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Donor advised funds allow donors to retain control of charitable gifts

by Wayne Cheveldayoff, 2006-08-10

Investors wishing to donate stocks to charity should consider the advantages of donor advised funds.

For a donation of as little as $10,000 in stocks or cash, an individual or group of individuals can effectively set up a special endowment fund under the umbrella of a larger foundation and retain control over how the money is invested and which charities receive the earnings. Control can last forever, with decision rights passed on to heirs.

Of course, the most advantageous donation from a tax standpoint would be stocks, mutual funds or other securities that would normally be subject to the burden of capital gains tax. This is because the May 2 budget eliminated capital gains taxes on any securities donated to charity.

For example, in the case of securities now worth $10,000, if the original cost was $4,000, the capital gain would be $6,000 and the taxable capital gain (half) would be $3,000.

If you sold the securities and then made the donation, you would have to pay $1,350 in income tax (assuming a 45-per-cent combined federal-provincial marginal tax rate applied to the $3,000 taxable capital gain), although you would get a tax credit on your amounting to $4,500 for your donation.

However, if you simply made a donation of the securities, you would save by not having to pay the capital gains tax, and you would still get the $4,500 tax credit for the charitable donation.

The May 2 budget change has stimulated interest in stock donations and has triggered an expansion of options available to donors and for the financial planners advising them.

RBC Dominion Securities and Mackenzie Financial Services Inc. recently launched programs offering donor advised funds to their clients. These donor advised funds are offered in partnership with the Charitable Gift Funds Canada Foundation, which provides administrative support and makes sure the client-chosen charities receive a financial contribution each year.

With such donor advised funds, donors are generally able to choose the mutual funds or specific investments that their donated funds will be invested in. (And, of course, investment advisors receive compensation for providing donors with investment advice.) Donors are also able to make changes to the instructions on which charities get the investment earnings.

Donors receive a charitable tax receipt when the original and any subsequent donations are made to the donor advised funds, but not when charitable organizations subsequently receive the earnings from the investments.

In 2003, BMO Financial Group and Community Foundations of Canada created “Supporting Your Community,” the only donor advised fund that connects Canadians directly to charitable experts working in their community.

BMO Financial says that by working with their community foundation, donors get access to the inside track on local issues and organizations, so they can make the most of their charitable gift, year after year.

BMO Financial says you can name your endowment fund after a family member or a loved one, involve your family in the grant-making process, or band together with a group of people sharing a common cause to create an endowment fund.

On the growing popularity of donor advised funds, Marvi Ricker, BMO Financial Vice President and Manager Director, Philanthropic Services, BMO Harris Private Banking, says, “The days of (donors) just writing a cheque and forgetting about it is dying. People want to be involved with the issues they support and they want to know that their money is being used in a good way, in an effective way, and for the cause that they had intended.

“Anything that makes it easier for them to give a large amount such as decreasing capital gains on appreciated shares is all for the good.”

She notes that once the federal government began offering tax incentives in the form of reduced capital gains tax for donations of securities in the late 1990s, there was a big positive impact on the charitable sector. The new incentives the government announced recently “will make it more attractive for individuals to donate publicly traded stock that has appreciated.”

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff