With Bell Canada stock set to go private in 2008, investors who are sitting
on holdings with significant accrued capital gains have an opportunity to do
some proactive tax planning.
As reported earlier this week, investors who hold Bell shares that have
appreciated substantially outside of a tax-sheltered plan such as a RRSP or
RRIF, may face a huge tax liability in early 2008 when their stock is bought
out. But, if you are philanthropically-inclined, you can reap huge rewards in
the form of tax savings in 2007 and, potentially, for the next five years.
That's because last year's federal budget eliminated capital gains tax on
donations of publicly-traded shares to registered charities. This year's budget
extended that tax advantage when shares are donated to private foundations.
By combining the advantages of "in-kind" donations with the donation tax
credit system, you can put into place a significant, strategic charitable giving
plan that will also save you taxes.
Let's take a look at an example: Avery owns $30,000 Bell Canada shares that
she inherited years ago from her great-aunt. At the time of her great-aunt's
death, the fair market value of the shares was $6,000, which became Avery's
adjusted cost base (ACB) or tax cost.
Avery donates about $5,000 annually to charity, divided equally among four
favourite causes. Let's say she donates her entire $30,000 of Bell stock this
year by giving $7,500 worth of shares to each of her four selected charities.
She will immediately save the capital gains tax on the $24,000 accrued gain,
equal to about $5,000 of tax, assuming a marginal capital gains tax rate of 20%.
But that's not all. Avery will receive four donation receipts totalling
$30,000, which will produce a tax savings to her of at least 40% or $12,000,
regardless of which tax bracket she's in. Any donations beyond the first $200
annually are eligible for the donation tax credit at the top federal and, in
most cases, provincial tax rates. So, they are worth virtually the same to all
Canadians, regardless of income level.
While the charities will benefit this year from the increased donations,
Avery can either choose to claim the entire $30,000 donation credit on her 2007
return or she can spread out her donation credits by claiming them over the next
five years, the maximum carry-forward period allowed for charitable donations.
Naturally, she would only do so if she were unable to use the full value of the
donation credit in the current year to reduce her tax payable to zero.
Is it hard to make such a donation? I have found that as long as you're
dealing with a major charity it's a piece of cake. Most charities are set up to
accept donations in-kind, especially now that these donations are given
preferential tax treatment.
Jamie Golombek, CA, CPA, CFP, CLU, TEP, is
vice-president, taxation and estate planning, at AIM Trimark Investments in
Toronto.
Jamie.Golombek@aimtrimark.com