High
Valuations and tax rules may benefit Universities
Suppose
you're a co-founder of a successful technology firm. For your efforts, you are
rewarded with a $2 million cash bonus - one of many such bonuses. Taken as
salary, you'd be left with half that amount, after paying taxes. Of course, it
is unlikely that you would earn such a bonus in cash. Earning it through capital
appreciation on your zero cost founders shares is a more likely scenario.
Because
of the more favorable tax treatment on capital gains coupled with the tax credit
on charitable contributions, let's take a look at what you can do with a $2
million windfall on stock.
Instead
of selling your founders shares, you contribute $1 million worth of stock to
your alma mater as a charitable donation. You also sell another $1 million for
yourself. On your donation, you are deemed to have disposed of the shares but
instead of being taxed on two-thirds of the gain, you are taxed on only
one-third of this at your full marginal rate of, say 50%, implying a tax
liability of approximately $166K.
On
the $ 1 million which you sold for yourself, you will have a net tax liability
of $333K. However, on the other $1 million in stock donations, you get a tax
credit of 50% which almost wipes out your entire tax bill of $500K arising from
these two transactions.
Sure,
if you had not been quite so generous, making no donations, you would have
netted $1.33 million. But look at it this way: by donating $1 million in gains
you're in roughly the same situation as you'd be if you had earned the same
amount in the form of a salary bonus. Regardless of how you might rationalize
it, it really isn't all that painful.
So
why am I making this pitch? Many would agree that the sharing of some new- found
wealth with worthwhile causes is a very admirable deed. I would argue, though,
that such actions are not just "nice", they are absolutely essential
in securing our future prosperity, especially if the beneficiaries are our
universities.
Our
American friends understand this. Statistics show that they are more generous in
altruistic terms. It goes beyond generosity, though. Look at the endowments
enjoyed by some of their leading universities such as Stanford and MIT. High
technology entrepreneurs know that research and higher education are the
lifeblood of their enterprises. Sustaining
this valuable resource makes good business sense.
Jeff
Skoll, a University of Toronto alumnus and Vice President at eBay.com, recently
contributed $7.5 million to the University. Thanks to even more favorable tax
breaks in the U.S. which, unlike Canada, encourage donations to private
foundations, Bill Gates has created the largest foundation in that country by
gifting appreciated stock.
We
all know that our Canadian universities are not meeting the demands of industry
- with respect to addressing the escalating skills shortage and fueling the
R&D engines by attracting and retaining researchers and educators. Counting
on government alone to address these issues won't work.
In
British Columbia, the market value of publicly traded technology firms has
appreciated more than ten-fold to almost $100 billion in just two years. If a
mere one percent of that increase could flow back to the Province's
universities, their combined annual operating budgets would double!
The
way I see it, private sector financial support of higher education and research
in Canada is a necessary condition for sustaining our prosperity in the new
economy. We can't compete effectively without such support. New tax rules make
it a great deal easier for us to meet these obligations.
Copyright, 2000.