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Early evidence shows stock donations making an impact, says TD Bank

4 minute read
By TD Bank Group
• May 1, 2007
Changes to tax rules offer major benefits to donors and charities TORONTO, May 1 /CNW/ - Tomorrow marks the one-year anniversary of the Canadian government's announcement of a 100% tax exemption on the capital gains of publicly-listed securities and mutual funds donated to charities and evidence suggests that the charitable sector has benefited significantly according to a new report by TD Economics. Many charities moved quickly to develop policies and practices to handle the expected increase and several large, high-profile donations of securities were made in 2006. According to TD Economics, there is every reason to believe donations of securities will remain strong in the years ahead. "We've definitely seen an increase in donations of securities over the past year, and I believe we've just scratched the surface," says Jo-Anne Ryan, Vice President, Philanthropic Advisory Services and Executive Director of the Private Giving Foundation launched by TD Waterhouse. "We need to continue to get the message out to Canadian investors that donating stocks offers a major advantage." The $2 Trillion Dollar Factor Entitled "Donating Securities Makes Good Financial Sense," the TD Economics report, authored by Vice President and Deputy Chief Economist Craig Alexander, underscores the potential for this type of giving due to the tax advantages. To illustrate, Canadians owned shares with a market value of $1.4 trillion at the end of 2006, of which approximately $700 billion represents unrealized capital gains. Under Canada's tax rules, 50% of the capital gain on the sale of a security is taxable as income. If even a modest portion of these outstanding shares are donated to charity to reduce the owners' tax liability, the impact on the philanthropic sector will be huge. And the good news is that this impact will grow over time. TD Economics estimates conservatively that the S&P/TSX Composite Index will experience on average a 5% annual total return (excluding dividends) over the next decade. Under this assumption, and allowing for the continued purchase of securities from savings, the total market value of Canadian shares outstanding could exceed $3 trillion in ten years' time, and as much as two-thirds - $2 trillion dollars - could be capital gains. "Donating securities has clear advantages over donating cash," continues Ryan. "When you consider the huge tax bill Canadian investors will face when they sell securities held outside their RRSPs, it's reasonable to assume they will be very receptive to strategies to minimize that bill. The important thing to remember is that the greatest tax benefit will come from donating stocks that have appreciated most over their book value." One example cited by the report is policyholders of Canadian life insurance companies who elected to convert their policies into common shares after the companies were demutualized in 1999. Another is shareholders of an acquired company in certain types of merger and acquisition transactions. In these cases, there is often a strong incentive for shareholders to reduce their capital gains tax liability. "The elimination of capital gains taxes when securities are donated has had a very positive spill-over effect for people with stock options," adds Ryan. "Exercising stock options in conjunction with a charitable giving strategy is one way to minimize tax." Charities Win, Donors Win TD Economics has developed the following example to demonstrate the advantage of donating securities rather than cash: John Smith buys shares for $400 that appreciate to $1,000. If Smith sells the shares and donates the cash to charity, he has a capital gain of $600, of which $300 is taxed as income. Assuming Smith resides in Ontario and has a combined federal-provincial marginal tax rate of 46.41%, he will pay capital gains taxes of $139.23, leaving him $860.77 to donate. Smith will get a tax credit of $399.48 for his donation. If, however, Smith decides to donate the shares directly to the charity, they receive $1,000 in value instead of $860.77. His tax credit of $464.10 is $64.62 higher and he completely avoids the $139.23 in capital gains tax. In the end, Smith saves $139.23 donating securities versus selling the shares and donating the cash proceeds. At income tax time, Smith profits $64.10 on the securities donation - a financial benefit courtesy of the Federal Government intended to encourage him to use this avenue for giving. "The rise of securities donations, along with the emergence of donor-advised funds such as the Private Giving Foundation, signals a new era for the charitable sector in Canada," concludes Ryan. "The trend towards 'strategic philanthropy' answers donors' desire for more control over their charitable giving. And it is, of course, a welcome development for those whose lives are made better by the work of our charitable institutions." TD Waterhouse pioneered commercial donor advised funds in Canada when, in the fall of 2004, it launched the Private Giving Foundation, an independent registered charity, and a simple, effective way to leave a lasting legacy as alternative to setting up a private foundation. About TD Bank Financial Group The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group serves more than 14 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking including TD Canada Trust; Wealth Management including TD Waterhouse and an investment in TD Ameritrade; Wholesale Banking, including TD Securities; and U.S. Personal and Commercial Banking through TD Banknorth. TD Bank Financial Group also ranks among the world's leading on-line financial services firms, with more than 4.5 million on-line customers. TD Bank Financial Group had CDN$408 billion in assets, as of January 31, 2007. The Toronto-Dominion Bank trades on the Toronto and New York Stock Exchanges under the symbol "TD". For further information: Julie Bellissimo, NATIONAL Public Relations, (416) 848-1462, jbellissimo@national.ca; Lisa Hodgins, TD Bank Financial Group, (416) 983-2982, lisa.hodgins@td.com

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