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managing great wealth

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Each year Ottawa seems to tighten up the tax rules a bit more by closing loopholes and seeking a bigger haul from taxpayers. One tax-reduction strategy that remains untouched and can be attractive to high-net-worth Canadians is the donation of securities or mutual fund securities directly to charities.

Here are the ins and outs of this strategy.

Chief advantage

Because the Canada Revenue Agency does not levy capital gains tax on publicly donated securities, people are better off financially if they give the securities directly rather than sell them, incur capital gains and then give the proceeds.

Ted Rechtshaffen, president and chief executive of TriDelta Financial in Toronto, gives the example of an individual selling $50,000 in stock and then donating the proceeds to a worthy charity. "That is not a very smart way to do it. Instead you could donate the $50,000 in stock to charity, get a charitable tax receipt for half of it, but you never have to pay any capital gains on it."

By selling first and then donating, you are basically giving twice: once to the taxman by the capital gains payout and second to the charity.

Who should do it

Investment professionals say giving securities makes sense for high-net-worth Canadians who may have long-held, capital-gains-heavy securities in their portfolios. It also makes a lot of sense for those with moderate to high income, especially those with income of more than $200,000 who are targeted with a new federal surtax, are charitably minded and can expect a surplus of capital in their estate.

The securities have to be held in non-registered portfolios – they cannot be held in registered, tax-sheltered holdings such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

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The option of donating securities to a charity provides wealthy Canadians with a tax-effective way to leave a legacy and reduce their tax burden while alive or after death. They might also find it preferable to giving it directly to Ottawa.

"Why give your money to a vast pool in the government – why not to your special charity and create your own legacy?" says Chris Catliff, president and chief executive officer of BlueShore Financial in Vancouver.

Clean up your portfolio

Donating securities may be attractive to investors who have large positions in favourite stocks – think bank or utility securities – that have produced massive gains for years or decades.

"Our clients use it for those concentrated positions where they are a little overweight [in] a stock that has a gain in it," explains Scott Hayman, a partner with Northwood Family Office, an investment firm that manages families with high net worth in Toronto. "It is a good way to accomplish multiple goals. It helps fix the portfolio as well as decrease tax and does some good."

Clean up your estate

Donating securities also can reduce the ultimate tax bill on an estate by allowing the holder to donate holdings that carry the highest capital gains tax.

"You want to choose those stocks that have the highest capital gain on them," says Mr. Catliff. "So you are actually reducing tax to your estate by putting those high-capital-gains ones into the charity you are supporting at no tax to you.

"It is quite a significant saving," he says. "You could save about 18 to 20 per cent of your tax due."

Reduces concentration risk

Donating securities tax free to charities can be particularly valuable to executives who have collected stock options and will face a sizable tax obligation when they sell those securities.

"You could be a high-income-earning executive of a public company who got options, you could be with a private company and got options, or you could be a long-term investor," says Mr. Catliff. "What we see with some of those people is that they have huge concentration risk on those securities. Holding too much of your wealth in one stock or sector, or even one currency in some cases where an executive is working for a foreign multinational, can be mitigated by donations of securities.

"You want to diversify your holdings and take advantage of this tax situation."

It's easy

When Ottawa introduced the concept of capital-gains-free charitable giving, it knew it was providing a tax benefit to Canadians but made the calculation that the public good – giving to charities – outweighed the cost. The ease of giving securities, combined with "doing good" and benefiting financially, is a powerful combination.

On the eve of the federal budget, Mr. Hayman was hopeful that Ottawa would not mess would a good thing (it didn't).

"It would be one less tool in the toolbox, that is for sure, and there aren't a lot of them left. It would not be something that a lot of our clients would be happy to see."

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