Tax breaks boosting donations: TD report

It’s been one year since the federal government enacted legislation that removed the capital gains tax on publicly traded securities donated to charities. But are clients taking advantage? There aren’t any concrete numbers yet but a TD Economics study estimates this type of giving will only increase as more Canadians accrue capital gains on their investments.

The study, entitled Donating Securities Makes Good Financial Sense, explains that if an investor sells a security, 50% of the capital gains are considered taxable income. If the investor sells the security and donates the proceeds to charity, it’s still subject to the tax. However, if he or she donates the security in its entirety to charity, the charity gets 100% of the value of the security plus the capital gains.

The advantages for charities in this scheme are fairly clear-cut — they get more. Canadian investors are also able to benefit because in some cases they can eliminate substantial capital gains taxes through the credits they receive by donating to charity.

The TD study uses the example of an investor who buys shares for $400 that appreciate to $1,000. If that investor sells the shares and donates the cash to charity, he or she has a capital gain of $600, $300 of which is taxed as income. If the investor lives in Ontario and has a combined federal-provincial marginal tax rate of 46.41%, the capital gains tax would be $139.23, and he or she will get a tax credit of $399.48 for the donation.

When the shares are donated directly, the charity receives $1,000 in value instead of $860.77. The tax credit of $464.10 is $64.62 higher, and the donor completely avoids the $139.23 in capital gains tax.

Jo-Anne Ryan, vice-president of the philanthropic advisory services at TD Waterhouse Canada, says whether it’s through direct gifting of securities or the use of donor-advised funds, Canadians are increasing their giving because they can donate more or get the tax benefits.

” I believe we’ve just scratched the surface,” she says, noting that unrealized capital gains account for half of the $1.3 trillion Canadian investors held in securities last year.

“A year later we’re up $100 billion on that. In 10 years’ time the report predicts it will be $3 trillion with $2 trillion in unrealized gains,” she says.

Ryan says her company has focused on getting the message out about its Private Giving Foundation to groups that have astronomical capital gains. One group that falls into this category consists of former policyholders of some of the major Canadian insurance companies that demutualized in the late 1990s and took stock instead of cash. One of her clients had a Manulife policy that was gifted to him from his parents. The initial value was $2,500. He kept the policy and chose shares instead of cash. Ryan says his stock is now worth $60,000. Because he didn’t purchase the stock for a set value, all of its value is in capital gains, making him a prime candidate to take advantage of the tax benefits of donating some of the shares.

Recognizing these types of tax advantages, RBC Dominion Securities launched its RBC Charitable Gift Program less than a month after the government implemented the capital gains exemptions.

Anthony Maiorino, vice-president of wealth management solutions and product management for RBC Dominion Securities, says they marketed their product not only to the philanthropic, but to investors looking to minimize their capital gains tax.

While interest was relatively sluggish after its novelty subsided, Maiorino says the program took off in the fall as clients started their tax planning and realized the benefits of the new legislation. The program’s donor-advised fund now oversees $17 million in assets.

“Most of that came in between September and November. We have already issued $440,000 in charitable grants, and the average account size is in excess of $400,000,” he says. “I know anecdotally that a large percentage — about 50% of our accounts — were funded in part with appreciated securities.”

Maiorino says the program is particularly popular with higher-net-worth clients who can use it as a tool to maximize tax savings. “The program is popular with executives who have options,” he says. “We work with them to see how they can donate a portion of their options that will in turn allow them to exercise additional options and pay no tax.”

In RBC’s experience, those who join the program out of self-interest nevertheless get caught up in the spirit of giving, Maiorino emphasizes.

Maiorino says some clients who have donor-advised funds had little interest in charitable giving initially. Donor-advised funds require clients to set up their own foundation that grants to a specific charity. “Once they decide where to grant money, they’re very excited and get really involved in wanting to see this money go [to a charity]that’s important to them.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(05/02/07)

Mark Noble