Taxes   |   Nov 20, 2019

Not Your Typical Donation

Robert Handelman
Vice President, Tax & Wealth

Efficient gifting revisited

Although it’s only the beginning of November, the holiday season advertising and retail push is in full swing. As we approach the end on the year, many investors take the opportunity to review their charitable commitments for the year. While much time is given to determining the allocation of funds, people often overlook the true cost of making a donation.

At first blush, making a charitable donation may seem like a larger cash outlay than it actually is. People often forget that when you make a charitable donation you are entitled to receive a tax-credit from the government as a result of your gift. This credit ultimately benefits you when filing your personal tax-return, as the credit reduces your taxes payable balance owing to the CRA.

Many articles have been written at length about using “in-kind” donations of property to give a more tax efficient gift. In-kind donations of property, such as publicly traded shares or mutual funds, afford donors both a charitable tax receipt for the full market value of the investment and the opportunity to avoid paying taxes on the imbedded gains in the gifted security. Making gifts using this strategy has been a “no-brainer” for advisors and investors alike.

Which securities are best to donate?

Not surprisingly, donors should seek out the security with the largest capital gain to optimize their donation. The larger the imbedded capital gain in an investment, the more benefit is derived by avoiding the tax on the imbedded gain through an “in-kind” donation.

Certain mutual funds that pay a return of capital (“ROC”) distribution can be prime candidates for clients looking for a way to maximize the efficiency of their donation. Return of capital distributions draw their tax-free character from the adjusted cost basis (“ACB”) of the investment. As an investor receives ROC distributions, they simultaneously grind down (reduce) the ACB of their investment until it reaches $1, at which point, any additional ROC distributions are taxed as a capital gain. Investors holding ROC distributing mutual funds with an ACB of $1 or another low number, in fact, have the most efficient securities to donate.

The following page show three examples of donating $10,000 to a registered charity to illustrate the benefit.

The illustration shows that in-kind donations are clearly more efficient as compared to traditional gifts of cash. However, in order to truly make the most efficient donation possible, donors should seek out the security with the largest imbedded capital gain to donate. A mutual fund that pays a ROC distribution can help investors create a security “ripe for donating”.

Bottom Line

This year, when thinking about how much you can afford to give toward charitable causes, remember the true cost of making your gift, it can be significantly less than what you initially thought.

Robert Handelman, CPA, CA, CFP, CIM, CLU
Vice President, Tax & Wealth

Disclosures

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The examples contained herein are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of printing, however, Fiera Investments cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and Fiera Investments cannot be held liable for the use of or reliance upon the information contained here.

Fiera Investments does not provide tax, accounting, regulatory, or legal advice to its clients. All investors are advised to consult with their tax, accounting, or legal advisors regarding any potential investment. Return of Capital should not be confused with a mutual fund’s performance, rate of return or yield. If distributions paid by a mutual fund are greater than the performance of the fund, then the investment will decline.