I am interested in donating some of my securities to charity and avoiding the capital-gains tax, as you discussed in a recent column. However, I only have an online brokerage account and don’t have physical possession of the shares. How do I get the securities to the charity? And can I donate Canadian or U.S. stocks?
The vast majority of securities transactions are now done electronically, so it’s actually easier to donate this way than if you held paper share certificates. First, make sure the organization you wish to support is a registered charity or other qualified donation recipient that can issue an official tax receipt (The federal government maintains a list here. Second, contact the organization and ask whether they have the facilities to receive a securities donation. Most large charities have all the systems in place and will direct you to fill out a transfer of securities form with your broker. Some smaller charities do not have the facilities to receive gifts of shares directly, but you can still donate securities to them by using a third-party service such as CanadaHelps.org, which will charge a percentage of the donation to facilitate the transaction. Make sure your broker understands that you are making an “in-kind” donation (that is, the shares themselves are going to the charity) and that you do not wish to sell the shares. And, yes, you can donate U.S. or foreign stocks as long as they are traded on a designated stock exchange. (See a list of designated exchanges here)
Can securities can be donated in-kind to charity by an estate, with the same capital-gains tax savings and donation-tax credit advantages that are available to a person who donates securities when he or she is alive?
“Yes, this can be done, provided the will is drafted to allow for this gift,” said Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce. “A donation made under your will is deemed to be made by your estate on the date the transfer is made to the charity, using the fair market value of the securities on that date.”
However, a key condition for qualifying for the capital gains tax exemption – and for providing flexibility in claiming the donation tax credit – is that the estate must be designated by the executor as a “graduated rate estate," Mr. Golombek said. “Be sure to get proper advice from your estates lawyer or accountant so you get the full benefit from your in-kind donation,” he said.
My discount brokerage account shows the “average cost” of all stocks that I own. Is this the same as the adjusted cost base (ACB) for reporting purposes when I sell in a non-registered account?
In a perfect world, the average cost figure provided by your broker would always be the same as the ACB for tax purposes. However, I’ve seen cases where the broker’s average cost or “book value” is not correct. (I wrote about an especially egregious example here. The numbers can be off, for example, if the broker fails to include distributions of return of capital (which are deducted from the adjusted cost base) or ignores reinvested fund distributions (which are added to the cost base). To cover themselves, brokers typically post a disclaimer on their website saying it is the client’s responsibility to calculate the ACB. So, if you are planning to sell a security and need to calculate your capital gain or loss, you should double-check the broker’s average cost figure to make sure it is accurate.
Regarding your recent column on the proposed unit split at Brookfield Infrastructure Partners LP (BIP.UN), what happens if I buy shares of the new company, Brookfield Infrastructure Corp. (BIPC), on the New York Stock Exchange and hold them on the U.S. side of my account? Will I still get the dividend tax credit?
Yes. BIPC’s dividend will qualify for the Canadian dividend tax credit regardless of whether you purchase the shares on the NYSE or the Toronto Stock Exchange, or whether you hold them on the U.S. or Canadian side of your account. BIP.UN’s distribution, on the other hand, does not qualify for the DTC under any circumstances. BIPC’s dividend will have the same dollar value as BIP.UN’s distribution and will also be declared in U.S. currency. The only difference will be the tax treatment.
I have held Brookfield Infrastructure Partners LP (BIP.UN) for a long time and I’m happy with the results. But why is the price-to-earnings (P/E) multiple so high?
Because earnings (the denominator in the P/E equation) can be depressed by non-cash accounting charges such as depreciation and amortization, which in turn inflates the P/E, analysts sometimes find it more useful to value companies based on the actual cash flow generated by the business. So, while BIP.UN’s P/E is indeed high (1,635, according to Globeinvestor.com), the stock’s price-to-cash flow multiple is a much more reasonable 14.2, based on estimated “funds from operations” (FFO) per share for 2019, according to a recent note by RBC Dominion Securities analyst Robert Kwan. FFO, a cash flow measure, is defined by the company as net income excluding depreciation, amortization, deferred income taxes and other items. The lesson here is that you should treat P/E multiples (and other metrics such as payout ratios) on financial websites as a starting point for further research, as these numbers often don’t tell the whole story.
E-mail your questions to jheinzl@globeandmail.com. I can’t respond to everyone personally, but I select certain questions to answer in my column.
John Heinzl