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COMMENTARY BY THE PATENAUDE SCHAFER GROUP
Every year Canadians donate money to their favorite charities for many different reasons and of course, the charitable tax credits are always a nice bonus.
In the 2006 budget, the Federal Government made a significant change to our tax system which eliminated any capital gains taxes on shares donated to charities. Therefore, if you had invested money in shares which had grown significantly in value, you could donate those shares to a charity and pay no tax on the growth.This change created a real opportunity for registered charities and those who wish to donate lies in a growing investment class called flow through shares.
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A ‘Flow through share’ is a share of a Canadian junior resource company trying to raise money by issuing new stock. They receive incentives in the form of CEE (Canadian Exploration Expense) or CDE (Canadian Development Expense) tax credits from the government to explore in Canada and they renounce or ‘flow through’ those tax credits to the investors generating an income tax deduction, generally equivalent to the amount invested.
When the shares are sold or redeemed they are taxed as a capital gain, therefore achieving both a tax deferral and reduction.An investor can purchase flow through shares and receive 100% tax deduction from personal income creating a powerful tax strategy for those seeking tax deductions beyond the traditional RRSP.
So how can flow through shares enhance your charitable giving? Well, for starters you can purchase flow through shares and receive a deduction for your investment. When you donate those shares to charity you avoid any tax consequence from the disposition of the shares. Also, you receive the tax credits for the full amount of your donation.
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A ‘Flow through share’ is a share of a Canadian junior resource company trying to raise money by issuing new stock.
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Let’s look at an example.
Let’s assume a person is in the highest marginal tax bracket in Saskatchewan and can donate $10,000 cash to a charity. After approximately $4,400 in tax savings from the tax credits, the net cost of the charitable donation is $5,600.
What if that person buys and donates flow through shares instead? Not only is there the $4,400 tax savings from the flow through investment, but assuming no change in the value of the investment, another $4,400 in charitable tax savings. After tax savings, the net cost of the charitable donation is only $1,200. Can you imagine donating $10,000 and receiving $8,800 in tax savings!
This is not too good to be true, Flow through investing does have additional risks from investing in junior resource companies and you should consult with a qualified investment professional. There is no guarantee the value will stay the same, as it obviously may increase or decrease, thus changing your strategy. The success level for this strategy will depend on the value of the shares at donation and your personal tax situation. Consult with your tax advisor, financial advisor and your favorite charity if this idea is of interest to you.
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If you have any thoughts about this article or would like to make a suggestion on future articles contact;
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The information contained herein is based solely upon the author's current analysis and is derived from sources believed to be reliable but Wellington West Capital Inc. makes no representation that this information is accurate or complete. Wellington West Capital Inc. is a member CIPF.
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