Give a gift of securities and benefit come tax time

The year end and holiday season is a time for giving, but when you give you can also receive…

Remember that in addition to the tax credit, NO tax on any capital gain applies to gifts of publicly-traded securities given to charities.

• To qualify, the securities must be listed on a prescribed public exchange.  Bonds and mutual fund units are also accepted.
• The tax credit is based on fair market value on the day ownership is transferred (typically closing price).
• NONE of the capital gain is taxable.
• Annual donation limits are 75% of net income in a given year.
• There is a carry-forward period of 5 years for excess contributions.

Canadians keep giving despite economy

Canadians truly are a giving people.  Charitable donations for 2010 are up 6.5% from 2009 at just under $8.3 billion.

At the same time, the number of donors increased 2.2% to just over 5.7 million with the baby boomers leading the way.  The trend toward giving amongst donor’s age 55+ is very strong and rising; accounting for 45% of all gifts or $3.7 million.  Given our aging population and current levels of giving, it is reasonable to expect that total donations from this age category will continue to rise as more baby boomers enter retirement.

Although a recent BMO study found that almost 70 per cent of Canadians have made a charitable donation in the past 12 months; nationally, just 23.4% of all taxfilers claimed charitable donations on their tax return.  The taxfiler number may be lower due to one spouse claiming the tax credit for charitable donations, but the discrepancy highlights that it is important to make people aware of the tax and financial benefits of giving as well as the social and emotional benefits.

Ways to Give

Giving directly or indirectly

You can choose to be involved directly with the charities you have selected or to give indirectly through a foundation via an endowment or donor-advised fund.

Giving directly ensures you have direct contact with the charities carrying out the charitable activities and direct communication from them relating to their activities. But having direct contact with organizations sometimes can be difficult, especially if you impose conditions on your gift. You will also have to do all the paperwork relating to your gifts yourself unless you hire an administrator.

An alternative is to use a community or national public foundation like Benefaction and set up a personal endowment or donor-advised fund. In this case, the foundation supports the good work of other charities. Its staff can negotiate granting criteria on your behalf and ensure that you get recognition for your gift, if you wish it. For busy people, this is an effective and low-cost solution that still allows you to decide who will receive your gifts. You can focus on your giving, keep administration costs down and avoid getting bogged down in paperwork.

Giving time and skills

Many charities are under-resourced and some lack the business skills needed to help them grow and manage their organization and programs effectively. Sometimes, donating your time and business acumen can be as valuable to charities as financial donations.

Charities often deal with a difficult balancing act. Increasingly, donors are putting conditions on their gifts, preferring to support a new initiative that they believe will have the greatest impact, instead of allowing their donations to fund core costs such as management salaries and administration. The charities are then constrained in what they may do with the donations.

Setting up a new charity

Another way to give is to set up your own private foundation. This is an effective route if you want to maintain total control over your activities, but it can be expensive and time consuming. Also, with over 9,000 public and private foundations in place, it is likely that there is already a charity with a similar mandate to your own. You should investigate this before committing to the set-up costs. An existing charity may be happy to carry out the work you specify, based on an endowment gift. Private foundations are really most effective for sums over $5 million, assuming you are prepared to do the work required. For smaller amounts, an endowment or donor-advised fund with a public charity is a far simpler and more cost-effective solution.

If a private foundation is your choice, you will need to establish a board of directors, decide on your corporate structure (trust or incorporation, national or provincial) and process that application. Then, you need to apply for charitable registration with the Canada Revenue Agency. On an ongoing basis, you will need to hold regular meetings, keep minutes, issue tax receipts, keep adequate books and records, report to the CRA and administer your grants and monitor your annual budget. And, you may be audited. Usually some professional staff is needed.

In Canada, a charity must qualify as being charitable under one of four specific categories:

• The relief of poverty;
• The advancement of education;
• The advancement of religion;
• And other purposes beneficial to the community as a whole in a way the law regards as charitable.

In addition, to qualify for registration as a charity, an organization must meet a “public benefit” test. An organization must show that its purposes and activities provide a tangible benefit to the public as a whole or a significant section of it. All this is done at the outset when you establish the objectives of your organization in its charter.

Donating RRSPs/RRIFs

Retirement plan assets are one of the most heavily taxed estate assets to pass to heirs.

The recipient would normally be taxed at their highest marginal rate.  However, since 2000 it has been possible to make a direct designation of an RRSP or RRIF plan to a charity (except in Quebec where a beneficiary must be a person).  The charity must be named as beneficiary on the plan.  On the date of death of the donor or the second spouse, the plan assets are valued for the tax receipt.  This can be a portion of or the whole value of the plan.  Like with life insurance proceeds, the executor will transfer proceeds directly to the charity avoiding probate.  Then the estate could claim the gift up to 100% of net income in the final two tax years.

The important things to remember when clients are donating a RRSP/RRIF are:

• It is appropriate for any committed donor with RRSP/RRIF, regardless of age;
• The most recently signed documents normally overrule previous instructions, so it is important that the charity be named beneficiary on plan documents and that this is outlined in the Will too;
• The tax credit on donor’s final income tax return is based on value of gift from the plan ;
• The amount of the gift creditable on final tax return is 100% of income (not 75% like when donor is alive);
• There is a one year carry-back if the gift is in excess of 100% final year income;
• A direct designation gift is good for donor advised fund endowment donations;
• The gift is not subject to probate;
• It is most appropriate on death of 2^nd spouse (RSP rollover tax free between spouses).[1]