HOW DESERVING IS YOUR CHARITY

---

  This is the time of year when many of us take a little time to think about those less fortunate. A gift to one or more of your favourite charities can provide much-needed financial support to those who are working to provide shelter and food for the poor, or to find a cure for disease, or to help the disabled, or any of a thousand worthwhile causes.

And, of course, a charitable donation also earns you a healthy tax credit when you file your return, so the federal and provincial governments are really picking up part of your cost.

There are currently about 78,000 charities registered with Canada Customs and Revenue (CCRA). However, some of them are more deserving of your support than others. And a few could actually expose you to some degree of risk if you contribute to them. So be selective with your money.

To my mind, the most deserving charities are those that keep their fund-raising and administrative expenses to a minimum. This leaves more money available to do the work that the charity has been set up to fund.

For example, in 2000 the Canadian Cancer Society (Ontario division) received a total of $54,436,000 in donations, gifts, and government grants. Of that, just under $43 million went to charitable work that the CCS itself carried out or to qualified donees. That represented 79% of the total donations, a very good score. The War Amputations of Canada did even better, with charitable payments of just under $25 million on donations of $29.4 million. This means that 85% of the money went directly to the causes the War Amps support.

If you have any doubts about a particular charity or would like some insight into how your money is being handled, CCRA offers a lot of information. Go to http://www.ccra-adrc.gc.ca/tax/charities/menu-e.html and do a search for the charity of your choice from the Lists of Canadian Registered Charities. If the search is successful (and notify CCRA if it isn’t) a listing will appear. If it’s a large organization, such as the Salvation Army, there may be many entries and you’ll have to narrow down the search to the specific province or city that interests you.

To find out financial information and other details, click on T3010 Return in the right-hand column. That’s where you can see how efficient the charity is in terms of putting your money to the use you intended. The current returns displayed are for the 2000 tax year.

BE CAUTIOUS ABOUT THIS CHARITY

---

  While donating to most charities entails zero risk in terms of receiving your tax credit, there are a few that take a very aggressive approach that might, just might, attract the attention of CCRA.

For example, I recently received an e-mail inquiry that asked for my advice about a new charity that the writer heard being promoted. Here’s part of his question:

“The scheme involves the donor buying comic books at a low price and donating them to a charity which issues a tax receipt at over five times the value of the donation. The program is run by an organization called Canadian Literacy Initiatives (CLI). More information is available on their web site at www.canadianliteracy.ca “It appears to me that this falls into the ‘too good to be true’ category. However, the speaker was a well-known personality (Jerry White) and assured the audience that the CLI has done its due diligence. He also cited a couple of court rulings and legal and accounting opinions.

“One thing that was not mentioned is that how much of the ‘donated’ money was actually used to buy comic books and trading cards for use in literacy programs. Aside from that, can you comment on this program as a tax saving tool?”

I hadn’t heard about CLI prior to this, so I undertook some research. It appears that the idea is that you buy comic books or trading cards from a private company at a wholesale price. You then donate them to a literacy charity through a Toronto church. They are appraised at “fair market value” (retail price). This is the value for which your charitable donation receipt will be issued, and the suggestion is the amount will be several times more than your contribution.

This could result in a tax refund that’s more than the amount you actually contributed! For example, if you contributed $100 and received a receipt for $500, you would get a federal tax reduction of $119 (16% on the first $200; 29% on the rest). When the provincial tax deduction is added, your total saving will be in the area of $150. You’ve made a 50% profit on a charitable donation!

There is nothing wrong in principle with donating a gift to charity and getting a receipt for more than the price you originally paid. I do it myself with wine donations for charitable auctions. However, the wines were purchased several years ago and have appreciated in value while resting in my cellar. That’s a lot different from the quick flip this represents.

CLI has tax opinions from three well-known law firms that should be read carefully (they’re available on the Web site). All the opinions are lengthy and contain warnings that prospective participants of the plan should heed.

For example, the nine-page opinion from BDO Dunwoody states that the basic concept of the plan is legally sound, but it warns that the appraisal of the donation must be at fair market value. The opinion contains the following statements:

“CCRA is in the process of issuing notices of reassessment on many taxpayers that purchased works of art and donated them to charities. CCRA is taking the position that the fair market value of the works of art which were donated was substantially less than the amount for which the donation receipts were issued. In many cases they have charged a gross negligence penalty as part of the reassessment, claiming that the valuation was negligent and that the taxpayer should have known that it was wrong.”

The legal firm notes that some of the reassessments are being contested in the courts and that there is no way of knowing what the outcome will be. The firm’s advice: “Although not required under the law, we suggest that as a matter of prudence you should obtain two independent appraisals.” Two other legal opinions are even lengthier but reach generally the same conclusions. One from Fraser Milner Casgrain runs to 10 pages. It reviews the BDO Dunwoody opinion and in general concurs with its views. An opinion from Stikeman Elliott covers all of 34 pages, complete with footnotes and legal precedents. It’s a chore to wade through, but contains all the detail you could ever want to know on this subject.

CLI does not have a ruling from Canada Customs and Revenue on whether the program will pass their tests. That makes me a bit nervous. The CCRA has a history of going after aggressive tax claims. I have seen several situations in which assessments were held up for years (literally) and then the claims were disallowed.

