While much of the tax-driven investment planning these last few weeks of the
year traditionally centres on tax-loss selling, I'd like to suggest a program
which I'll call "tax-gain donating."
If you will recall, in the Conservative budget of May, 2006, the government
eliminated the capital gains tax on the appreciated gain on listed shares,
mutual funds and segregated funds when donated to registered charities.
So, how does tax-gain donating work? First of all, rather than focus on your
losers at year-end, take a closer look at your winners to see if there's a
charitable opportunity waiting to be seized.
Take the example of two investors, Robin and Ronnie, who each wish to make a
$5,000 donation to their favourite charity. Let's also assume that each of them
owns $5,000 worth of shares in Industrial Alliance (IAG) that they received
through its insurance demutualization in February, 2000, and they've performed
well. The shares, which have an adjusted cost base or tax cost of zero, are an
ideal candidate for the program.
Robin, being a collector of frequent-flyer miles, decides to donate using her
VISA card since she can accumulate one mile for each dollar given to the
charity.
Ronnie decides he wants to continue owning the IAG shares, but would like to
make his donation "in-kind" to maximize the tax opportunities. As I will show
you, he can do both.
Robin will receive a tax receipt for $5,000 for her donation (and get 5,000
reward miles). However, the adjusted cost base of her untouched IAG shares
remains at zero. Assuming a combined federal and provincial tax credit of 40%,
her donation receipt would generate $2,000 of tax savings.
Ronnie, on the other hand, would pay no capital gains tax on the donation of
his IAG shares to charity. He would, however, be entitled to his full tax
receipt for the $5,000 contributed. Since he wants to continue to own the IAG
shares, he simply buys them back on the open market. By doing this, he will bump
his adjusted cost base to the current fair market value of $5,000, meaning he
would only pay capital gains tax on any future appreciation.
And, no, Ronnie does not have to wait 30 days before buying back the stock as
there's no superficial gain rule in the Income Tax Act.
The end result? Both Robin and Ronnie have made a $5,000 donation and
continue to own IAG shares. While Robin has accumulated 5,000 air miles, Ronnie
has saved future capital gains tax of $1,000 ($5,000 X 50% X 40%).
Which would you prefer?