You can substantially increase your donations to charity by using Flow-Through investments.
If you understand that Flow-Through Shares or Flow-Through Limited Partnerships are volatile investments and you have a desire to give to charity, there is actually a common planning strategy that marries the two together. To summarize, a donor would first make a purchase of a Flow-Through Limited Partnership (or a Flow-Through Share, but I tend to stick with the LPs since they are more diversified) and once the liquidity event occurs, they would then donate the rolled-over mutual fund in-kind to a registered charity. The donor would first receive a 100% income deduction on the Flow-Through purchase and then again receive an eligible donation tax credit on donating the rolled over mutual fund.
The Baseline Case
Let’s assume the donor intends to give $10,000 to charity. If they were to just donate the money to charity, they would be able to claim the $10,000 as a charitable donation and receive a total tax savings of $4,641 (Ontario rates as usual for my examples). So in this case, the charity receives $10,000 and your out of pocket cost was $5,359.
Investing in a Flow-Through First, Then Donating The Rolled-Over Mutual Fund to Charity
In this case the donor first invests in a Flow-Through. The investor receives a 100% income deduction through the flow through of the tax savings from the Limited Partnership after applying the CEECs (Canadian Exploration and Expense Credits). For an Ontarian in the highest tax bracket, this equates to a tax savings of $4,641.
18 months later (average), when the Flow-Through’s liquidity event is effected, the value of the investment is rolled-over into a mutual fund. Limited Partnerships do not qualify for in-kind donation to charities, but mutual funds do. Assuming no growth or loss on the initial $10,000, you would then generate another $4,641 in tax savings.
So in this case, you have twice received tax savings of $4,641 for a total savings of $9,282. Your $10,000 donation to charity only cost you $718.
But Flow-Throughs are Volatile…
Very true. It’s not uncommon for Flow-Throughs to be either up or down 30% within the 18 month investment period. Let’s look at how this changes things. If the $10,000 originally invested is up 30% then you would be donating $13,000 in-kind to the charity. In this case you will have generated a tax savings of $6,033 for the in-kind donation. Add that to the original $4,641 and your total tax savings were $10,674. Not only did you “make” money, you also increased your donation to charity up to $13,000. How great is that?
But in reality, losing 30% is more likely than making 30% on your flow-through investment. In this case, your original $10,000 would have decreased to $7,000 in value by the time you donated it in-kind to the charity. In this case you would have earned $3,248 in tax savings for the charitable donation. Add that to the original $4,641 in savings from the initial investment in the flow-through and your total tax savings in this case adds up to $7,889. In this case, your total out of pocket cost was $2,110 to make a $7,000 donation to charity.
I did not factor in that the first $200 in charitable donations receive a lower tax savings than amounts over $200 as it had no meaningful impact on this analysis. Also, I assumed that our donor was in the highest marginal tax bracket in Ontario. If you are in a lower tax bracket, then your tax savings from investing in the flow through will be less, but your tax savings from charitable contributions will remain as stated since they generate tax credits (not deductions). Finally, this strategy is common and not currently challenged in Canada – however, it is strongly recommended that you consult with a qualified financial advisor before engaging in such a strategy.