That is not to say that anything similar might happen in this case. But you need to be aware of potential problems if you’re considering this plan, which many people apparently are doing. CLI is actively promoting it across Canada, with almost 30 seminars scheduled this month alone.

My recommendation is that you consider this option only if you take an aggressive approach to tax-cutting and are willing to accept the possibility of a CCRA challenge. I strongly suggest that you read all the legal opinions thoroughly and discuss them with your own tax advisor before taking any action. Based on what he or she has to say, you can then make an informed decision.

By the way, you won’t find CLI on the CCRA list of registered charities. That’s because it is not a charity in its own right, but a corporation based in Burlington, Ontario. CLI arranges for your comics and trading cards to be donated to a charity. So if you want to check on how effectively your money is being used to support good causes, ask for the name and registration number of the actual charity that’s getting the donation and check it out at the CCRA site.

JOIN CARP AND WIN AN AXIOM AUDIO HOME SOUND THEATRE

---

  (advertisement)

Here’s an unusual holiday idea. Give a gift membership in CARP (Canada’s Association for the Fifty-Plus) to a friend or loved one (or to yourself) and get a chance to win a great home audio system. Members can save hundreds of dollars a year in special discounts. For complete details, go to: http://webadmin.50plus.com/newsletters/promo/carpgiftpape0212.html

IWB STOCK PICK SOLD FOR PROFIT OF 50%+

---

  One of the stock selections made by our Internet Wealth Builder newsletter has been sold for a profit of 50%+. The pick, Bombay Company, was made by contributing editor Irwin Michael. Bombay trades on the New York Stock Exchange under the symbol BBA.

Irwin originally recommended Bombay on Sept. 4/01, when it was trading at $3.05. He gave entry points of $3 or less for aggressive investors and $2.75 or less for conservative investors. The stock subsequently traded at levels that allowed both groups to take positions.

On the evening of Dec. 5, we sent a special e-mail bulletin to all IWB members advising them to take profits. Bombay had closed that day at $4.52, which meant a gain of at least 50% for aggressive investors and 64% for those who chose to wait for the conservative entry point.

Irwin Michael is the founder and manager of the ABC Funds. His column appears once a month in the IWB, which is a weekly publication.

For membership information and to take advantage of our special 20% off Holiday Season price, go to http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=312

Note: Special Offer expires Dec. 31.

HOW ONE PHONE CALL CAN MOVE MARKETS

---

  Want a behind-the-scenes look at how the power brokers of Bay Street can influence markets? Read our story on the buyer’s strike that shook the income trusts world. You’ll find it at http://www.gordonpape.com/News/Featuredetails.cfm?NewsletterID=1326

BEWARE THE DECEMBER FUND TRAP

---

   Do you own mutual fund units outside a registered plan? Are you thinking of investing in any more this month? Then this article is a must-read if you want to avoid a potentially nasty tax surprise. http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=1345

WHERE TO PUT RESP MONEY

---

  Thinking of investing in a registered education savings plan? Lots of people are, with the 2002 contribution deadline looming (Dec. 31). But all the options now available have some folks confused about the best choice, and making a mistake can be costly in more ways than you might think. We’ve been receiving a lot of questions on RESPs from concerned parents and grandparents. To read our latest advice, check out this week’s Q&A page at http://www.buildingwealth.ca/qa.cfm

Remember, if you have a question of your own you can send it along using the form available on the Q&A page. We can’t provide personal answers but we post five new responses each week. If there’s a topic that interests you, search our Q&A database. It’s a treasure trove of information.

RESP CORRECTION

---

   The letter that we sent recently advising you of the special purchase we made of Head Start contained a factual error regarding the Canada Education Savings Grant (CESG).

Even if you don’t have an RESP in place, the child does not forfeit the right to the grant for that year. It can be carried forward to future years, to a maximum claim of $800 a year.

The following explanation appears on the Web site of Human Resources Development Canada, which administers the program:

“Starting January 1st, 1998, each child who is a resident of Canada began to accumulate grant contribution room regardless of whether or not the child is a beneficiary under an RESP. For example, if a child is born in 1998 but no RESP is opened for the child until the year 2001, the child will have accumulated a total of $1600 ($400/yr x 4) in grant contribution room by the year 2001. The maximum grant that can be received in any year is $800.”

For more information about the CESG, go to http://hrdc-drhc.gc.ca/hrib/learnlit/cesg/011/001_e.shtml

We thank several readers for bringing this to our attention and we apologize for the error.

The Head Start book is still available at the special price of $9.95 plus taxes and shipping but supplies are limited. Order your copy at http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=333

LAST CHANCE FOR HOLIDAY SPECIALS

---

  Remember that all our Holiday Specials come to an end at the stroke of midnight on New Year’s Eve. Don’t let 2003 turn out to be a pumpkin. You’re sure to find a glass slipper among our many fine books and newsletters, and you’ll save up to 56% in the process. See the Bookstore Specials on our Home Page at http://www.buildingwealth.ca .

SEASON’S GREETINGS

---

  That wraps up this week’s edition, and 2002 as well. From all of us, our most sincere wishes for a healthy, happy, and wealthy holiday season and New Year.

And remember: Investing Today makes a nice, free Christmas gift. Send a copy of this issue to your friends, relatives, or anyone you think might be interested. If you have received this copy from someone and would like to be on our regular distribution list, go to http://www.buildingwealth.ca/InvestingToday/Newsletter.cfm to sign up