Donation planning doesn’t have to be difficult
There’s less than a month left before BCE Inc. investors face potentially massive capital gains on their holdings of the Bell Canada parent. Time is therefore of the essence for investors who are sitting on holdings of BCE (or any publicly traded stock, mutual fund or seg fund) with significant accrued capital gains who wish to do some proactive tax planning.
The 2006 federal budget completely eliminated the capital gains tax on donations of publicly traded securities to registered charities. The 2007 budget extended that tax advantage when such securities are donated to private foundations. By combining the advantages of donations “in kind” with the additional advantages of the donation tax credit system, you can put into place a significant strategic charitable giving plan that will save your clients tax now and in the future. Let’s look at an example.
Isaac owns $30,000 of BCE shares that he inherited years ago from his uncle. At the time of his uncle’s death, the fair market value of the shares was only $6,000, which became Isaac’s adjusted cost base (ACB) or tax cost.
Isaac generally donates about $5,000 annually to charity, divided equally amongst several of his favourite causes. Given that BCE shares won’t be around next year, however, he may wish to act quickly to take advantage of this tax planning opportunity.
Let’s say he donates his entire $30,000 of BCE stock this year by giving $7,500 worth of shares to each of his four selected charities. He 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 approximately 20 per cent.
But that’s not all. Isaac will receive four donation receipts totaling $30,000, which will produce a tax savings to him of at least 40 per cent, regardless of which tax bracket he’s in. That’s because any donations beyond the first $200 annually are eligible for the donation tax credit, generally at the top federal and provincial tax rates, making them worth virtually the same to all Canadians regardless of income level.
While the charities benefit this year from the increased donations, Isaac can either choose to claim the entire $30,000 donation credit on his 2008 return or he can spread out his donation credits by claiming them over the next five years, the maximum carry-forward period allowed for charitable donations. Naturally, Isaac would only do so if he was unable to use the full value of the donation credit in the current year to reduce his tax payable to zero.
Donating in kind has also become a lot easier to do, especially if you’re dealing with a major charity. Most brokerage firms now have a special form to complete to transfer the securities in kind while many charities have streamlined their procedures to make in-kind donations as easy as possible.
Another route to facilitate multiple in-kind donations is to use an intermediary such as CanadaHelps.org. CanadaHelps, a public charitable foundation, serves as a national, online, not-for-profit donation portal that allows you to donate to any of Canada’s 80,000 charities, from national organizations like the Canadian Cancer Society to your local church or synagogue. CanadaHelps’ motto is “Giving made simple” and that’s exactly what they’ve just done for “in-kind” donations.
The donor fills in her basic personal information on the website, selecting the charities to which she wishes to donate from a comprehensive, online database directory. She provides details of the stock or funds to be donated and the details of where these securities or funds are being held. Upon “check out,” the donor simply prints out a prepopulated “Letter of Direction,” which is signed and sent to the financial advisor authorizing the transfer of securities to CanadaHelps.
An email is automatically sent from CanadaHelps to the advisor advising him or her of the donor’s pledge and the donor will receive a tax receipt via email once the shares or funds have been received by CanadaHelps. The receipt is based on the closing price of the securities on the day they are received by CanadaHelps.
CanadaHelps charges a “transaction fee” that covers all brokerage fees, banking costs, receipting, reconciliation and disbursements. The fee is deducted based on the proceeds of the sale of securities donated before the donation is sent to the charity.
Another solution is for the donor to set up a “donor-advised fund” within a community foundation or other public charity. A donor-advised fund is a special account set up by a donor with a charity in which the donor receives the tax receipt upon the initial gift and, each year, directs the foundation to make gifts to charities of his choice. While the foundation or charity does not legally have to follow the donor’s suggestions, it would generally do so to honour the wishes of the donor, providing the donations are in keeping with foundation or charity’s charitable objectives.
A donor-advised fund is often used as an alternative to establishing a private foundation as it avoids much of the administrative burden, fees and legal complexities often associated with both the initial establishment of the foundation and its ongoing upkeep and maintenance.