If the ability to receive more after-tax income today and offset capital gains tax with a future donation appeals to you, this Tax Advantaged Strategy may be for you.
A "T" Class investment provides a regular stream of tax efficient cash flow from monthly distributions. A significant portion of the distribution is considered a tax-free return of your capital (ROC), deferring capital gains. Each monthly distribution (ROC) decreases
the adjusted cost base (ACB) of the investment.
Down the road, the deferred capital gains would be payable if you liquidated the fund, however, if you include your favourite charity, The Canada Revenue Agency offers incentives to donate these publicly traded securities, which can reduce the capital gains inclusion rate to zero percent.
Let's look at an example:
John and Alice, age 60, want to start drawing a sustainable and tax efficient income from $200,000 of savings. The goal is to keep the $200,000 intact or even grow it at a modest rate. The fund generates 6% per year in annual cash flow. This would provide them with after tax income of $11,550 for 19 years-a total of $219,450. At that 19 year point the ACB of the fund is zero.
Assuming a 6% rate of return, the value of the fund would still be $200,000. If John and Alice cashed out the fund, the full $200,000 would be a capital gain payable to CRA. At the highest tax rate, this would be $40,150 in taxes.
Here's how it works:
John and Alice choose to transfer ownership of $59,000 of the portfolio to their favourite charity. The capital gain realized will not be taxed and they will receive a donation receipt of $59,000 which provides a tax credit of $27,140. They can then remove the remaining $141,000 from the fund and the tax of $26,785 will be offset by their donation receipt.
The results of this strategy are: tax efficient income, a sizable donation to charity, and a reduction in taxes owing to CRA.
Note: The opinions expressed here are Greg Glista's. Cornwall Wealth Management Group/Manulife Securities Incorporated are not responsible for the accuracy of any of the information supplied here.