Editor’s Note: These tax incentives are offered in Canada. Check with your financial advisor to ascertain the applicable tax credit benefits in the United States.

The Planned Giving Pulse interviewed John Horwood on his planned giving strategy that coordinates three tax strategies.

Planned Giving Pulse: What is “triple dipping” and how can investors and charities benefit from it?

John Horwood: Triple dipping is the combination of three different pieces of tax legislation that individually benefits investors and also charities. If you combine them it significantly adds to the benefit for all concerned. There are three independent pieces of legislation that when combined make for an attractive package for individual investors and for charities seeking to increase their level of donations.

“Triple Dipping” using flow through shares coordinates three strategies:

The deductions available on flow through shares (Canadian Exploration Expense)
The special tax advantages on donating appreciated securities
A donation tax credit.

Donors benefit from the tax incentives for charitable giving and also to natural resource exploration.

One key benefit is that charities look for long-term strategies. “Triple Dipping” lends itself to a long-term commitment – it works well over the popular 5 year planning horizon.

Planned Giving Pulse: What are flow-through shares?

John Horwood: These are a special class of shares issued by Canadian resource companies (mining, oil and gas), which include some special tax benefits relating to the exploration expenditures that the companies undertake. These benefits “flow-through” to benefit the investor, hence the term “flow-through” shares. Flow-through shares have the same characteristics as other common shares of the companies that offer them, with one important difference: their issue proceeds must be spent on qualified exploration activities, for the tax deductions generated to be transferred by the issuer to the purchasers of the shares.

Planned Giving Pulse: Can you give a concrete example of the tax benefits of donations made in this manner?

John Horwood: In year one, an investor might purchase $10K worth of flow-through shares and receive the tax benefit for the Canadian exploration expense. In year three the investor then donates these shares, which have a cost base of zero or close to zero, to a charity in-kind, thereby receiving both the enhanced capital gains tax benefit and the donation tax credit. I developed this strategy and it has been bench-tested with my own personal funds. I feel it is very important that I do not recommend a strategy to my clients without testing it first! It came about as a result of my experience as a chartered accountant, working as an advisor and several years in the mining industry.

Attached is a hypothetical example of how it might work based on tax legislation at the time.

Estimate of After Tax Cost of Donation*

Investment Investment Investment Breaks Gains Loses

Even 25% 25%

Investment $10,000 $10,000 $10,000

Initial tax benefits $ 5330 $ 5330 $ 5330

Money at risk $ 4670 $ 4670 $ 4670

Fair market value at date of donation $9,000 $11,250 $ 6750

Adjusted cost base at date of donation - - -- --

Capital Gain $9,000 $11,250 $ 6750

Inclusion rate for gifts of publicly

traded securities 25% 25% 25%

Taxable capital gain $2250 $2812.50 $1687.50

Combines federal & provincial

highest marginal tax rate 46.41% 46.41% 46.41%

Capital gains tax payable $1044.23 $1305.28 $783.17

Federal donation tax credit $2584 $3236.50 $1931.50

Ontario donation tax credit $994.40 $1245.50 $743.30

Total tax credit $3578.40 $4482.00 $2674.80

Ontario surtax reduction re:

donation tax credit $549.96 $690.58 $409.35

After tax cost of donation $1585.86 $802.70 $2369.02

*Assumptions

(a) Initial tax benefit (CEE deduction & ITC) is $5330 per $10,000 invested

(b) Donation of flow-through shares goes to registered charity

(d) ACB at the time of donation is zero – although actual ACB may be higher

(e) Maximum offering and full investment of proceeds

Planned Giving Pulse: To what income bracket is this strategy most suited?

John Horwood: This is definitely a strategy for top tax bracket Canadian tax payers, people with taxable incomes of $70K plus.

Planned Giving Pulse: How new is this strategy and how widespread is its use?

John Horwood: The different pieces of the strategy are quite old. Flow-through shares started in the 1980s. Donation tax credits have been around for many years. The final piece of the puzzle was the changes to capital gains inclusion on appreciated securities. Triple dipping has become more widely used over the past couple of years but it is still quite new. It has been available in the financial planning industry for about three years but wasn’t widely publicized until last year. To my knowledge, there isn’t a similar application in the U.S.

About John Horwood – At age 54 John has over 35 years of financial experience, as a Chartered Accountant in public practice, corporate planning and since 1987 as an Investment advisor. He has been recognized as a leader in his field for the last 15 years and is a First Vice President at Richardson Partners. His prior positions were Vice President at RBC Dominion Securities and Director at Richardson Greenshields of Canada.

His focus includes principles of stewardship by providing comprehensive planning, analysis and tax minimization strategies for his clients.

Feel free to contact him at 416-969-2937 or email john.horwood@rpfl.com

Editor’s Note: The Canadian federal and provincial governments provide generous tax incentives for charitable giving and for natural resource exploration as described above. Although charitable tax incentives are available in the United States, to our knowledge there is no similar tax incentive for natural resource exploration. Contact your appropriate state and federal authorities and financial advisors to investigate and lobby for this opportunity.