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Fredericton Daily Gleaner ~ Capital Appreciation ~ Tax Philanthropy ~ July 17, 2006 - 26 Jul 2006 by TaxHelp
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A couple of weeks back I was on CBC Radio One with Jane Barry, executive director of the Greater Saint John Community Foundation (and former provincial cabinet minister). The interview segment took place before the Aliant stock-BARCIF unit swap. The focus was on the surprise that some long time holders of Aliant shares would have when they do their taxes next year as this exchange generates a disposition which for some will result in significant capital gains. She suggested that those predisposed to philanthropy might consider gifting the shares to the Foundation before the conversion.
As a brief primer, the difference between what you pay for a stock and what you sell it for (discounting the outlays, expenses and other items that affect the adjusted cost base) is a capital gain. Half of the gain is reported on your return and is taxed at your marginal rate (which we’ll leave for another day). In the last federal budget, the Conservatives introduced a measure that eliminated the tax on the capital gain if the listed shares were given to a registered charity, as a way of encouraging gifting. Tax changes over the past ten years in this area have increased the amount of donations from $69 million to about $200 million in 2004. According to the federal finance department’s website, the latest change may support about $300 million annually.
These changes are good news for qualified charities. However, while the person making the gift avoids the capital gains tax, he or she also no longer has the asset. Again the Canadian tax regime helps in this case. Charitable donations are step-rated in the amount of relief they create. The donation generates a non-refundable tax credit of 15.25 per cent federally and 9.68 per cent provincially, or about 25 per cent combined on the first $200. But the great news is that once you’ve moved beyond the $200 threshold the numbers increase to 29 per cent federally and 17.68 per cent provincially for a combined tax savings of almost 47 per cent. Put another way, someone who qualifies to give $10,000 to charity ends up saving $4,668 in taxes.
At any rate, for those who may be affected by the Aliant situation, the time has passed. But you may have a solution sitting in your kitchen drawer from a few years past. During the late 1990’s a number of life insurance companies changed their makeup. There are basically two different styles of insurers – mutual and stock. Stock companies are owned by their shareholders, while mutual companies are owned by their policyholders. The problem is that mutual companies had many more restrictions on their investing capabilities. As a result, they demutualized by giving their policyholders shares in their newly converted stock companies based on a number of variables. The short story is that by doing nothing, insureds still owned their life insurance, had no change to their death or other benefits and all of a sudden had equity in the new companies in the form of stock.
Of course if the stock is sold, all of the proceeds are treated as capital gains since they originally had no cost. As an example, Manufacturers Life in 1999 gave their insureds 186 shares in the new company (plus a variable amount based on policy values). At the time the shares were valued at $18. On Friday it closed at $35.50 (MFC-Toronto). It’s not inconceivable that someone may be sitting on a piece of paper that they’ve had for a number of years that represents ten grand. Taxable!
If so, you may be interested in lowering your taxes next year by gifting that piece of paper to a registered charity. In the process as explained above, you could pick up tax savings of almost five grand! And much like Jane, I’m sure the good folks at the Fredericton Community Foundation will be happy to help you with the process.
Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1-888-450-1212. His column appears Monday. |
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