Doing Well by Doing Good

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
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Norbert Schlenker
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Doing Well by Doing Good

Post by Norbert Schlenker » 07 Sep 2006 03:28

In this thread, Springbok describes a situation with a big capital gain that makes him (her?) reluctant to sell a position.

Let me describe a similar situation, much simplified because I am posting without a calculator at hand. I am going to use BC tax rates because they come to mind easily, top marginal rate because it's as unfavourable as possible.

Suppose you own some highly appreciated securities and the position is large enough that you don't feel very comfortable about it. Springbok has such a position with an 80% gain but, to make it simple, presume a 100% gain. Let's make the dollar gain relatively large, so that the prospect of paying capital gains taxes might cause hesitation. We'll go with a position that cost $50k and a current market value of $100k. If you sell the position, the tax liability is $11,000 and the net in your pocket is $89,000.

Consider two alternatives instead. Donate 10% of the position to a registered charity of your choice, in kind as appreciated securities. That gets you a $4400 tax credit (federal + provincial). What can that do for you?

First alternative: Donate the $10k and sell the other $90k. The net tax liability after the donation credit is $5500, so you pocket $84,500. That's not much of a haircut from $89,000, and the charity still gets ten grand.

Second alternative: Donate the $10k. Sell $40k of the position. The net tax liability after the donation credit is $0, so you end up with $40k in cash and a position in the security worth $50k, i.e. half the size that made you so uncomfortable. The charity still gets ten grand and your concentration problem is lessened.

It's September, the start of the season when charities come looking for money. You might want to use them to solve your own diversification problems.
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Post by pitz » 07 Sep 2006 03:52

There are even some charities that allow you to make a donation, and then they will send you on a trip to do missionary/humanitarian/miscellaneous work overseas. If you are overly worried about giving to charity and not receiving 'anything' in return.

So you give your $10k to the charity, and they buy you, as an employee, a plane ticket and provide you with housing/food, and in many cases, a very unique experience in another country, helping those in need. Plus you still get the tax credit, and you can take a few weeks 'off' from the charitable work overseas and spend the time at a resort -- the expensive long distance flight to the region already paid for.

I know for Professional Engineers (my profession), the projects have involved stuff like consulting and construction relating to the rehabilitation of water treatment/distribution systems in small towns and villages in certain Latin American countries. For medical professionals, the opportunities are almost endless. And it definitely expands one's horizons. Plus you might also receive education and/or community service credits or recognition through your professional association.

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Post by Bylo Selhi » 07 Sep 2006 08:22

pitz wrote:There are even some charities that allow you to make a donation, and then they will send you on a trip to do missionary/humanitarian/miscellaneous work overseas...
Can you name some names?
I know for Professional Engineers (my profession), the projects have involved stuff like consulting and construction relating to the rehabilitation of water treatment/distribution systems in small towns and villages in certain Latin American countries.
I couldn't find anything on point at EWB. Moreover, "Our projects funded by CIDA require volunteers to be under the age of 30. Other projects are open, though a majority of our long-term volunteers are between 24-30 years old because of the rigorous living conditions." I suspect few people in that age group have excess funds available to donate to charity.

Do you know of anything that's available for boomers?
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Re: Doing Well by Doing Good

Post by Bylo Selhi » 07 Sep 2006 08:42

Norbert Schlenker wrote:Let me describe a similar situation, much simplified because I am posting without a calculator at hand.
Your back-of-the-envelope calculations are consistent with Tim's A great stock sale idea: Zero taxes and help a favourite charity

See also: Donating Stock. Note that thread was started before the last budget allowed for CG-free donations to charity. Another consequence of this:
On the 2006 budget thread Bylo wrote:Consider someone who has $1k cash and a security with an ACB of $1k and MV of $2k. If they plan to contribute $1k to charity, they should transfer $1k of the security, then use the $1k cash to either buy the security back or buy something else (i.e. rebalance.) Either way, they've just added a net $500 to the ACB of their portfolio in addition to whatever tax credit they get on the charitable contribution.
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Post by always_learning » 27 Oct 2006 11:19

My wife recently did some work for a foundation, for which she can either receive 4K, or else she can direct it to her favourite registered Canadian charity. Suppose we want the charity to end up with 4K. Can someone please doublecheck my math in the following? I think that option A makes more sense than option B.

Simplifying assumptions: 50% marginal tax rate, our appreciated stock is 100% gain. I'm just ballparking the numbers below to see if I'm roughly applying the principles correctly to our situation.


Option A: Take the cash
Take the 4K in cash personally, give 4K in stock to the charity.

