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Donation strategies using Fidelity Tax-Smart CashFlow™


Enhancing the tax efficiency of charitable giving



 

The gift of giving

Donations to a charity are a great way to give back. Usually, when investments are sold in non-registered accounts, a capital gain (or loss) is realized, and fifty per cent of any capital gain is included in taxable income. If qualifying investments are donated directly to a registered charity (an “in-kind” donation), the capital gains inclusion rate is reduced to zero per cent, which means no taxes are paid on the capital gain of the donated investments. Qualifying investments include mutual funds, stocks, bonds or other publicly traded securities.

The value of the donation (whether cash or “in-kind”) is used to determine a tax credit, saving taxes for the donor.

With Fidelity Tax-Smart CashFlow™, the cash-flow payments generally include ROC and reduce the ACB of the investment, deferring the capital gain to the time the units are sold. If the Tax-Smart CashFlow units are donated directly to a registered charity, then, as noted above, the capital gains inclusion rate is reduced to zero per cent. 

Charitable giving with Tax-Smart CashFlow lets you receive tax-deferred cash-flow payments from your investments and donate to a worthy cause in a tax-efficient way.

Charitable giving with Tax-Smart CashFlow

The following example assumes a $50,000 investment was made a number of years ago, which has since doubled in value. The investor wishes to sell the investment and donate $50,000 to charity.

  • Scenario 1 (cash) – The investment is sold and cash is donated to charity.
  • Scenario 2 (in-kind) – Only half of the investment is sold; the remaining half units are donated in-kind. This cuts the tax bill in half.
  • Scenario 3 (in-kind with Tax-Smart CashFlow) – Tax-Smart CashFlow is used to effectively separate the original capital from the gain. Over a period of years, Tax-Smart CashFlow distributions provide cash flow to the individual and reduce the ACB to zero. The Tax-Smart CashFlow units are donated to charity, and capital gains taxes have been eliminated.

In all three scenarios, a $50,000 charitable donation receipt is used to reduce taxes otherwise owing.



Donation strategy Cash In-kind In-kind with Tax-Smart CashFlow
Initial investment $50,000 $50,000 $50,000
ROC distributions Tax-Smart CashFlow units
Investment doubles in value $100,000 $100,000 $50,000 $50,000
Composition ACB =
$50,000

Capital gain = $50,000
ACB =
$50,000

Capital gain = $50,000
ROC =
$50,000
ACB =
$0

Capital gain = $50,000
Donation (amount for tax credit) $50,000
(cash)
$50,000
(in-kind)
$0 $50,000
(in-kind)
Tax on disposition
of investment
$12,500 $6,250 $0 $0
Tax efficiency Lower Lower Higher Higher



For illustrative purposes only. Source: Fidelity Investments Canada ULC. The above example assumes no distributions or dividends and a tax rate of 50%. Capital gains inclusion rate: 50% inclusion if sold for cash; 0% for in-kind donations.

Canadian-controlled private corporations (CCPC) can also benefit from this strategy.

1

Private corporations claim charitable donations as a deduction, unlike individuals, who receive a tax credit.

2

The entire capital gain on the donated securities increases the capital dividend account when units are donated in kind, because of the capital gains zero-per cent inclusion rate.

3

Private corporations can benefit from the T-SWP donation strategy and increase the capital dividend available to be paid tax-free to the shareholder.

This strategy can also work on the death of a taxpayer. For more information, ask your financial advisor.

Brochure: Fidelity Tax-Smart Solutions™



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