Canadian tax laws are structured to encourage philanthropy, and for many donors, an outright gift of cash is simple and most attractive. Our tax laws offer significant benefits to donations of securities to a registered charity and it is surprising that donors are not as familiar with the benefits of this approach. If you are considering making a gift to an arts organization and intend to use a security to raise the funds, it is far more tax effective to gift the security to the charity, as opposed to selling the asset and then donating the cash equivalent.
Change in Tax Laws
In 2006, the Federal budget eliminated the taxation of capital gains arising from donations of listed securities to a public charity or private foundation. The exemption applies to donations of publicly traded securities (stocks, bonds, mutual fund units which are publicly traded). As a taxpayer, you receive a charitable receipt equivalent to the fair market value (closing price on the day the security is received by the charity from you/your broker). The tax treatment works in this way:
Sell shares and then donate cash
Donate shares directly to charity
Fair market value
Your tax cost (ACB)
Taxable capital gain (50%)
Tax credit on donation (46%)
Tax on capital gain (46%)
Net tax saving
The total benefit to you of donating $10,000 of securities that have a capital gain in contrast to an equivalent gift of cash is $1,840. If you sold the asset, and then donated cash, you first have to pay tax on the capital gain. Making the donation of the security directly to the charity results in a charitable receipt of $10,000, and you pay no capital gains tax. You end up with a tax credit of $4,600 which is $1,840 more than had you sold the security and then made a cash donation. It is much more tax efficient.
Every individual’s situation will be different and this example is very general to illustrate the benefits. If you aren’t familiar with the concept, we recommend you speak with your financial advisor as well as staff at the organization you wish to benefit for more detailed information. Canada’s tax laws continue to evolve and the charitable sector is working with the Canada Revenue Agency to expand this concept to other types of assets such as private company shares and real estate.
The Economic Impact of Arts and Culture
July 03, 2012
Most if not all, arts organizations are able to articulate the intangible, cultural benefits of their arts programs to their community and to society. Defining the economic impact, particularly when seeking funding, can be a tougher task. Arts and cultural organizations achieve much more than their specific art form. Arts programming contributes to a community at many levels. Documenting the positive impact of an event/arts program is important at the time the organization is seeking a grant renewal or discussing funding opportunities with a private donor or corporate sponsor.
Direct and Indirect Economic Contribution
It is straightforward for an arts organization to identify the direct economic contribution made – all spending by visitors who attend an event, as well as wages, taxes and goods and services purchased in the community. A second positive impact, but more difficult to quantify is the indirect economic contribution related to spending in the local community by visitors and participants of an arts program, event or performance.
A new US study, “Arts and Economic Prosperity” issued by Americans for the Arts relates how arts and culture impact the economy. It begins to quantify how arts and cultural organizations leverage additional event related spending by audiences into the local economy. The objective is to try and identify for funders that arts is an important component to a local economy and a support to economic recovery. It firmly suggests that private donors, corporations and government funders need not feel that a choice exists between arts funding and other means of economic prosperity. Both are important as our Vice Chair John McKellar stated in “The Arts Mean Business”.
The research indicates that every attendee of an arts event generates local income, an average of $24.60 in addition to the cost of admission. Non-local visitors to an arts event spend more ($39.96 vs. $17.42 ) than local attendees. A thriving arts community supports residents who spend ‘local’ but also attract visitors who spend money and further support local economic activity. Comparable data at the community or national level is not as available in Canada. We notionally know this, and referencing the American findings may be a useful tool for arts organizations when making funding requests or speaking with their donors.
Behind all arts programs and performances, lies the challenge for arts organizations of having financial stability in a continuing volatile economy. Should this take the form of a ‘reserve’ or longer term capital fund (‘endowment’). A reserve is attractive as the fund has flexibility and remains available to the organization at the discretion of the Board. An endowment has a long term focus, providing the security of an expected income, available to the organization without restriction and governed externally.
For the Executive Director or Board member, it is critical to think through the purpose of long term funds, who will decide how capital is to be managed and accessed. As an organization, you should understand your donors, what motivates their decisions to provide annual financial support and longer term gifts. At the end of the day, the yield from an operating surplus, reserve or endowment provides the means to help you ensure artistic vision and creative programming can continue.
A new dynamic phrase is emerging in the USA – ‘change capital’. This refers to financial support that supports improvements in the quality or efficiency of the arts organization’s programs, supports growth or ‘right sizing’ of an organization and enables the organization to take risks, innovate and remain vibrant. Characteristics of change capital are three fold:
Funding is separate from regular earned or contributed revenue, and typically is received during a limited time frame
Flexibility – how the organizations spends the funding is of lesser importance than what it achieves – does the use allow the arts organization to enhance how arts programming is delivered or build efficiency into its operating model
Is the result increasing and reliable revenue that creates operating surpluses
Each form of capital – reserve fund, endowment and change capital have a place to help fund improvements in efficiency and quality of programming. They help to align the size and fixed costs of an organization with its sources of revenue (‘right sizing’) and are tools to help arts organizations take risks, be innovative and pursue new visions. A series of papers on capitalization of the arts that speak to this topic and illustrate how arts organizations put them to use can be found through the website of GrantMakers in the Arts – www.giarts.org – National Capitalization Project. All are worth reading, and the NonProfit Finance Fund paper titled “Case for Change Capital in the Arts” expands on the concept of change capital.