Lexicon Financial Group Weekly Update

Monday, October 25, 2021


Looking Back

It’s hard not to get distracted by short terms numbers. We recently wrote about the VIX index as a measure of market volatility. For the period between October 18 – October 21, 2021, the VIX is down 8% (1). As a reminder, the VIX is a forward-looking measurement of market sentiment. So looking at the markets over the last few days, a novice investor might feel a bit more at ease given the reduction in perceived volatility. It’s a cautionary tale, to be sure. You can’t look at one measurement, one chart, or one index to guide an investment decision. Is the market truly less risky today than it was a scant week ago?

This past week can be characterized as “slow and steady”, in a positive direction. Between October 18 – October 21, 2021, the S&P500 index climbed more than 1.4% and the S&P/TSX gained 1.1%. (1) It’s another example of how closely correlated the two major markets in North America are. Part of the reason for investor optimism is that close to 280 companies announced their Q3 results, with some very notable names (Netflix, for example) beating analyst estimates.


A Closer Look: Charitable Giving

For many families, Thanksgiving is time for them to celebrate their family and community. Many choose this as a time to evaluate the impact that they can make through philanthropic or charitable activities, which has led to an increase in the number of conversations we have been having about these issues. We are able to assist all clients establish a philanthropic giving plan, and are deeply experienced in guiding people through the giving conversation. Indeed, through Raymond James Canada Foundation we have access to even more sophisticated tools to help families truly realise a philanthropic plan.

This week we’re going to look at a method of giving that can potential increase the impact you have on the charities you choose to support. Many are not aware that you can donate securities from your non-registered investment portfolio directly to a charity. At first glance, many don’t see the difference if the money comes from their bank account or their investment account, but there is a difference and it can be big.

That’s because from a tax perspective, donating individual securities in the most efficient method. With a donation of this type, you (the donor) can avoid paying capital gains taxes on what you donate and receive a charitable tax credit for your donation.

Let’s look at a simple a specific amount to a cause that is important to you.

Several years ago, you made an investment into a taxable account. Over the years, that investment has increased in value and now matches exactly the amount you wish to donate!

“Aha!”, you think. “I’ll sell the investment and donate the proceeds of the sale to charity!”

Not so fast. If you were to sell this investment, you would have a capital gains to declare. A capital gain is the difference between what the investment is currently worth and what you originally paid for it (often referred to as the market value and the book value). Canada Revenue Agency will require you to declare that capital gain and pay tax on it, which means that after accounting for any tax that you owe, you can’t make the full donation. We don’t need to know the specifics of your individual tax situation to know that you are able to give less than you intended. And, you’ll get a charitable donation tax credit for a smaller amount, and most importantly the cause you chose to support will get less.

But because you’re reading this update, you now know that you can donate that appreciated security from your taxable investment account.

“Aha!”, you think. “I’ll just donate the security to charity!”

We will coordinate with the charity to make that donation on your behalf. Because you are donating the security, you never realise the capital gain. The charity receives the full value of the donation and you get a charitable tax credit for the full amount.

Ultimately, donating securities is better for the donor and for the charity that receives the donation. As the donor, you are still giving the same amount away, whether from your investment account or your bank account. Donating securities allows you to avoid paying taxes on capital gains, because you never triggered them. Plus, the full value of the donation is recorded on your donation receipt, allowing you to reduce your taxable income even further. Of course, the higher your marginal tax rate, the more donation of securities makes sense.

If you make monthly, recurring gifts to charitable organisations (perhaps through your credit card) and you have a taxable investment portfolio with appreciated securities, I assure you this is a strategy you should review with a tax professional.

Further Reading


Upcoming Event

November 4, 11AM EDT. Fireside chat with Amy Steciuk, Portfolio Manager with Cougar Global Investments. Link to be provided at a later date.


The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

  1. Data provided by Factset showing the price return of S&P500, TSX and VIX for October 18-October 21st, 2021 in its respective local currency.