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A time for giving: Act like a saint but think like an investor

Many people believe that being charitable results in more coming back to them.

A friend who spent time in the U.S. Army once told of a sergeant who addressed the men.

"When I was a little child," the sergeant said quietly, "I had a set of wooden soldiers. There was a boy at school from a very poor family, and after I had been to Sunday School one day and listened to a stirring talk on the importance of being charitable, I was moved enough to give them to him. Later that day I cried to my mother, wanting them back. 'Don't cry,' my mother said, 'some day you'll have wooden soldiers again.' And believe me, you thick-headed bums, that day has come."

Whether or not you believe that charity results in returns to you personally, one thing's for sure: Charities in Canada need your help more than ever. TD Economics released a paper in October that provides a novel way to think about charity. The idea? Think about your giving as you do your investing. And why not? It can mean more meaningful and effective giving. Here are some highlights from that paper.

Develop a philanthropic plan: A good place to start is by creating a financial plan that details your goals -- and don't forget about your charitable giving goals. Your plan should consider all of your assets, including the possibility of making gifts in-kind. And give thought to including gifts to registered charities in your will.

Understand the charity: Any prudent investor will take the time to understand what they're investing in. Charity should be the same. What portion of donations to the charity covers administrative costs? What portion is used for charitable activities? What portion of support comes from personal (versus government) donations? Be sure to conduct due diligence.

Consider diversification: Diversification of an investment portfolio reduces risk. Diversification in charitable giving is not as important, except to realize that charities in every field need your help. There's a good chance that your philanthropic priorities are not limited to a single cause. But be careful. In my view, too much diversification can mean less meaningful gifts to each charity.

Give for the long term: Your charitable goals should include supporting specific charities for the long term. Any charity will tell you that their greatest challenge is to find a long-term stable source of support. Don't be afraid to make pledges to a charity, to let them know your long-term charitable intentions. It will help them plan for the future. (A note to charities: Make pledge forms available to potential donors!) Finally, consider an endowment fund to provide that long-term support.

Maximize your tax credits: Investors try to maximize the return on their investments. You can do the same in your charitable giving by maximizing your tax credits. Consider these ideas: (1) Claim all donations on one spouse's tax return; (2) donate securities instead of cash to slash the tax on your capital gains in half; (3) give during your lifetime to minimize probate and executor fees.

Consider self-directed giving: A portion of your income will be used to help others whether you intended this or not. How? Through taxation and a redistribution by the government to charity. By making donations to registered charities yourself, you're self-directing your social capital, and the government gives you part of the money to do this (through donation tax credits). This way, the charities of your choice -- not the government's -- will benefit.

Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.

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