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Tax-Saving (Part Two): Being charitable

In my last column I talked about the importance of planning ahead to realize maximum tax savings. Here are a few more ideas to think about now, so you can reap the benefits on future tax returns.

Appreciated securities, like stocks or mutual funds, provide a tax-efficient way to donate to your favourite charity. The tax rule change in 2006 means donated securities will no longer be subject to capital gains taxation.

For example, let’s say you want to pledge $5,000 to a charity. You want to make this donation by using 100 shares/units of a stock or a mutual fund that has appreciated in value to almost double what you originally paid—the $30 purchase price is currently $50. There are two methods to consider.

Method One: Sell the investment and write a cheque to the charity.

You sell the shares $5,000
You write a cheque -$5,000
You pay tax on the gain $900

You can see the problem with this widely used method of funding charitable donations. Tax on the capital gain of $2,000 is payable on 50 per cent of that gain, so in a 45 per cent tax bracket, $900 needs to be paid to Revenue Canada. This can be avoided.

Method Two: Donate the shares to the charity $5,000

No taxable capital gains on the donation

Easy. Smart and clean. The charity will sell the shares on receipt and put the $5,000 to work for them. Do check to see if the charity has an account open at your investment firm. If it does, things get even easier with a one-day transfer and sell. If the charity deals with a different firm to which you must send the shares, the transaction may take two to three weeks. The time difference can be important if breaking news has caused the stock to increase and the sale needs to happen immediately.

Also, you can change the beneficiary on your RRSPs or RRIFs to your favourite charity. This allows the charity to receive the whole RRIF account value. It will send your estate a tax receipt equal to the RRIF value and no tax will be payable. This is often done on a second spouse death, or for a single person. The goal is to get the most money to the charity and reduce your taxes payable during your life and for your estate.

If you do wish to leave some money to charity, and you haven’t done any estate planning, make sure you talk to a financial advisor who specializes in estate planning strategies. The idea of planning your estate may seem morbid, but it results in major savings of both estate costs and taxes. Your beneficiaries will be happy you planned ahead. You should share your donation decisions and information with your charity of choice now, providing them with the opportunity to thank you today.

There’s no doubt that the charity will be pleased with both the donation and the possibilities it creates for them in terms of future planning. Your executor will also be happy with the decreased taxes and probate fees.

Make the commitment to plan ahead. Over the summer, spend some time thinking about how you want to give back to your community. If charitable giving is important to you, speak to your financial advisor and determine the best methods for you to contribute and make a difference in the lives of others—and the amount of your estate’s tax bill!

Glenn Stewardson, CFP, FMA, is a Senior Financial Planning Advisor with Assante Capital Management Ltd. (Member CIPF). Email Glenn at gstewardson@assante.com or check out his website www.assante.com/advisors/gstewardson.Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above.