The charity gets 4K, we end up with 4K because the 2K tax credit offsets the 2K taxes owing on the earned income.


Option B: Direct the cash
Direct the 4K to the charity, sell 4K in stock and keep the proceeds.

The charity gets 4K, we end up with 3K after paying cg taxes on the stock sale.



Looks to me like we come out ahead using option A. Did I get that right?
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Post by Norbert Schlenker » 04 Jul 2007 12:04

I know a fair number of people here are looking at pretty big capital gains to be realized when BCE finally gets taken out. Let me again suggest donating some highly appreciated shares to a charity of your choice as a way of mitigating your tax bill.

Let me also present a formula that will allow you to determine what fraction of your holdings you need to donate in order to wipe out the tax liability on the rest of the shares. You don't need to donate the whole position to get away free of capital gains tax.

For your own personal situation, you need to determine the value of two variables. Let

c = your adjusted cost base divided by current value, and
t = your marginal tax rate divided by the maximum marginal rate in your province

Then donating a fraction of your holding equal to

((1-c)t)/((1-c)t+2)

zeroes your tax liability on the sale of the rest.

Let's work a couple of extreme examples.

If you have owned BCE since the Ice Age, c could be close to zero. If you're also in the top tax bracket, i.e. t=1, then you need to donate ((1-0)1)/((1-0)1+2) or 1/3 of the total position in kind, i.e. as shares, to a charity in order to wipe out the liability on the sale of the other 2/3.

Now suppose your gains and your tax bracket are more modest. Suppose BCE has just doubled since you bought it and your marginal rate is about half the top rate (e.g. approximately the lowest bracket in most provinces). Then you need to donate ((1-1/2)1/2)/((1-1/2)1/2+2) or about 1/9 of the position to nullify the tax on the sale of the other 8/9.

Customize to your own situation.
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Post by Bylo Selhi » 04 Jul 2007 12:21

Dunno that I'd call it a "tax bonanza," but Jon Chevreau in today's Financial Post: Give the Bell shares to charity and reap a tax bonanza
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Post by Norbert Schlenker » 05 Dec 2007 13:06

Above last July, I wrote a piece that I've now tweaked a little for publication elsewhere. The tweaked one, hopefully a little easier to read, is here.
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Post by Bylo Selhi » 20 Dec 2007 13:32

Norbert Schlenker wrote:The tweaked one, hopefully a little easier to read, is here.
Norbert's piece stars in today's Star: Giveaway of stock can keep taxes at bay. :thumbsup:
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Post by Norbert Schlenker » 20 Dec 2007 14:35

(Amended because I complained earlier that Daw's formula was incorrect. In fact, it's correct, because he very cleverly mixed one "divide into" with another "divide by", and I read it wrong.)**

I suspect it may not help the average Star* reader, given that there's something akin to algebra involved.
Fran Liebowitz wrote:Stand firm in your refusal to remain conscious during algebra. In real life, I assure you, there is no such thing as algebra.
-----------------

* I guess I should be happy it's not the Sun. :lol:

** If it confused me, then what chance does anyone have? :rofl:
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Post by kcowan » 21 Dec 2007 09:27

** If it confused me, then what chance does anyone have?
Maybe there should be a step-by-step calculator on your web site.

Norbert's Gambit is already taken. How about Norbert's Dodge? :thumbsup:
For the fun of it...Keith

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Post by Bylo Selhi » 21 Dec 2007 10:00

kcowan wrote:Maybe there should be a step-by-step calculator on your web site.
There is, but unfortunately Daw chose not to link to it.
Doing Well by Doing Good wrote:First, determine the value of two ratios. Let:

g = the gain in your shares divided by total current value, and
t = your marginal tax rate divided by the maximum marginal rate in your province.

Then donating a fraction of your holding equal to gt / (gt + 2) offsets your entire tax liability on the sale of the remainder, leaving your overall tax bill as if the sale of the shares had not occurred.

