Donation process should mirror investing

With another tax-filing deadline having passed, now might be a good time to discuss tax planning strategies for this year with your clients, while the topic is still fresh in their mind. Many of them would likely rather donate less to Ottawa, and more to a cause close to their heart.

Investors wanting to donate publicly-listed stock may want to hold off making that gift during periods of market volatility, but that could leave the cupboard bare at charities that rely on donations.

When the federal government eliminated capital gains tax for donated securities in 2006, registered charities saw an 8.3% increase in donations from the year earlier.

There may be an upside to waiting, as higher share prices result in larger tax credits, but Jo-Anne Ryan, vice-president, philanthropic advisory services, TD Waterhouse Canada, suggests investors take a different tack.

“If you’re trying to wait out current volatile conditions in order to maximize the value of your stock donation, I would say that your heart is in the right place, but your strategy is wrong,” she says. “Timing the market is a feat that virtually all investment professionals and experts agree is impossible to accomplish.”

Instead, donors should adopt the same strategy that is widely recommended when buying securities: dollar cost averaging. Ryan recommends donating the securities in tranches, which will mitigate market volatility. Such a strategy not only smoothes out the prices for the donor, but also provides a more stable funding stream for the charity.

“When organizations have stable funding, they can conduct long-term planning and design programs with greater impact,” says Waseem Syed, vice-president of community investment, United Way of Greater Toronto. “Being able to plan how resources are invested — and having the certainty that the funding will be there — makes a big difference to a charity’s effectiveness.”

Recently, the TSX has set new highs, but much of the gains have come from just a handful of stocks: Research in Motion, Encana, and Potash Corp. Much of the market, including the widely-held financial sector, is still under water so far this year.

For investors wanting to make a donation, these underperformers could be sold off, with the proceeds being given to charity. Not only does this give the donor a tax credit, but also a capital loss, which can be used to offset capital gains.

For would-be donors sitting on capital gains, it might be tough parting with such winners. But if they have available funds, it might be wise to donate the shares, and use cash on hand to replenish that particular holding. This will gain them a tax credit, avoid capital gains, and also increase the adjusted cost base of the investment.

“Neither your investments nor your charitable endeavours need to be held hostage by the market,” says Ryan. “By taking a strategic approach to charitable giving, you’ll maximize your tax savings and the value of your donations over the long-term. You’ll also contribute to the stable, long-term funding that is vital to Canada’s philanthropic community.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com