## Minimizing Donor Tax to Maximize Donor Gifts, courtesy Frank Arnold

### Minimizing Donor Tax to Maximize Donor Gifts

I am proud to be paying taxes... The only thing is - I could be just as proud for half the money. Arthur Godfrey

by Frank Arnold, The Pinch Group

For many donors, there are plenty of opportunities to receive additional tax relief, which means they can give more to their favourite charity or land trust. Being an investment advisor, my area of expertise is with gifts of publicly traded securities, and to a lesser extent, gifts of life insurance.

#### What are publicly traded securities?

- Publicly traded stocks and bonds (e.g. - Telus Corp stock)
- Mutual funds (e.g. - Templeton Growth Fund)
- Segregated funds (like mutual funds but issued by insurance companies)

#### Why give securities?

Simply put, the donor gets all the tax break of a regular donation, but bypasses the capital gains tax if the security is worth more than the original cost. Normally, when a security is sold for more than its original cost, the difference is called a capital gain, and half this must be included as income. Donating the security before instead of selling it avoids the capital gains tax.

A quick example, using a $10,000 gift of a security with an original cost price of$4,000, and assuming the donor is in a middle tax bracket (30%, but this varies by province):

Tax Benefit of Donating Securities
Option 1
Option 2
Sell Security and give cash
Donate Security "in kind"
Market Value of Security
$10,000$10,000
Cost Base
$4,000$4,000
Capital Gain
$6,000$6,000
Taxable Capital Gain (50%)
$3,000$3,000
Tax Due on gain at 30%
$900$0
$10,000$10,000
Value of tax reciept at 44%
$4,400$4,400
Net Tax Savings
$3,500$4,400

#### Major Hurdles

Market Meltdown

Stock markets dropped about 50% from peak to trough, and are still down about 35% from their highs.

In general, stocks had their worst year since the 1930s and are back to where they were 10 years ago, with corporate bonds, mortgages and real estate all falling last year. This presents three major problems for charities:

• Globally, approximately $50 trillion in wealth (stock market, bond market, and real estate) has been destroyed in the past 12 months, translating into substantially less money available from donors and foundations. • Even if donors came out of this relatively less scathed, the current recession, together with the fear and uncertainty brought on by all this will likely reduce the inclination for larger donations • While virtually all donors give for the sake of giving, the tax advantage of donating securities is enhanced when they are worth more than the original cost. Thus, donors can donate more to the charity for the same after-tax cost to the donor. Last years market tumble essentially erased the previous 4 years of gains, and likely removed the need to worry about capital gains for the next few years. Translation: expect fewer gifts of securities. #### Tax Free Savings Accounts (TFSAs) Longer term, expect the new TFSAs to be a hurdle to larger, tax-preferred donations. In a nutshell, all the interest, dividends and growth within a TFSA are tax-free, as is taking money out of a TFSA. This will not impact gifts of securities this year or next, considering contribution limits are just$5,000 per year. However, over the next 10-20 years, a substantial portion of the non-registered (i.e. - money outside RRSPs and RRIFs) will be moved into TFSAs, removing the extra tax incentive of donating funds from these plans.

One area where advisors are having more involvement with their clients' philanthropy is donor-advised funds. Donors are increasingly wanting to be more hands-on within the philanthropic process, rather than just writing a cheque and being done with it.

Donor advised funds allow the donor to have their own personal private foundation, all under the umbrella of a larger public foundation such as the Vancouver Foundation or Tides Canada.

Financial institutions are seeing demand here and so they are jumping in too - most of the banks now offer them, as do some fund companies like Mackenzie Financial and Dynamic Funds.

For you, rather than getting a cheque for say, $25,000, if the supporter instead contributes to a donor advised fund, the money goes into an account that then pays out an annual income to the charity or charities of the donor's choice. Generally, the income is about 4% or so of the value of the donor advised fund. The biggest consideration of these funds, using the example of a$25,000 contribution, is that now you would be receiving $1,000 a year rather than$25,000 up front. Also, the donor can always change where s/he wants to direct the income each year.

On the plus side, a stream of long term income for many charities is preferred over one-time infusions of cash.

Also, they could act as a bridge to the investment advisor community, if the advisor gets to keep managing the money, as is often the case. Finally, if your supporter sets up a donor-advised fund at Tides Canada Foundation (in Vancouver), view this as an opportunity to showcase what you do to this important public foundation - Tides is Canada's public foundation focussing on environmental charities, so it is always a good idea to be on their radar.

#### Conclusion

I have gone over some of the more common situations where charities can pass along enhanced tax savings to their donors. It is useful to be aware of the areas where opportunities exist, as well as some of the pitfalls. The goal is for this to be mutually beneficial for donors and worthy non-profits - the easier the process and the more tax saved, the more donors can use their money for good.

Frank Arnold
The Pinch Group at Raymond James Ltd.
250-405-2420 or 1-866-515-2420
frank.arnold@raymondjames.ca