GOVERNMENT RULES PUT MORE MONEY BACK IN YOUR POCKET

Thanks to Canada's income tax legislation, charitable donations don't just help the receiving organization – they also provided the donor with valuable income tax credits. It's a win-win proposition! Proper planning can further enhance your Tzedakah dollars by up to 40%!!

When an individual donates money to a charity they receive a charitable donation credit. On donations above $200 the donor will receive a 45% tax credit.(assuming the top marginal tax bracket) A tax credit is a reduction of tax owing. As an example, if an individual donated $10,000 to the shul the 45% tax credit would reduce his taxes by $4,500.

Very often the question arises, is it more advantageous to give cash or to sell some assets from one's stock portfolio and give the money to the organization. Generally it is more tax efficient to use the securities, as the increase in their value has never been taxed. However, under the new Federal Budget, it may be even more beneficial to donate the securities directly to the institution as opposed to selling them and then making the donation.

Let's look at the following scenario: Beryl wishes to donate $10,000 to the shul for the building campaign. He can either sell stocks that he bought for $2,000 and are now worth $10,000 or he can just transfer ownership of this stock directly to the shul.

A) Sell the securities:

When Beryl sells the stock he will calculate the Capital Gain. This is the difference between the price he paid for the stock and its value today. In our case the capital gain is $8,000 and he would end up paying $1,800 in tax. This is calculated as follows: 50% of the gain or $4,000 is taxable at 45%. When he donates the money he will get a tax credit of $4,500 which will give him a net tax savings of $2,700.
($4,500-$1,800=$2,700)

B) Transfer the shares directly:

By transferring the shares to the shul Beryl will avoid paying the $1,800 in Capital Gains Taxes! Under the new rules passed in the last Federal budget, when gifting public securities to a charitable organization no tax is payable on the growth of the security! Therefore he would not pay $1,800 capital gains tax and would receive a $4,500 Tax Credit!

Some people may wonder whether Beryl should give up this great stock. If he still wants to own it, he can buy it back. By so doing his new cost base will be much higher which will alleviate capital gains issues down the road. This strategy would also work for corporations that gift securities to the charity.  However the rules for corporate gifting are slightly more complex and are beyond the scope of this article.

Individual circumstances may differ and impact the way that things need to be structured. It is imperative that one obtains proper tax advice to make sure that all the correct steps and procedures are followed.

Technical notes for your accountant:

When one does a "transfer in kind of securities", the charity will issue a regular receipt for the amount of the donation. The financial institution will issue a T3 for the capital gains that have been incurred. That amount is included in one's tax return. Your accountant will then complete a form T1170 which will exclude that capital gain from your income.

Elli Schochet, CFP is President of ESP Financial Group, a company specializing in Insurance and strategic tax planning strategies. He has been in the Financial Services Industry since 1995 and provides insurance and tax planning solutions to professionals and business owners. For further information he can be contacted at (416)644-0579.This information is provided solely for informational and educational purposes and is not to be construed as providing individual investment, tax or legal advice. Consult your professional advisor prior to acting on the basis of this material.

E & O.E.
Sept. 2007