Some examples of how the formula works...
I suppose a Java calculator would be better but what's so hard about the above?
Norbert's Gambit is already taken. How about Norbert's Dodge?
Or Norbert's [Tax] Neutralizer™?
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Post by Shakespeare » 21 Dec 2007 10:06

How about Norbert's Dodge?
I suppose Norbert's Fiat would be out of the question.... :twisted:
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Post by kcowan » 21 Dec 2007 12:27

Bylo Selhi wrote:]I suppose a Java calculator would be better but what's so hard about the above?
Don't forget that the article appeared in The Star! :twisted:
For the fun of it...Keith

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Post by Bylo Selhi » 21 Dec 2007 12:44

Shakespeare wrote:
How about Norbert's Dodge?
I suppose Norbert's Fiat would be out of the question.... :twisted:
Well that would certainly be better than Norbert's Audi[t]
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Post by Bylo Selhi » 08 Jan 2008 18:23

Another way to do well (earn 3.7%) by doing good: Shared World Term Deposit
You deliver dollars, dignity, and hope. We deliver a competitive return. That's the idea behind the Citizens Bank Shared World Term Deposit... Your investment dollars help provide affordable credit to people in the world's poorest communities, allowing them to educate their children, obtain secure housing for their families, develop micro and small businesses, and otherwise improve their quality of life...

A Shared World Term Deposit offers:
* More opportunity to help: save for your future while aiding people in developing worlds to build their livelihoods
* More bang for your buck: your dollars are loaned out again and again, providing hope and help to many families and small businesses.
* More flexibility: start making a difference with just $100
* More certainty: interest rates are guaranteed for the length of the term
* RRSP eligible

Your deposits are safe and secure here. We're a member of the CDIC (Canada Deposit Insurance Corporation), so up to $100,000 of your Canadian dollar deposits are eligible for CDIC protection.
See also: Open an account, change the world
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Post by Pickles » 08 Jan 2008 23:13

Bylo Selhi wrote:Another way to do well (earn 3.7%) by doing good: Shared World Term Deposit
Bylo, you have many excellent ideas and advice and I always look forward to your posts. But each time I read about Kiva and other micro loan/charity programs, I can't help but wonder if these aren't the latest version of some Nigerian internet scam.

I have seen several of these promoted in recent months (no doubt b/c of the Christmas season) and have checked out some web sites. I have no idea whether these are legit charities or not. I also don't know what percentage of revenue is spent on salaries of the employees and the (often overseas) partners who screen loans applications.

Each of these plans sound like a great idea, but I wonder how much of the 10% interest an African woman pays for her micro loan is pocketed by someone else and I don't know if this is a fair cost for the service or if it is exploitative of both the Canadian lender (who lends at 0%) and the impoverished borrower.

I have, on occasion, lent/given small amounts of money to people for whom the loan/gift was crucial to a project or aiding with a life crisis. I am genuinely interest in the idea behind Kiva et al, so please do not consider this post critical of them or you in any way.

Can you vouch for these groups? Do you know enough about them (beyond their own claims) to be confident in their good works?

Hoping for the favour of your valued response,
Regards,
Pickles

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Post by Bylo Selhi » 09 Jan 2008 08:59

Pickles wrote:But each time I read about Kiva and other micro loan/charity programs, I can't help but wonder if these aren't the latest version of some Nigerian internet scam.
That seems to me to be highly unlikely. See e.g. this thread and follow the links. Kiva has been mentioned in main stream media worldwide for several years. If it's a "scam" I'd imagine we'd have heard about it by now.
I have no idea whether these are legit charities or not.
They are (or seem to be) however they don't have charitable status for tax purposes. That actually makes sense. They're not charities. They're businesses. Their mission is to make large amounts of capital available in small doses to individuals living in the developing world where the sort of borrowing options we take for granted don't exist.

In Kiva's case you're not making a donation. As I understand it, you loan say $100 which Kiva then loans out in the developing world on your behalf. When your loan is repaid you can ask Kiva to return your money to you. Kiva reports a default rate of ~0.2% so obviously the borrowers are motivated to repay. (Compare to the default rate on credit card debt in developed countries. (Compare to the "success" rate of Nigerian scams ;)))
Can you vouch for these groups? Do you know enough about them (beyond their own claims) to be confident in their good works?
No. I must confess that I haven't partaken in any of these programs. In the case of Kiva it was because after the PBS show they claimed to have more money than they could loan out. However other FWF members have sent money to Kiva. (Yielder and brucecohen, at least.)

My reason for posting the link to Shared World Term Deposit was to provide another option for people, who are looking for ways to do good, to consider. My mention of any security here is not meant to be a blanket endorsement or recommendation nor does it necessarily mean I own it. You have to do your own homework and determine, based on your circumstances, whether it's appropriate for you.

Perhaps we should move this discussion to the Kiva thread in SoapBox (or start a separate thread to discuss the broader topic.)
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Post by bootsie » 09 Jan 2008 10:25

There are similar organizations that accept donations and give charitable receipts that reloan the money (thus the donation) that have been around for decades. One such organization is the Grameen Foundation (http://www.grameenfoundation.org/).

