means your capital gain is $6,000 and 50% of this gain is taxable;
  2. You are in the highest marginal tax rate (43.7%) for purposes of calculating the tax on the capital gain;
  3. You have made other gifts to charities over $200; and
  4. You have sufficient income to be able to deduct the entire tax credit in the current year or following five years.

In this scenario, you transfer the shares to the charity of your choice and receive a charitable donation receipt in the amount of $10,000 (the market value of the securities). Based on your tax bracket, this results in a tax refund of $4,370 ($10,000 x 43.7%).

In this example, the tax credit you receive ($4,370) is greater than the original cost you paid for the shares ($4,000). This means you made a profit of $370 on your original investment while also providing the charity with a gift worth $10,000.

I’d be happy to walk you through the potential tax benefits of making a direct transfer of shares based on your particular situation. Simply give me a call at the number below.

 

This article was originally published in the January 2013 edition of the Comox Valley Business Gazette.