client meeting

With year-end approaching, it seems like everyone is talking about tax loss selling. That’s the term used by advisors when they recommend that investors take a close look at their portfolios to determine if there are any “losers” (think cannabis stocks!) that should be sold before December 31st so that these capital losses can be crystalized and used to offset capital gains triggered elsewhere in the portfolio. They can even be used to establish, or add to, a “donor-advised fund,” as discussed below.

But year-end is also a time of charitable giving and a lesser-known tax strategy I call “tax-gain donating.” But before getting into that strategy, let’s review the basic tax rules surrounding charitable gifts.

Donation tax credit

A charitable donation is eligible for both federal and provincial non-refundable tax credits. Federally, donors get a credit of 15% for the first $200 of annual charitable donations. The federal credit rate jumps to 29% for cumulative donations above $200. Donors who have income subject to the 33% top federal rate (for income over $210,371) and who donate more than $200 annually benefit from a 33% tax credit on such donations.

Parallel provincial credits work similarly, although not all provinces have adopted their top tax rate as their top provincial donation credit rate. Combined, federal and provincial credits can bring the total credit to 50% or more, depending on the province.

Tax gain donating

With just a few weeks left in 2019 and with the substantial unrealized gains building up in many clients’ non-registered stock portfolios (cannabis stocks aside), now is a great time to remind our clients about “tax-gain donating.” Donations of publicly traded shares, mutual funds or segregated funds to a registered charity not only provides the donor a tax receipt equal to the fair market value of the securities or funds being donated, but also allows the donor to avoid paying capital gains tax on any accrued gain on the shares or funds donated.

If the investor still wants to hang on to that winning stock, no problem. They can donate “in-kind” to charity, and then use the cash they were going to donate to the charity to repurchase the stock back on the open market. This bumps up their adjusted cost base or tax cost of the stock just donated to fair market value.

Donor-advised funds

Finally, for some clients, now may be a great time to remind them of the benefits of contributing to a donor-advised fund (DAF). Often considered an alternative to setting up a private foundation, DAFs essentially piggyback on public foundations, such as community foundations or foundations established by some of the major financial institutions or investment management firms, by permitting the donor to create a “mini-foundation” as a subset of the larger, public foundation.

The donor starts by making a donation to the DAF. The minimum required donation varies by foundation, but is typically at least $10,000 and often higher. The donor can give cash or appreciated securities and get an immediate tax receipt equal to the fair market value of the gift. The funds can grow inside the DAF tax-free and each year the donor can recommend distributions (typically a minimum of 3.5% of the opening fair market value of their fund each year) to be made from the DAF to registered charities of their choice.

The biggest advantage of a DAF is that the donor doesn’t have to worry about any administrative details or record keeping. The foundation will process all donation requests and transfer the funds to the charities chosen, as well as track the DAF and provide the donor with regular updates on the foundation’s performance.

And most DAFs will allow donors to appoint others, like children or grandchildren, as successors, so that they can continue to manage the DAF after the donor has died. This allows the donor to continue their legacy without the costs or hassles of establishing their own private foundation.