If your client wishes to donate to charity, under the new tax guidelines he or she may be further ahead giving securities rather than cash.

In 2006, the federal government made donations of publicly listed securities to public foundations tax-exempt, and this year’s federal budget proposes extending this benefit to donation of securities to private foundations.

“Donating securities has clear advantages over donating cash,” says Jo-Anne Ryan, vice president of philanthropic advisory services at TD Waterhouse in Toronto. “Canadians face a huge tax bill when they sell securities held outside RRSPs. They should be receptive to strategies to minimize that bill. The greatest benefit will come from donating stocks that have appreciated the most over their book values.

“We’ve seen a 30%-40% increase in securities donations in the past year,” Ryan adds. Stocks made up 90% of the $11.8 million donated to TD Waterhouse’s Private Giving Foundation since November 2006.

In a recent report, TD Waterhouse used the example of an investor, John Smith — who bought shares for $400 that appreciated over time to $1,000 — to show the advantage of donating securities instead of cash. If Smith sells the shares and donates the cash to charity, the report says, he has a capital gain of $600, of which $300 is taxed as income. Assuming Smith resides in Ontario and has a combined federal/provincial marginal tax rate of 46.41%, he will pay capital gains taxes of $139.23, leaving him $860.77 to donate to charity. He will get a tax credit of $399.48 for his donation.

But, the report notes, if Smith donates the shares directly to the charity, the charity will receive $1,000 in value instead of $860.77. His tax credit of $464.10 will be $64.62 higher and he’ll completely avoid the $139.23 in capital gains taxes. In the end, he’ll save $139.23 in taxes by donating securities vs selling the shares and donating the cash. And, at income tax time, Smith will be ahead by $64.10, the difference between the tax credit he received and the original price of the shares.

“Ottawa’s changes are stretching clients’ donation dollars,” says Keith MacIntyre, a chartered accountant and partner at Grant Thornton LLP in Halifax.

Ryan is happy private foundations will be getting the same tax treatment as public foundations when the budget proposal becomes legislation. “The more donation options, the better it is for charities,” she says.

MacIntyre notes private foundations are popular among wealthy Canadians who want to be involved in the disbursement of the funds. “We’ve seen an increase in the creation of private foundations,” he says. “The intergenerational transfer of wealth has given many people more money than they expected.”

He cites a client who wants to leave $2 million to each of his two children. “But, by the end of his life, this man will have another $20 million, which he thinks would only complicate his children’s lives,” MacIntyre says. “We’re creating a private charitable foundation for the largest part of his wealth.”

This year’s proposal to extend the tax break to donors to private foundations comes with the “excess business holding regime,” limiting a foundation’s shareholdings. Divestment is required when the foundation and all non-arm’s-length persons hold more than 20% of outstanding shares in any share class of a corporation.

MacIntyre notes there’s a good reason for the restrictions: “They ensure charities will indeed spend the money to carry out the good works for which they were created.”

Robert Hayhoe, partner and specialist in charities law at Miller Thomson LLP in Toronto, sees significant benefits in donating flow-through shares to a private foundation. Flow-through shares, the common shares issued by Canadian companies in the resources sector, allow the issuing firms to transfer exploration tax deductions to investors.

“A client can purchase listed flow-through shares and immediately deduct their value from income,” he says. “A few months later, the shares can be donated to the foundation for a full tax receipt with no corresponding income inclusion.”

As well, advisors with clients who have large holdings in BCE Inc. should inform their clients that there will be a significant tax effect when the Ontario Teachers’ Pension Plan Board’s all-cash offer for BCE closes. “Advisors can calculate how many BCE shares clients could donate to charity to offset capital gains,” Ryan says.

Private foundations help build long-term client relationships, Hayhoe says: “If shares are given to the donor’s private foundation, they remain under the control of the donor into the future. And the advisor can continue working with the foundation, rather than heirs, after the client’s death.” IE

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