Tax Planning
RAPINE & PILLAGE MAKE GOOD
When he turned eighteen, Stilton was given one share in Rapine & Pillage Alberta Oil by his father -- in appreciation for Stilton leaving home. The share was then worth $100.
Today, Stilton manages Rapine & Pillage Quadra Sierra Snake Oil & Forest Products, earning about $80,000 a year. The stock given him is now worth $5,000.
Stilton has a soft spot for the Quadra Food Bank, perhaps in compensation for his long history of rapine and pillage, and wonders how he might use the stock to help them out.
Stilton considers selling the stock, paying a $100 brokerage fee, then gifting the remaining cash. Once his charitable donation credit is taken against his capital gains tax, he'd earn a $1117 income tax refund.
Stilton wonders if there's a better way, and visits with Certified Financial Planner John. John explains how the federal government in their 1999 budget floated a trial balloon around gifting stock -- providing a unique window of opportunity until February, 2002. During this time, when the stock itself is gifted (rather than the cash) only half the capital gain is subject to income tax. This use of stock was further enhanced by the 2000 budget, which reduced the capital gains inclusion rate from 3/4 to 2/3.
Since then the capital gains inclusion rate has been decreased to 1/2, and the feds have locked in the trial stock treatment. For Stilton, then, gifting the stock,rather than cash, would increase his income tax refund by a further $576.
John suggests to Stilton there are a number of ways to look at his $5,000 stock. First, if he simply cashed it in, his $5,000, after fees and tax, will buy him only $3474 worth of groceries. But, when he gives it to the Quadra Food Bank, they're able to buy $4,900 worth of groceries -- for which he earns a $1693 worth of groceries via an income tax refund. In short, cashing = $3748. Gifting cash = $6017 Gifting stock = $6593.
$5,000 Fair market value - 100 Cost base 4,900 Capital gain x 1/2 Capital gain inclusion rate 2450 Taxable capital gain x 47% Stilton's marginal income tax rate 1,152 Income tax due on disposition of stock - 60 Charitable tax credit on first $200 of donation -2,209 Charitable tax credit on remaining $4,700 of donation 1,117 Income tax refund 576 Additional refund when capital gains tax halved for stock donation $1,693 Total income tax refund from stock contribution Though there may not be many shares of Rapine & Pillage Alberta Oil around, a number of islanders have received stock from life insurance companies— windfalls as part of the demutualization process—at no cost to themselves. They now have the ability to leverage nothing into an income tax refund, while doing an immense amount of good for their favourite charities.