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  Donating capital gains: a king-size karmic boost

BENJ GALLANDER and BEN STADELMANN

Friday, November 17, 2006

As faithful readers know, at Contra the Heard we aim for king-size capital gains. A huge winner from time to time is sweet and outweighs the occasional, but inevitable, losers. NQL Energy Services definitely qualifies as a home run. Purchased about two years ago at $1.11, we sold chunks at $5.50 in 2005 and $9.49 this year, and the stock is currently cruising quietly at $7.55.

This highly profitable Calgary-based supplier of tools to drilling companies has received a $7.60 a share cash takeover bid from National Oilwell Varco. National Oilwell, based in Houston, is a Fortune 500 company and the largest maker of oilfield equipment in North America. NQL looks to be a superb fit, though it will be sad to see another bright spot of Canada s industrial base become swallowed up by an American rival.

Pulling in these kinds of profits is obviously pleasing, and the alteration in the last federal budget has created an excellent opportunity to cover another plank in the Contra philosophy: giving to charity. Due to this tax change, individuals no longer have to pay capital-gains tax on securities transferred to charitable organizations. Though this is a benefit on any shares that hold a substantial capital gain, blockbuster winners like NQL make it really worthwhile.

Let s see how the numbers work out. Assuming a top marginal income tax rate of 46 percent, the sale of 1,000 shares of NQL at $7.55, with a cost base of $1.11 a share, yields a profit of $6,440. Capital-gains tax is applicable to 50 percent of the profit, or $3,220, which results in tax payable of $1,481, leaving $4,959 of net profit in your pocket.

If the same 1,000 shares are given to charity, the tax payable is zero. The total tax credit for the donation varies with the province of residence; in Ontario it works out to 40.6 percent, so the tax credit would be $3,065 in that province. So a donation that is worth $7,550 to a charity, only actually costs an investor $1,584. Talk about bang for the buck!

Those with a naturally philanthropic sentiment or religious compulsion don t need tax inducements to be generous. But what if you don t see yourself as some Goody Two-Shoes humanitarian?

For those from the school of hard knocks, the concept of giving back to society may seem a cruel joke. Or perhaps you were inoculated as a teenager by philosopher and novelist Ayn Rand s hyper-capitalist creed that altruism is the root of all evil. Okay, you Gordon Gekkos, here s a pitch for giving to charity on the basis of enlightened self-interest.

Unlike with taxes, you get to actually pick who to help out, and there are an amazing array of charitable organizations in Canada. Cultural, educational, scientific and environmental organizations, among others, abound; anyone with a particular interest should be able to find a charity that contributes to the benefit of that concern.

Donations to the broader community don t just help the less fortunate, they enhance the stability and cohesion of society. Charity alone can t solve social ills such as crime, but the divisive chasm between the haves and have-nots benefits the few on the upper crust, and those folks flogging alarms systems and bulletproof cars.

We feel exceedingly fortunate and grateful to live in a capitalist country that makes it possible to legally make fantastic profits like with our NQL. But while making money is a pleasure, some sages suggest there is karma in giving some away. As we search for the next grand slam, we ll take all the help we can get.


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