
For
more
information contact
Barry Johnson
BA, CFP, CLU, CHFC |
Charitable Planning
Planning and strategizing how to
accomplish one’s objectives
includes the most efficient use of one’s resources. Charitable
planning is no different. Recent federal budget changes and other
developments make it more attractive and easier to make charitable
donations.
For
example, two unrelated events have created better opportunities for
charitable giving:
- Mutual life insurance companies have
demutualized. This has created a tremendous
amount of new-found wealth in the community.
- The 1997 federal budget introduced
measures that reduced the inclusion rate of capital gains realized
on certain property gifted to public charities from three-quarters
to three-eighths of the capital gain. It should be noted that this
provision was introduced with a sunset date of 2002.
The following examples
compare the impact of different strategies where an individual desires
to donate shares of a demutualized company valued at $50,000. The
shares have a zero adjusted cost base. It is assumed that the donor is
in a 50% federal/provincial income tax bracket.
Example
1: The individual sells
the shares on the open market, pays the tax due, and donates the
balance in cash to a charity.
|
|
Proceeds of
disposition |
.
. . . . . $50,000 |
Less: adjusted
cost base |
.
. . . . . . . . . . 0 |
Capital gain |
.
. . . . . $50,000 |
Taxable capital
gain (75% of $50,000) |
.
. . . . . $37,500 |
Income tax (50%
of $37,500) |
.
. . . . . $18,750 |
Amount available
for donation
($50,000 - $18,750) |
.
. . . . . $31,250 |
Tax credit on
donation (50% of $31,250) |
.
. . . . . $15,625 |
|
|
Bottom line:
The donor keeps $15,625 and the charity gets $31,250. |
Example
2: The individual donates
the shares to the charity.
|
|
Deemed proceeds
of disposition |
.
. . . . . $50,000 |
Less: adjusted
cost base |
.
. . . . . . . . . . 0 |
Capital gain |
.
. . . . . $50,000 |
Taxable capital
gain (37.5% of $50,000) |
.
. . . . . $18,750 |
Income tax (50%
of $18,750) |
.
. . . . . $9,375 |
Tax credit on
donation
(50% of $50,000) |
.
. . . . . $25,000 |
Tax refund
($25,000 - $9,375) |
.
. . . . . $15,625 |
|
|
Bottom line: The donor keeps
$15,625 and the charity gets $50,000. The charity will not be
taxed when it converts the shares to cash. As a result, the
charity will net an additional $18,750 compared to the strategy
employed in example 1, while the donor gets to keep the same
amount. Should the donor not want to keep anything from the
demutualization, an additional cash donation of $31,250 could be
made. With the new tax credit on the cash donation and the
existing tax refund, the donor would break even. |
© Copyright 2000
Excerpted with permission, from Comment, a publication of the
Canadian Association of Insurance and Financial Advisors (CAIFA).
All rights reserved.
This commentary is published by the
Canadian Association of Insurance and Financial Advisors (CAIFA)
in consultation with an editorial board comprised of recognized
authorities in the fields of law, life insurance and estate
administration.
The Canadian Association of
Insurance and Financial Advisors (CAIFA) is Canada’s largest
voluntary professional association of financial advisors with 18,000
members from coast to coast. CAIFA has been setting conduct standards
and providing professional development for its members for over 90
years.
The articles in Comment are not
intended to provide legal, accounting or other advice in individual
circumstances. Seek professional assistance before acting upon
information included in this publication.
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