We're seriously considering making this our 2008 charity choice.

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Post by Bylo Selhi » 09 Jan 2008 11:27

For Pickles et al, from GF's FAQ:
I’ve heard that MFIs charge a high rate of interest for the loans. Is that so?

Like other financial institutions, microfinance institutions (MFIs) charge interest for the loans they make to their clients. The interest covers the high cost of making very small loans and personally servicing each client every week. It also covers the cost of managing the “center meetings”; the peer support group process; and providing information on social services, personal development, health and other critical information that helps clients improve their lives and the future of their families. Their rates are also largely influenced by the rates MFIs themselves pay for borrowing the funds that they in turn lend to their clients. MFI interest rates can range from 18 to 60 percent, depending on the conditions in each MFI’s service area. Without microfinance programs, the most common alternative for very poor people is the local “money lenders,” who regularly charge between 120 and 300 percent.
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Post by bootsie » 09 Jan 2008 12:39

Bylo Selhi wrote:
For Pickles et al, from GF's FAQ:
I’ve heard that MFIs charge a high rate of interest for the loans. Is that so?
Like other financial institutions, microfinance institutions (MFIs) charge interest for the loans they make to their clients. The interest covers the high cost of making very small loans and personally servicing each client every week. It also covers the cost of managing the “center meetings”; the peer support group process; and providing information on social services, personal development, health and other critical information that helps clients improve their lives and the future of their families. Their rates are also largely influenced by the rates MFIs themselves pay for borrowing the funds that they in turn lend to their clients. MFI interest rates can range from 18 to 60 percent, depending on the conditions in each MFI’s service area. Without microfinance programs, the most common alternative for very poor people is the local “money lenders,” who regularly charge between 120 and 300 percent.
To add to that, according to kiva's website:
Why are microcredit interest rates so high?
The nature of microcredit – small loans – is such that interest rates need to be high to return the cost of the loan.

"There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums."

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Post by LurkyDismal » 09 Jan 2008 16:56

An interesting article on the benefits of microfinance, not the icing on the cake, but in fact the cake itself.

"Through the ages, we have come to associate profit with greed and serving the poor with self-sacrifice. Accordingly, now that the outstanding performance of leading microfinance banks has inserted banking at the base of the pyramid as an integral part of emerging-markets finance, socially conscious investors are starting to agonize over earning returns while serving the poor. By focusing on their motivations in helping the poor rather than on poverty itself, they have obscured the pragmatic realities of the problem they wish to address. ...

So if you want to put your money in microfinance just to feel good, by all means direct it to the organization that most pulls your heartstrings. But if your objective is to roll back poverty and change the world, don't believe those that have been telling you that returns on your investment are the icing on the cake. It is the cake itself."


http://www.forbes.com/2007/12/20/michae ... 20chu.html
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Post by brucecohen » 09 Jan 2008 17:33

LurkyDismal wrote:"So if you want to put your money in microfinance just to feel good, by all means direct it to the organization that most pulls your heartstrings. But if your objective is to roll back poverty and change the world, don't believe those that have been telling you that returns on your investment are the icing on the cake. It is the cake itself."


http://www.forbes.com/2007/12/20/michae ... 20chu.html
Either I missed something or the ending of Chu's article conflicts with its thrust. Could be he tried too hard for a grand finale or could be an editor's error.

The way I read it, his ending suggests that those who support Kiva and other microfinance agencies will make little, if any, impact on helping the poor. Yet earlier Chu stated that only the creation of private enterprise can offer the poor effective, efficient, sustainable help. And in the next-to-last paragraph he spotlights the success of microfinance in Bolivia. So:

1. The best way for the poor to advance is to create effective businesses
2. Business creation and growth requires capital
3. The poor lack capital and their needs are too small to be economic for mainstream lenders
4. Microfinance agencies meet those needs using a combination of pure-profit and feel-good structures
5. Poor entrepreneurs get the capital they need, typically put it to the use intended and typically repay the loans with full interest
6. As each business prospers, so does the poor person's family and community

I don't see how the interest paid to lenders constitutes the entire cake, and doubt that's what Chu meant.

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Post by Pickles » 10 Jan 2008 07:55

Thank all those who responded to my post. Some very interesting links and articles.
Regards,
Pickles

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Post by LurkyDismal » 10 Jan 2008 08:38

Either I missed something or the ending of Chu's article conflicts with its thrust. Could be he tried too hard for a grand finale or could be an editor's error.
Bruce I think you are right, likely not what the author meant, the result of poor editing or attempting dramatic finale.

Insightful comments, thanks.
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