Budget 2012:  No New Donation Incentives

No new measures to increase incentives for charitable giving.

Budget 2012 focuses largely on measures dealing with the perceived lack of transparency and accountability concerning charities devoting their resources to political activities. This will create new challenges for registered charities conducting political activities, but generally speaking the scope and impact of this budget is not as broad as that of 2011.

It is worth noting that Budget 2011 established a new House of Commons Standing Committee on Finance for the study of how current tax incentives for charitable donations might be improved.  Alas we will have to wait until 2013, but the sector remains hopeful as Budget 2012 at least confirmed the Standing Committee will continue to review submissions. 

Let’s have a quick look at one of those. The Canadian Association of Gift Planners (CAGP-ACPDP™) proposes encouraging and enabling Canadians to meet their philanthropic goals by supporting the following planned giving incentives:

• Stretch Charitable Tax Credit: This incentive is a broad measure in which increases in giving year on year receive increased tax recognition.

• Gifts of Real Estate: This incentive means that the capital gains realized on gifts of appreciated real estate would be exempt from tax.

• Gifts of Private Company Shares: This incentive extends the exemption from tax on capital gains realized on gifts of public company shares to the capital gains realized on the disposition of certain gifts of private company shares.

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.

Benefaction’s top 10 charitable giving tips for Canadians

Canadians know that giving brings with it a tremendous sense of connection and fulfillment.  Check out these tips to see how to get the most out of your charitable gifts.

1.  Save tax by taking full advantage of tax planning opportunities.

Structure and time your gifts to limit any tax on the capital gain and obtain full benefit of the tax credits available to you.

2.  Make gifts of securities instead of giving cash.

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

3.  Limit taxes for your estate by gifting your RRSP or RRIF.

Naming a charity as the beneficiary for your RRSP or RRIF usually eliminates the tax on this investment.

4.  Executives should consider donating optioned stock.

Cash proceeds from optioned stock may be donated within 30 days of the exercise date. Like public securities, the donated portion will incur NO tax on the capital gain.

5.  Make your gift go farther.

By designating a charity as the beneficiary of a life insurance policy, donors can bequeath many times more to their favorite charity.

6.  Know your limits.

Up to 75% of net income (100% in the year of death) can be deducted annually. Any excess can be carried forward for the next five years.

7.  Donate flow-through shares.

Despite the 2011 budget eliminating the capital gain component of the tax benefit that existed where a Canadian taxpayer buys a FT and then donates it to charity, taxpayers continue to benefit from the allocated FT resource deduction and the charitable donation tax credit.  Subscription agreements prior to March 22^nd 2011 are not affected, but charitable owners of FT’s should be aware of the impact this budget may have on their future donation plans and the possible time limit on being able to take advantage of the capital gain exemption of a FT share donation.

8.  Save time by dealing with professionals who can manage your donations.

Benefaction can help to administer all your gifts from one place; and we can help make complex gifts easy for you to donate to your favorite charities.

9.  Take control of your giving.

Enjoy benefits of having your own private foundation without the administrative costs and complications.   Contact us for more information about a Benefaction Donor Advised Fund.

10.  Create a legacy.

Many charities offer donors the ability to make gifts (and attach their names to them) so that others will know of their generosity for generations to come.

Teach your kids to give

Tis the season to show children the importance of giving back

The approaching holiday season is a time for giving, but is the message of sharing the wealth getting lost in the commercial clutter? It doesn’t have to. Parents across Canada are finding ways – some subtle, some not so subtle – to drive home to their children and grandchildren the idea that it can be fun to give. Follow these tips adapted  from grandparents.com to instill a tradition of philanthropy in your family.

1. Be a Role Model

The first step toward helping your grandchildren become more charitable is to model charitable behavior for them.  Tell your grandchildren about the causes you support and let them see you write a cheque. Better yet, take them along the next time you volunteer.

2. Start Small

Instead of just buying gifts for each other, pool your money to start your own charitable fund.  You can put all your charitable giving in one place with a Benefaction Donor Advised Fund.  It is just like establishing your own charitable foundation, without all the hassle.  You can give to any charity at any time. Then give your grandchildren a budget, and let them pick which charities your family will give to.

2. Make it Tradition

Call your family together each year before the holidays.   At the meeting, encourage everyone to shares what made them happy or sad during the year, and then lobbies for a cause that deserves the family’s philanthropic support in the year ahead.

4. Make It Meaningful

You can turn holiday traditions into opportunities for giving.  Increase your impact with a Benefaction online donation page.  Send emails to friends and family asking them to donate to your foundation. When your friends join using that link, you will be able track how much has been raised and print out a report with your progress.  So you’re not only doing good, but you’re also increasing your chances of making a significant difference through your foundation.

Case Study:  The Philanthropist

Gifts of preference shares from a private company

Robert is in his late 40’s and has built a successful business now worth approximately $20 million.  He was recently asked to join the Board of a local charitable foundation and would like to demonstrate his leadership and support by making a large gift.  Unfortunately most of his wealth is tied up in the value of his shares and he does not want to significantly reduce his current cash flow, which is being used to support his high standard of living.

His insurance advisor suggested that Robert explore converting some of his common shares in his company (say $750,000) on a tax deferred basis into redeemable preference shares with a fixed dividend rate.  As part of this transaction Robert would use the capital gains exemption to increase the cost base of those shares to equal their fair market value of $750,000.  Robert’s company would then acquire a $750,000 insurance policy on Robert’s life, which would be used to redeem the preference shares on Robert’s death.

As a next step, Robert would donate the preference shares to the charitable foundation and receive a charitable donation receipt for $750,000.  This donation receipt can be used to offset taxes in the current year and/or carried forward for up to 5 years to offset his taxable income. Assuming Robert is in a 45% tax bracket, this gift would generate tax savings in the range of $225,000.

While Robert is alive the charitable foundation will receive dividends on the preference shares, which can be used to fund its charitable activities.  On Robert’s death the shares will be redeemed with the life insurance proceeds, so the foundation will have $750,000 in cash for charitable endeavours.

There is another benefit of this strategy.  The insurance proceeds received by Robert’s  corporation on his death will create a credit to the its “capital dividend account”.  Tax-free dividends can be paid from the capital dividend account to the surviving shareholders in the company.  This will generate an additional tax savings to Robert’s beneficiaries in the range of $150,000- 225,000 (depending on the dividend tax credit available on the dividend)

To summarize the benefits of this strategy:

1.  Robert can make an immediate gift without impacting his cash flow, and benefit from a significant charitable tax credit.
2. The Charity will annually receive income from the shares, and on Robert’s death will realize a large cash infusion from the redemption of the shares.
3. The share redemption is funded through corporate owned life insurance, which also creates a credit to the capital dividend account and future tax savings to the beneficiaries of Robert’s estate.