Articles July 2006

Under the new rules for charitable giving, you now completely avoid capital gains when you donate publicly-traded securities to a charity. In other words, you can deduct the full donation receipt from your income. None of the deduction has to be applied to avoid taxation of a deemed capital gain.

This makes charitable giving somewhat more intuitive. Most donors could never understand why capital gains even came into the picture when they were giving something away to a charity. Finally, the government has listened.

To illustrate the new rules, let’s use an example. Let’s say that Jen Erous invested $500 in mutual funds some time ago. That original investment has grown to $10,000. Jen wants to make a $10,000 donation to her favourite charity.

Jen could make the donation by selling her mutual fund units and donating the cash raised on the sale. Alternatively, she can donate the mutual fund units themselves. As shown in the chart, Jen is much better off if she donates the mutual fund units.

	Donate Cash	Donate Mutual Funds
Value of Mutual Funds	$10,000	$10,000
Cost of Mutual Funds	$500	$500
Capital Gain	$9,500	nil
Portion of Donation Receipt that has to be applied against the capital gain	$2,050	nil
Portion of Donation Receipt that can be deducted from other income	$7,950	$10,000

In either case, Jen receives a charitable donation receipt for $10,000.

If Jen sells the mutual funds in order to donate cash, however, Jen triggers a capital gain of $9,500 on the sale. Since tax applies to the capital gain, Jen has to use the first $2,050 of her donation receipt to avoid tax on the capital gain generated by the sale (even though she is not keeping any portion of the sale proceeds for herself). This leaves only $7,950 to be deducted against her other income (her real income, some might say).

If Jen donates the mutual fund units directly to the charity, however, she avoids triggering any capital gain. This means that she can deduct the entire $10,000 donation receipt from her other income (income that she is keeping for herself). No part of the donation receipt has to be applied against the capital gain inherent in the increased value of the shares. In other words, Jen has an extra $2,050 of deduction to apply against her real income that she is keeping for herself. That is over 25% more deduction power than in the sale scenario.

The new rules also apply to gifts of ecologically-sensitive land and can provide enhanced tax assistance for donors. Of course, the donor is still making a gift and has to be primarily motivated by a generous spirit. However, donors can now choose to give in a way that does not produce a “phantom” capital gain that uses up part of the donation receipt.

-- Blair P. Dwyer

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