In the Spirit of Giving


With Thanksgiving just past and Christmas around the corner, we thought it would be a good time to dedicate this issue of The Martens Report to the spirit of giving. Do you ever give to charity? If so, you already know this is a great way to give back to society and it usually comes along with a generous tax benefit, as donations to registered charities can be written off against your income when you file your taxes. We would like to highlight a strategy that can help provide even greater income tax benefits than making the donation directly out of your bank account. Did you know that you are able to gift units of your non-registered mutual funds or stocks to a registered charity directly? The benefit to this is you will receive a charitable receipt for the value of the units transferred to the charity, but do not incur a taxable capital gain in doing so. If you have non-registered investments that are sitting with a sizable capital gain this can be a great way to move out of these positions, without causing any tax to you in that year, all while giving to your favorite charity. Example Let’s say you are an investor in the 40% tax bracket who donates $5,000 every year to the MS Society. You can write a cheque from your bank account and receive your usual charitable giving receipt for $5,000 to write off against your income. Also, let’s assume you hold $100,000 invested in ABC Global Fund with a current price of $10.00/unit and Average Cost per unit of $5.00. Keep in mind that to make a withdrawal of $5,000 this would result in a capital gain of $2,500… or for a full withdrawal a capital gain of $50,000 that you would need to pay tax on, unless donated to a charity. [if !supportLineBreakNewLine]

In both scenarios you have achieved your goal of donating $5,000 to the MS Society and receive your charitable giving receipt for doing so, but what are the additional benefits are to donating your mutual fund units? Allow us to explain. For starters you have been able to wind down $5,000 of a mutual fund holding without needing to pay any capital gains tax (in our example you would have a capital gain of $2,500 if you were to withdrawal $5,000 from ABC Global Fund, resulting in income taxes owing of about $500, at our 40% income tax rate). After this donation, you will have a remaining balance of $95,000 of ABC Global Fund (9500 units at $10.00/unit). The Average Cost of your units would still be $5.00/unit, meaning you still have a capital gain of $47,500 if you sold the remainder of the fund today… a small improvement from before the donation was made when the capital gain was $50,000. Furthermore, you still have the $5,000 sitting in your bank account that was not used to make the donation this year. It enhances the benefits of this strategy further if you use this $5,000 to buy back 500 new units of ABC Global Fund. Below we highlight all the benefits in doing so.

  • By adding the $5,000 back into the fund you will return to your original balance of $100,000 of ABC Global Fund invested (10,000 units at $10.00/unit).

  • Because the purchase price of the new $5,000 being reinvested into ABC Global Fund is being bought at $10.00/unit, you are bringing your ‘Average Cost’ up to $5.25/unit (500 ‘new’ units at $10.00/unit + 9500 ‘old’ units at $5.00/unit = 10,000 total units with an average cost of $5.25/unit).

  • With your new Average Cost of $5.25/unit a full withdrawal of the $100,000 will only incur a capital gain of $47,500 (rather than $50,000 as before).

  • You have received a charitable donation receipt of $5,000 for the donation, and

  • The MS Society has received the donation of $5,000. I should note that we used the MS Society as an example of a registered charity, but any charity with a registered charitable number can accept funds in this manner. It could be one of the major charitable organizations, or a smaller charitable cause such as a local Lions Club or Church.This is a great strategy to look at as we are approaching the end of the year, simply because you should have a clear idea of what your income will be for the year, and plan the amount and type of giving you would like to do, to ensure it is completed before December 31st for this tax year. This is a great strategy to plan on for your charitable giving on a year over year basis, as every time a donation of units is made, you improve your capital gains position. If you are interested in learning more, please let us know.

Thank you, Andrew & Peter


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