Charities and Taxation
May 11, 2010
Tax, Charities and the double-dip.
Many Canadians have met with success in our country and want to give back a little . this form of generosity can be seen in many philanthropic endeavors. Supporting a charity of your choice can very internally rewarding.
In keeping with this spirit of giving, the Government of Canada, several years and budgets ago, decided to support the charitable spirit of many Canadians. Rather than Government being the ones to decide who is to get support, they have left the decision in the hands of individual Canadians and encourage this by providing additional tax incentive to donate. This tax incentive manifests itself in the form of allowing a credit on your annual tax return related to the donation. In addition, where you donate an investment that you have made rather than cash, the gain on the investment is not taxed. Remember this key statement as it is the major thrust of this report.
Quite separately, the Government also wishes to encourage certain types of investment activity. The development of Canada is in part a story of resource exploration and development. Energy and mineral resources are a significant component of the economic life of our country. As such, given the risky nature of investing in this sector, tax incentives are also provided to encourage such investment. In the main, this incentive is generally characterized as “Flow-through” tax benefits. What it means in reality is that a company that you invest into “renounces” some of the expenses that it incurs in the quest for resources to you the investor. This is the flow through of a deduction which allows you to deduct the amount from income. (Usually 100% of the cost of your shares). Typically this saves you about 42% of the amount you invest in the form of a tax savings.
Later, when you sell or dispose of the investment you have to realize a capital gain on the investment and due to the flow-through right off deduction dropping your cost base (ACB) to zero, the whole of the proceeds become a capital gain. As such, this means you pay about 21% tax on the proceeds received.
Obviously the real benefit is determined by the price you paid and comparing that to the proceeds of sale. For this to work you still need to make good investment decisions.
Perhaps you can see where this is going. Let me connect the dots for you. Combining the properties of these two tax strategies provides a very significant result for you.
In the first instance, you identify a flow through tax shelter. Upon maturity of the shelter you contribute shares to the charity of your choice. You get two tax benefits and miss the re-capture of the gain. Lets use an example.
Put $10,000 into a Flow through. Deduct $10,000 from income and save $4200
Assuming you get the same price on liquidation:
Transfer $10,000 investment to your favourite charity and save $4,200.
Total tax savings is about $8400.
Your actual cost to provide a $10,000 gift your charity is about $1600.
This makes the strategy a “double-dip” of tax benefits. A little like having your cake and eat it too…
This is a brief overview of the concept. Certainly there are some risk factors associated with the flow –through investment that must be considered. As always, this strategy is not suitable for everyone but is a great plan for those that understand the risks and want to make charitable donations.
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The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.
Slow and steady…a great way to invest.
May 11, 2010
A discussion about DRIPS
(Dividend Re-Investment Program)
One of the mantras in investing is to take a slow, methodical and continuous investment approach. You may have heard about dollar-cost averaging. It can be demonstrated that making a periodic investment has benefits over lump sum investing. Saving a regular amount over many years can produce great results. By investing a similar amount with regularity, you do end up with a lower average cost per share. This occurs because when a stock is down you end up buying more shares than when the price is high. Improved investment performance tends to result.
It is also interesting to note that rising stock prices are not actually a good thing and you benefit from lower prices, which also happens to coincide when most investors shun the market.
Of all the adages to investing we hear none is more common than buy low /sell high, which unfortunately flies in the face of human investing emotions (fear and greed to put it bluntly). Dollar cost averaging removes this emotion and is one reason for general better performance, i.e. you are most fearful when the market is declining and you should be buying and you are most aggressive as a buyer when the market is providing positive reinforcement that you are making the right decision with higher prices.
For all of this to work of course you need a viable long term growth investment that has regular fluctuations. Mutual funds have long taken advantage of this, but my investment of choice is to find a good dividend paying company that lets me re-invest regularly into more shares using the dividends it pays. Even better if it pays frequently and I can purchase at a slight discount.
Typical of such plans are several companies that have reasonable high dividends. Below I have copied the policy statement from one such company (which I happen to like and have held for years). They have just announced a re-institution of their DRIP. The math in this case works out to a need to have about 100 + shares and you can participate. I am recommending this to my clients that do not need current cash but love the idea of owing a stock that pays a dividend and allows them to get cash ultimately without the need to sell the stock. (eg when they cancel the DRIP). As long as the dividend is paid, they end up with a good savings plan that keeps expanding with the natural compounding of dividends that buy shares that then produce additional dividends.
Other benefits include no commission cost to get the DRIP shares and in many cases you get a discounted price. The one below is at 95% of the 5 day trade weighted average price per share prior to the monthly dividend payment.
One other item that you do need to note is that the dividends are taxable, albeit at a much lower rate than interest, but you do not have the cash to pay the tax on the dividend as you have re-invested the amount. In reality, this is a small effect for most people and I view it as an additional self-inflicted savings plan.
Full details at of the Superior Plus plan can be found by following this link.
The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation(“MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Mackie Research Capital Corporation, Member CIPF.
