Market Volatility Calls for Long-Term Approach to Donating Securities
(May 19, 2008) Donors waiting for just the right time to donate their stocks to charity will be waiting a long time and instead should focus on a longer-term “investor” approach to giving, according to a recent press release from TD Waterhouse.
"If you're trying to wait out current volatile conditions in order to maximize the value of your stock donation, I would say that your heart is in the right place, but your strategy is wrong," says Jo-Anne Ryan, vice president, Philanthropic Advisory Services, TD Waterhouse Canada Inc. "Timing the market is a feat that virtually all investment professionals and experts agree is impossible to accomplish."
Instead, Ryan recommends adopting a personal giving strategy as part of a long-term plan that should include contingencies for market volatility. Rather than trying to time the market, donors should take a 'dollar cost averaging' approach where they spread donations over a period of time in an organized and disciplined manner.
"This means applying the same disciplined approach to giving as you would to investing," continues Ryan. "Not only does this reduce the risks and pitfalls of making poor market timing decisions, but it also addresses charities' fundamental need for stable funding."
The guidance concerning gifts of stock is directed at Canadian donors who are taking advantage of the elimination of the capital gains tax on gifts of appreciated securities to charity, which was first instituted in 2006. Since that time, giving of securities has increased significantly, but with recent market fluctuations, many donors are unsure as to when to make their gifts of stock. The general strategy contained in the guidance may also applicable to American donors as well.
In addition to dollar cost averaging, Ryan offers the following tips to donors seeking to maximize the impact of their donated securities:
- If you are holding an investment because you believe it still has upside potential and do not want to sell it, consider donating the security and then re-purchasing it. By doing so you avoid paying capital gains tax on profits to-date and get a tax credit for the donation. You will also have "stepped up" the adjusted cost base of your investment, reducing capital gains and associated tax when you sell the investment.
- If you own securities that have depreciated since purchase, consider triggering a capital loss by selling one or more 'underperformers' and donating the cash proceeds to charity. With this strategy, you get a tax credit for the donation and you also generate a capital loss. This, in turn, can be used to offset other capital gains in the current year or in the past three years, or may be carried forward indefinitely.
- If you are still feeling uneasy about donating stock in light of current market conditions, consider a cash donation instead. You will receive a charitable tax receipt resulting in a tax credit of approximately 46% (subject to certain limits), which may reduce your taxes.
"You can donate both your winners and losers with substantial benefits," concludes Ryan. "The bottom line is that neither your investments nor your charitable endeavors need to be held hostage by the market. By taking a strategic approach to charitable giving, you'll maximize your tax savings and the value of your donations over the long-term. You'll also contribute to the stable, long-term funding that is vital to Canada's philanthropic community."
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group is the seventh largest bank in North America by branches and serves approximately 17 million customers.