The idea of using charitable donations to reduce one’s tax liability is not new. The funny part is that normally it makes no financial sense. The charitable tax credit is calculated at the highest marginal tax rate (ignoring the first $200), which means that in order to get a $437 credit next year you need to give away $1,000 (in British Columbia) today. If your goal is to save as much money as possible, it won’t work for you. The credit is intended to encourage charitable donations by reducing your expense, not by making you wealthier if you give your money away.

But in certain situations, charitable donations can actually lead to a positive financial outcome if done as part of an advanced planning strategy. One of those strategies is based on the new rules introduced just a couple of years ago dealing with donations of publicly traded securities. Normally, when you sell securities or dispose of them in any other way, you have to pay tax on any capital gains. But under the new rules, when qualified publicly traded securities are donated to a qualified Canadian charity, there is no capital gains tax. In addition to avoiding this tax, a donor will receive a 43.7% (BC) charitable tax credit based on the total fair market value (FMV) of the donated securities. This is almost like having your cake and eating it too!

If you have a stock or mutual fund portfolio with significant deferred capital gains and your intention is to leave it to your children, you can gradually donate it to a qualified charity over a period of several years. The amounts you receive as charitable tax credit can be used to fund a life insurance policy which would replace the inheritance to your children. In many cases, the insurance benefit will actually exceed the net after tax amount which they would have inherited if you had just left the portfolio to them. In essence, this arrangement leaves your beneficiaries in the same or better position, takes a large amount of money from the government and gives it to your favorite charity. And if you have to give the money away, would you rather give it to the government or to your church, hospital or university?

If you (or your parents or grandparents) are in a position to benefit from donating publicly trading securities, find a good financial planner who will run the numbers and determine whether this strategy can work for you.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.