Summertime is here, and the giving is easy
Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
Okay, so it's the summertime. We're not supposed to talk about snow in the summer. Or hockey (well, hockey is okay - it's our national pastime). We're not supposed to think about pumpkins, leaves turning colour, or - heaven forbid - charitable giving. Isn't charitable giving that thing you do in December each year just before the deadline for obtaining a donation tax credit for the current year? Yup. That's the approach most people take to charitable giving. Too bad, really.
You see, there's a difference between charitable giving and strategic philanthropy. Charitable giving is short-term, spontaneous, ad hoc expressions of brief generosity.
Strategic philanthropy - that's something different altogether. It involves a plan. It involves thinking ahead - something that most of us are not particularly good at. Strategic philanthropy is about taking a long-term approach to giving back. Yes, it's even about considering ways to give back in the middle of the summer.
Giving back to society is not mainly about the tax savings. It's about making a difference. It's about moving yourself from success to significance. And when did thinking about the welfare of others become a fall/winter sport?
Social capital
Believe it or not, a portion of your income and wealth is earmarked for the betterment of society - whether we like it or not. Call this your "social capital." If we choose not to give to others, the government will do it on our behalf - through the tax system. I call this "involuntary giving." I can't think of a more unsatisfying way to give than have the folks in Ottawa decide for me how to use my social capital.
A much more fulfilling way to give is to self-direct your social capital. Let's face it, consciously choosing how much to give, when to give, how to give, and whom to give to comes with advantages. Oh, and then there are tax savings from the donation tax credit. You're including the government as your partner in your giving - and you're calling the shots. I like that.
Giving strategy
While tax savings should not be your primary motivation for making a donation, it pays to make gifts wisely. Consider one idea that involves donating securities to charity.
Suppose you have $100,000 in XYZ shares with a $50,000 adjusted cost base (ACB). Suppose you want to sell those XYZ shares, and have thought about donating them to charity to eliminate the capital gain. Problem is, you don't want to make a $100,000 donation. Try this: Donate $20,000, and keep $80,000. The result? You'll face tax of $9,200 (at a marginal tax rate of 46 per cent) on the $80,000 worth of shares when you sell. You'll face no tax on the other $20,000. In addition, you'll be entitled to a donation tax credit for the $20,000, which will save you tax of $9,200. Bottom line? The tax savings from the $20,000 worth of shares donated will offset the tax on the $80,000.
What does it cost you? Well, if you had kept the full $100,000 for yourself, you would have walked away with $88,500 after taxes. Now, you'll keep $80,000 instead. So, you're giving up $8,500 in order to give the charity $20,000. So, how do you know how much of the $100,000 to donate to charity to offset the tax bill on the shares you choose to liquidate and on which you keep the proceeds? A formula works in most provinces, at most income levels. Here it is:
Amount to donate equals: (FMV)(FMV - ACB)/(3 FMV - ACB), where FMV is the fair market value of your investment and ACB is your cost amount. In our example: ($100,000)($100,000 - $50,000)/(3 x $100,000) - $50,000 = $20,000, the amount of our donation. Why not try something similar this summer?
