Donating strategies with Fidelity T-SWP®

Enhancing the tax efficiency of charitable giving

1

Receive tax-efficient cash flows.

2

Donate to a worthy cause and get a donation receipt.

3

Eliminate the tax on your capital gain.

Fidelity T-SWP

Fidelity Tax-Smart Withdrawal Program® (T-SWP®) gives you a flexible tool to develop solutions that combine tax-efficient cash flow with the potential for tax-deferred growth. Your non-registered invested assets can continue to grow, even while you receive cash flow.

With T-SWP, monthly cash-flow payments are composed mainly of return of capital (ROC). ROC is not taxable income, because the investment was originally purchased with after-tax dollars.

Furthermore, ROC does not contribute to the claw-back of income-tested government benefits such as Old Age Security (OAS). When all of your original capital has been returned (i.e., the ACB has reached zero), monthly payments become mainly capital gains, which are still tax-advantaged compared with other forms of income.

How does Fidelity T-SWP work?

Monthly cash-flow payout rates

Annual payout rates are calculated in January, and T-SWP series that are outside desired cash-flow payout ranges are reset to 5% or 8% of the net asset value per unit of the respective T-SWP series on the last business day in December of the previous year. Series within desired cash-flow payout ranges are not reset.

Monthly payment amounts may change to keep the cash-flow payout rates close to the 5% or 8% corresponding to the related T-SWP series 

Taxability of cash-flow payments

Monthly T-SWP cash-flow payments are generally characterized as ROC. Any taxable cash-flow payments paid out by the investment may reduce the tax efficiency of the investment.

Return of capital (ROC)

ROC is not taxable income, because the non-registered investment was originally purchased with after-tax dollars. A ROC payment will reduce the amount of your original investment and does not represent income or capital gains earned by the investment, and does not reflect, and is not the result of, the performance of the investment. Further, ROC does not contribute to the claw-back of income-tested government benefits such as OAS. Finally, payments characterized as ROC will reduce your ACB. When all your original capital has been returned (i.e., the ACB has reached zero), monthly payments become mainly capital gains, which are still tax-advantaged compared with other forms of income.

Market value

Investors should not confuse monthly T-SWP cash-flow payments with a fund’s rate of return or yield. The fund continues to generate investment returns.

The gift of giving

Donations to a charity are a great way to give back. Usually, when investments are sold in non-registered accounts, a capital gain (or loss) is realized, and fifty percent of any capital gain is included in taxable income.  If qualifying investments are donated directly to a registered charity (an “in-kind” donation), the capital gains inclusion rate is reduced to zero percent, which means no taxes are paid on the capital gain of the donated investments. Qualifying investments include mutual funds, stocks, bonds or other publicly traded securities. 

The value of the donation (whether cash or “in-kind”) is used to determine a tax credit, saving taxes for the donor.

With T-SWP, the cash-flow payments generally include ROC and reduce the ACB of the investment, deferring the capital gain to the time the units are sold. If the T-SWP units are donated directly to a registered charity, then, as noted above, the capital gains inclusion rate is reduced to zero percent. 

Charitable giving with T-SWP lets you receive tax-deferred cash-flow payments from your investments and donate to a worthy cause in a tax-efficient way.

Charitable giving with T-SWP

The following example assumes a $50,000 investment was made a number of years ago, which has since doubled in value. The investor wishes to sell the investment and donate $50,000 to charity.

Scenario 1 (cash) – The investment is sold and cash is donated to charity.

Scenario 2 (in-kind) – Only half of the investment is sold; the remaining half units are donated in-kind. This cuts the tax bill in half.

Scenario 3 (in-kind with T-SWP) – T-SWP is used to effectively separate the original capital from the gain. Over a period of years, T-SWP distributions provide cash flow to the individual and reduce the ACB to zero. The T-SWP units are donated to charity, and capital gains taxes have been eliminated.

In all three scenarios, a $50,000 charitable donation receipt is used to reduce taxes otherwise owing.

Donation strategy Cash In-kind In-kind with T-SWP
Initial investment $50,000 $50,000 $50,000
ROC distributions T-SWP
units
Investment doubles in value $100,000 $100,000 $50,000 $50,000
Composition ACB =
$50,000

Capital gain = $50,000
ACB =
$50,000

Capital gain = $50,000
ROC =
$50,000
ACB =
$0

Capital gain = $50,000
Donation (amount for tax credit) $50,000
(cash)
$50,000
(in-kind)
$0 $50,000
(in-kind)
Tax on disposition
of investment
$12,500 $6,250 $0
Tax efficiency Lower Higher

For illustrative purposes only. Source: Fidelity Investments Canada ULC. The above example assumes no distributions or dividends and a tax rate of 50%. Capital gains inclusion rate: 50% inclusion if sold for cash; 0% for in-kind donations.

This strategy can also work on the death of a taxpayer, for more information, ask your financial advisor.

Canadian-controlled private corporations (CCPC) can also benefit from this strategy.

1

Private corporations claim charitable donations as a deduction, unlike individuals, who receive a tax credit.

2

The entire capital gain on the donated securities increases the capital dividend account when units are donated in kind, because of the capital gains zero-percent inclusion rate.

3

Private corporations can benefit from the T-SWP donation strategy and increase the capital dividend available to be paid tax-free to the shareholder.

 

FIDELITY HAS A COMPLETE PACKAGE OF TAX-SMART INVESTMENT SOLUTIONS.

Fidelity’s suite of tax-smart solutions includes

  • Fidelity Corporate Class
  • Fidelity T-SWP
  • Fidelity T-SWP Class

 

 

 

For more information, contact your financial advisor.

Read a fund’s or pool’s prospectus or offering memorandum and speak to an advisor before investing. Read our privacy policy. By using or logging in to this website, you consent to the use of cookies as described in our privacy policy.

This site is for persons in Canada only. Mutual funds and ETFs sponsored by Fidelity Investments Canada ULC are only qualified for sale in the provinces and territories of Canada.

Close Search