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Using Flow Through Shares to Maximize Your Charitable Donations

This is a guest post from Carey Vandenberg who is a Financial Planner with Partners In Planning Financial Services Ltd and C.E. Vandenberg & Associates Inc. Carey primarily works with clients in the Greater Vancouver area although he has clients in Alberta, Saskatchewan and Ontario as well as the U.S. and abroad. He has been serving in this capacity since 1987.

If you give to charity or church on a regular or substantial basis ($5,000 or more per year) the following is something that you should seriously consider to replace your current mode of giving, namely writing a cheque and only getting the donation tax credit. Using this strategy will still put the same amount of cash in the hands of your designated charity or church, however it can cost you a lot less.

First, I must state at the outset that the tax savings does depend on your province of residence, your marginal tax rate, your advisor and what investment that you ultimately use for this purpose. That will be between you and your Financial Advisor.

What I call the “Double Dip Donation Strategy” starts with the investment in a “Super Flow Through Share” offering. This can save you up to $6,180 on a minimum $10,000 investment. In other words, you are out of pocket approximately $3,800.

Flow through shares are nothing new. They have been a huge part of the Canadian economy for over 50 years, longer than RRSP’s. However, unlike RRSP contributions you must make a Flow Through Share investment before December 31st to have the tax deductions and credits apply to the current tax year.

If you simply want the tax savings and hold the investment for yourself then you can stop there. You will have made a $10,000 investment for a net cost of only $3,820. If you choose to take a second step and use your investment as a charitable donation you will save up to an additional $4,370.  The $6,180 tax savings for investing and then $4,370 tax savings for donating.

For the donation part however, you will have to wait for the flow through shares to convert to a mutual fund. It is at this time you can gift the shares to the charity and the can be simultaneously sold for cash by the charity.

In other words you have received just over $10,000 back in tax savings and the charity or church you have given to has received $10,000 in cash. This of course assumes that the flow through share offering you have participated in is worth the same amount.

For a regular giver to a charitable cause or church this is considerably better than simply donating cash which produces a total tax savings of only $4,370.

I use the “Super Flow Through Share Donation Strategy” myself and will continue to do so for years to follow or until the government changes the tax rules. Multiply the tax savings by the number of years you will have breath and we are talking potentially hundreds of thousands of dollars in extra dollars for your (or your kids).

Note: The above tax saving figures are based on the highest tax bracket in BC ($123,000+ of taxable income). The tax savings are still very compelling at the over $70,000 taxable income level and can still be attractive for taxable incomes over $38,000.

Editors Note: Flow through shares are very volatile with a very high probability of decreasing in value.

Disclaimer: Carey Vandenberg is a Financial Planner with Partners In Planning Financial Services Ltd (PIPFS). The views expressed have not been endorsed by PIPFS. The information contained does not constitute an offer or solicitation to buy or sell any investment fund, security or other product or service. This is not intended to provide specific financial, investment, tax, legal or accounting advice for you, and should not be relied upon in that regard. You should not act or rely on the information without seeking the advice of a professional.







10 Comments, Comment or Ping

  1. 1. cannon_fodder

    It would be helpful to know what are the timelines for the SFLS to convert into mutual funds. This would give one a better appreciation of how long the charity (and you) will have to wait to bestow the gift.

    Also, are there any analysts which measure the various offerings to give one an idea which ones are most likely to succeed with perhaps the least amount of risk?

  2. Cannon, i’ve asked Carey the same question. The answer is that the timeline is dependent on the flow through share and is indicated in it’s prospectus. Some are as early as 12 months, but typically it’s around 2 years.

  3. 3. cannon_fodder

    FT,

    Thanks. Well, that is very reasonable. I had visions of 7 years or so. I would imagine that this year might be a great time for SFLS to actually appreciate after purchasing them later this year.

    Perhaps Carey will follow up when they become available to give us more info.

  4. Flow through shares are usually available throughout the year, albeit by different promoters. Sorry, but I won’t be announcing when particular ones become available in a public space due to regulatory issues / restraints. I only do that for my clients etc. who have expressed interest to me directly. I can however tell you this. There is a March 31st deadline approaching where the Federal Government said the additional tax credits for “Super” Flow Through shares are set to come to an end (for the past few years they have extended this for another year so anything can happen). This amounts to approx. 15% of the total tax savings.

  5. 5. danwk

    Great post.

    I do have one question: Is the initial tax credit (available at the time of investment) applicable against employment income? or only capital gains?

    I’m asking because in situations where significant capital losses have accumulated (ie. after 2008), this would be a great strategy to use up one’s capital loss carry forward… or am I missing something?

  6. Thanks for this. I may use it myself, and have passed on the link to our parish treasurer (she may be aware of it already)

  7. The tax deductions and credits are used against employment income. If you don’t “donate” the investment after they roll into the mutual fund you could in fact sell the mutual fund units, which would trigger a capital gain (as your ACB… Adjusted Cost Base, would be $0). Your capital gains would be offset by your capital loss carryforwards.

    Another comment re: the wide variability in the value of the investment. If the investment has fallen during the holding period it of course would be most advantageous to put off the charitable giving of the investment until a later time, when it has recovered it’s losses. In the interim, you may have to revert to the traditional giving of cash, particularly if you have a certain amount you like to or are committed to giving on an annual basis.

  8. There is no doubt as to the merits of Flow-Through Shares or Super Flow-Through Shares. Do keep in mind the Canadian government does not have this arrangement out of the goodness of their hearts. Their reasoning, as you might guess, is to aid in getting financing for these companies that would be hard-pressed to raise money any other way. What is another a Canadian is given a full write-off? Donating to charity. That should say something. They are incredibly high risk and should be treated as such.

    These securities should be reserved for accredited investors (individual or organizations), which, in Canada, is defined as a net worth of one million dollars not including the value of your principal residence or making at least $200,000 each year for the last two years ($300,000 if with a spouse).

    These are great for financial advisors who receive a commission of 4.00% to 4.25% of the total invested in these vehicles. Incredibly lucrative.

  9. Very much of what you say is true. Clarifications though.

    Flow through shares are in effect and simply put, from resource / mining companies with more tax write offs than they can use and thus these tax deductions and credits are “flowed through” to investors.

    Flow through shares are nothing new. They have been used since the 50′s and are in fact the oldest tax assisted investment program in Canada.

    Re: the accredited investor part…. many people outside of that “accredited investor” definition use them very effectively and properly. If, on a long term basis (through market ups and downs), someone who gifts generously and regularly as a life long philosophy can save themself thousands upon thousands in tax in a life time and I get paid for my work it’s a win win or a “Mutual Gain”.

    What my firms financial planner’s make on such a transaction is fully disclosed to the client along with the risks. This is mandatory from a regulatory standpoint. It’s not much different than an accountant or lawyer who devises some slick tax saving tax strategy for a client of theirs and bills them for that work.

  10. 10. Krista Billy

    Just be careful with this – flow through shares only provide advantages according to your tax bracket. Therefore if you are in the lower tax bracket you won’t get nearly the same benefits.

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