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Recent changes in tax rules may provide greater refunds from charitable donations
The Franz Group serves investors as part of
MacDougall, MacDougall & MacTier Inc.
(This article discusses financial issues and uses fictitious names of people for illustrative purposes.)
Last week we discussed the theoretical case of Steve and Rhonda Baker
(not their real names) with regards to the benefits of using RSPs to
save for retirement.
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Adena Franz
Portfolio Manager
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This year, they are heading into tax season with optimism because,
thanks to their money manager, they have found a way to turn their
charitable donations into contributions that not only effect the well
being of others, but will also help them to keep more money in their
pockets at tax time. Of course the federal government has always
rewarded charitable donations by awarding tax credits, but thanks to
recent changes in tax rules, Steve and Rhonda can expect a more
substantial refund or at least a lower tax bill than in the past.
The Bakers have always given generously to their preferred charity.
“It makes us feel good about ourselves.” Rhonda explained.
“We are very fortunate that we’ve done well for ourselves
and that we’ve planned well for the future. Giving
something back has always been important to us, but now it costs us
less than in previous years.” The Bakers used to make their
charitable donations in cash, but what they learned from their advisor
was that they could instead make these donations prior to year end with
stocks, bonds or mutual funds.
“And come tax season,” Steve interjects, “we
are rewarded with a lower tax bill. What could be better than
that?” What Steve and Rhonda are talking about is a change
in the federal government’s rules on donations that allow
the direct donation of certain assets to registered charities and
allows the donor to avoid paying any capital gains tax on the assets
donated . Prior to 2006 donations of this type could be made, but
capital gain associated with those assets would still be applied,
albeit at a lower rate. “Now we can make a donation comprised of
securities, directly to our favourite charity and avoid paying any tax
on the capital gains.”
“This means we get a tax credit,” Rhonda continues,
“that’s based on the current market value of the
securities.”
The previous year, the Bakers convinced their friends Jeff and Lisa
Bower, who are in similar tax brackets, to contribute to a charitable
cause. “Lisa complained to me that she thought her tax
refund associated with the donation of $5,000 in cash would be larger,
especially given that they were paying taxes at the highest marginal
tax rate in Quebec, 48.22%,” Steve said. “We were surprised
by this and asked her to explain her situation. She told us that their
refund only amounted to $1,408.04. They had raised the $5,000 by
cashing out securities that they had purchased for $1,000 many years
earlier. She also explained that Jeff had used the tax program they
purchased to investigate the impact of selling the securities and
making the donation, but that they still did not really understand it.
“At this point I took out my calculator,” Steve
continued, “and explained to Lisa the reason for her
disappointment. Their first mistake was selling an appreciated asset to
raise the money to make the donation. By doing this, they
triggered a capital gain of $4,000, the difference between the fair
market value of their securities ($5,000) and the adjusted cost base
(i.e. what they originally paid for these assets, $1,000).”
In the Bower’s case the tax reduction related to the donation was
$2,372.44 minus the increased capital gains taxes of $964.40, or
$1,408.04, the amount Jeff derived with the tax program. “I
explained that if they had initially donated the $5,000 security
instead of the cash, they would have ended up with a tax benefit of
$2,372.44 instead of $1,408.04.” she continued, “Lisa said
she felt like kicking herself for not looking into this before making
her donation.”
The first $200 of every charitable donation you make yields a tax
credit of the lowest combined marginal tax bracket (in Quebec 28.5%),
and every amount thereafter is credited at the highest combined
marginal tax rate (48.22% in Quebec), Rhonda and Steve combine their
charitable donations in order to exceed the $200 limit and achieve the
higher tax credit while avoiding the use of the $200 limit more than
once. “We also learned that you can carry forward donations
for up to 5 years, and since our son Adam usually contributes amounts
less than $200 per year to charitable causes, it enables him to use the
$200 limit only once in 5 years, giving him a greater
return.” Rhonda added.
“Lisa asked me how I had learned all this,” she continued.
“I told her that was one of the benefits of having a great money
manager; I don’t have to know this stuff, but she does and she
cares enough to pass along the information to us.”
Adena Franz
is a Vice President and Portfolio Manager at MacDougall MacDougall
& MacTier Inc. She can be reached at 514-394-3771. The information
contained in this article is for general information purposes only. It
does not account for specific investment objectives or the financial
situation of any person reading it. Opinions expressed are those of the
author and do not necessarily represent the opinions of MacDougall,
MacDougall & MacTier Inc. Investors should seek professional advice
regarding the appropriateness of investing in any securities discussed
or recommended here and should recognize that statements regarding
future prospects may not be realized.
 MacDougall, MacDougall & MacTier Inc.
The Franz Group
1010 de la Gauchetiere Ouest, Suite 2000
Montreal, Quebec H3B 4J1
www.3macs.com
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