I was planning on writing this piece before the Bell Canada Enterprises (BCE) deal was stopped by the courts and their stock tumbled.  The concepts are still the same, if the dollar figures are not.

Until recently, BCE stock prices had been making considerable gains and if the sale had gone through shareholders would have had to sell by the end of this calendar year.

Any sale of stock where there is a net gain is subject to capital gains tax.  This tax is applied to 50% of the shares sold and as a result the seller can be paying upwards of 24% tax on the money earned.  So how can you avoid paying tax on the gains?

In 2006 the Canadian government passed a bill ensuring that donations made to a registered charity by way of publicly-listed securities are 100% free of capital gains taxes.  By donating a portion (or all) of the taxable amount to a charity through stocks the donor not only receives a tax receipt for the donation (tax credit) but they also do not pay the taxes on their earnings AND they generate additional social capital through the investment in a charity that is benefiting society.

BCE aside, any stock that has seen considerable gains (EnCana) over the past year can be used in this example.

(All figures are rounded and approximate)

Let's say you sell 5,000 shares at $30 with an adjusted cost/share of $14 and the tax credit rate is 46%.  Total value of the sale is $162,500.

If you DO NOT donate your stocks to charity you will be paying capital gains in the amount of $46,000 (total capital gain recognized $92,500 - after $70,000 adjustment).  This leaves you with $141,000 to reinvest back into the stock market, add to the economy by purchasing a new car or going on a nice holiday.

If you DO donate your stocks (or a portion thereof) to charity you will be paying capital gains in the amount of $0!  How does this work?

You determine what your taxes would be on selling 5000 shares (in this case $46,250) if you didn't make the donation.  Now here is where it gets tricky...

Then you donate IN-KIND a portion of that value in shares to a charity(ies) of your choice.  This amount should be the value of the charitable tax credit that you would like to see offset your capital gains AFTER you have set up a donor advised fund.  Keep reading, it makes sense...

So let's say that you decide to donate 1200 (of the 5000 that were in scenerio 1) shares at $30.  After adjustment the capital gain recongized is $20,000.  You aren't paying tax on the capital gains and you receive a donation credit of approximately $16,000.

With the remainder of the share (just over 3800 totalling 5,000) you sell those shares.  The adjusted sale is $72,000 and the capital gains is $16,000.  You have a $16,000 tax credit from the donation of stocks in-kind to a charity that offsets the capital gains you with $126,500 in cash to reinvest, buy a new car, or go on a very nice holiday!  AND you have $36,000 in your charitable fund or foundation (the initial portion that you donated through your fund to a charity(ies) of your choice earlier).  The net total exceeding ($162,500) what you would have if you had just sold off the shares without developing a funding strategy.

Phew that was hard... Drop me an email if you have questions.

Here's to generating social capital!