Case Study: Donate to eliminateDonate to eliminate is a gift planning strategy where you use losses and donation credits to offset other transactions that cause income. Advisors play a significant role in this strategy.
One powerful use for outright gifts of capital property is to eliminate capital losses or gains. Allowable capital losses can be carried back three years and forwarded indefinitely to offset capital gains. When a gift is being contemplated, often future and or past capital property transactions should be considered.
For example: John lives in Saskatchewan and is considering making a gift (he normally gifts cash). After a routine portfolio review with his financial advisor, he remembers a significant loss that he had on an investment five years ago. His current portfolio is healthy (no losses expected), and one of his stocks has done very well. Unfortunately, the company is being merged with another company, and John is uncomfortable holding the stock after the merger. To make matters worse, John’s advisor feels a major market correction is on the horizon and wants to lock in some of John’s gains.
John has always donated generously and has more donation credit than he can use – or so he thought!
John was going to sell the security and use the loss to offset some of the capital gain (the loss is not large enough to cover the entire capital gain). However, John’s advisor suggested another strategy.
John will sell off all of his investments that he feels are going to suffer during the market correction. His resulting capital gain is $200,000 of which $100,000 is taxable to him. John is in the highest tax bracket of 44%. John’s advisor suggests that he use all of his loss and donation carry forwards to offset $75,000 of the income from the gain. Now, John donates the highly appreciated security to the charity as well. The resulting donation will create another $44,000 in tax savings, which will wipe out the remaining tax owing from the adjustment to the portfolio, and thanks to the zero inclusion rate from the resulting capital gain on the donation, no more income is produced from the transaction.
If John’s loss resulted from selling listed personal property, THEN the logical asset to gift would be another listed personal property because listed personal property losses can only be applied against listed personal property gains. Such asset selection is particularly important depending on the amount of time that has passed since the loss was incurred because LPP losses can only be carried forward seven years – then they are lost forever!
|FMV of stock sold||$400,000|
|Capital gain from stock sold||$200,000|
|Income from the gain||$100,000|
|Tax from the sale @44%||($44,000)|
|Donation of $100,000 in listed stock||($100,000)|
|Donation tax credit @44%||$44,000|
|Net tax owing from gift and sale of $500,000 in listed stock||0|
|Cash in donor’s jeans for re-investment||$400,000|
The key for advisors to educate their clients as to the possibilities for making planned gifts. Such knowledge will enhance the clients likelihood of leveraging the size of their gifts when they are ready to donate.Used with permission from the author, DeWayne Osborne General Manager, Compliance Officer, and in-house expert on charitable and planned giving at Lawton Partners.