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New tax rules increase benefit to charities


May 26, 2006
-by Dan Dyck

Winnipeg, Man. - A recent Canadian federal budget decision is creating extra work for Al Rempel, Mennonite Church Canada's Director of Resource Development.

But it's work he's happy to do.

"It's hard to believe, but the latest federal budget is encouraging people's generosity at its own [the government's] expense," quips Rempel.

What the government hasn't done is widely publicized the change - and that's creating welcome work for Rempel, who is more than happy to inform people of the change.

The new budget decision allows for the donation of appreciated, publicly traded securities to registered charities, with no tax payable on the profit (also known as capital gains).

For example, John Doe owns securities for which he originally paid $200. He wants to make a charitable donation, so he sells them at market value for $1,000 and reaps an $800 profit - half of which is taxable at a marginal tax rate of 45%. John Doe now owes the government $180 in taxes, reducing the gift to $820 (see table).

Under a new rule, John Doe can donate the securities themselves, foregoing the sale process and exempting himself from the capital gains tax. The total value of the sale - $1,000 - goes to the charity.

There are some conditions. The securities need to be publicly traded on a recognized stock exchange, donated "in-kind" (not sold before donation), must have appreciated in value, and be donated to a registered charity.

"For persons wanting to make a donation to important ministry, donating securities may be the best route to take," says Rempel. "You are able to meet charitable goals, receive a charitable receipt which becomes a tax credit for your personal return, and pay no tax."

Rempel adds that some people may not even be aware that they own securities. "You may have received shares when the insurance company through which you purchased a life insurance policy went public," he says.

Rempel encourages donors considering a donation of securities to work through Mennonite Foundation of Canada. "MFC is skilled and experienced at facilitating this kind of transaction. In addition, donors are able to split the funds generated from the transaction between a number of charities, such as church organizations and a favorite local charity in your community."

Using the example, John Doe can donate $180 more when he contributes the actual securities than would have been possible by a cash contribution generated through the outright sale of his securities.

What can an extra $180 do? "In Mennonite Church Canada's case, it's more than enough to support a Cuban or Chinese pastor for 6 months," says Rempel.

Sell securities and donate cash Donate securities
Selling price $1,000 $1,000
Purchase price
(Adjusted cost base)
($200) ($200)
Capital gain $800 $800
Taxable capital gain $400 (50%) $0 (0%)
Marginal tax rate 45% 45%
Tax payable $100 $0
Funds remaining for the gift $820 $1,000
Charitable Receipt $820 $1,000