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 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.

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]

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.

Existing life insurance policy (ownership transferred to charity)

This is an attractive option for people who have an older policy that is no longer needed or for those who want to make a large gift but have limited resources.  The benefits are (1) that the donor receives a tax receipt for the fair market value of the policy at the time of the donation, and for any future premiums paid; (2) for a relatively small sum, they can ensure a large future gift for their favorite charity;  (3) If premiums are still required, then all future premiums paid by the donor are eligible for a tax receipt;  AND (4) the death benefit will bypass the estate thus avoiding probate and legal challenges for the donor.

Purchasing a new policy and transferring ownership and beneficiary

This method, it is not the policy that is gifted, but the premium.   All premiums paid will qualify for a tax receipt. In this case, the death benefit is not considered for tax receipt purposes, only the premiums.

Making a bequest of life insurance proceeds to pass to the charity through the donor’s will

 This method is useful for donors looking to reduce taxes on their estate and does not mind probate fees. “A bequest donor can claim charitable donations up to a maximum of 100% of his or her income in the year of death and the previous year (to the extent that there is excess contribution room). With insurance, the death benefit is not taxable. Therefore, by naming the estate as beneficiary of the policy, the insured can inject a large sum of tax-free cash to pay off legal bills, taxes, or even to make charitable gifts… The insurance death benefit merely provides the means to make the payment.”

Making a charity the beneficiary of an existing policy

This method is commonly used by people who might be inclined to give, but whose personal and family needs may be subject to change would hesitate to transfer ownership of a policy to a charity. The benefits to the donor in naming a charity a beneficiary but not owner to their life policy are:  (1) they are able to make a future gift to their charity; (2) they retain access to the cash value; and (3) they maintain control over the gift as they are able to change the beneficiary in case family circumstances change. The donor names the charity as beneficiary, and upon his or her death, the insurance proceeds are paid to the charity, and the tax receipt is issued to the deceased.

Split ownership

This arrangement is usually based on a Universal Life Policy where the donor and charity co-own the contract.  It is structured on a ‘Face plus Fund’ basis where the level of death benefit is donated after the policy is acquired by the donor. The donor retains partial ownership rights in the equity portion of the policy (Accumulation Fund) and in its corresponding death benefit.

Split benefit

A twist on the above arrangement occurs when a donor buys a UL policy and donates to charity.  The contract for a split benefit gift would stipulate that the charity owns the policy and 50% of death benefit is payable to the donor’s estate/heirs.  During their lifetime, the donor pays the ongoing premiums and benefits from the tax receipt issued by the charity for 50% of those premiums (eligible amount).  At death, the charity receives the death benefit and by contract pays 50% to the donor’s estate/family.

Donation of Segregated Funds

Donations of segregated funds from a living Donor to Benefaction may be eligible for enhanced capital gains treatment.  Such donated segregated funds are deemed to have been disposed of by the donor immediately before  donation to trigger a gain or loss for the owner.  The Income Tax Act provides a taxable capital gains inclusion rate of 0% for gains on segregated funds donated in-kind.  The donation receipt would be equivalent to the value of the units (net asset value per unit as determined by the issuer) multiplied by the number of units donated less any advantage.

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.

Charitable giving, capacity and POAs

As the average lifespan of Canadians increases, so does the probability of acquiring a critical illness requiring long-term care or becoming mentally incapacitated during our lifetime. What if you or your clients aren’t capable of making crucial decisions concerning your health, finances or the care of young children? A recent study by BMO suggests that fewer than six in ten polled have a Power of Attorney for personal care in place and 54% don’t think they need one yet. But as Jonathan Chevereau noted in his recent article ‘Who takes care of your money when you can’t?’; “Yet” is the operative word and time may be shorter than you think.

Wills and power of attorney are the cornerstones of estate planning

To prepare for such a possibility, you need to have a properly executed Power of Attorney (POA) or Mandate in Quebec, both for personal care and for property. You will also need to have an up-to-date Will. While there are several ways to ensure your estate goals are accomplished, these two are considered cornerstones of estate planning. Everyone should have both.

A Will is a legal declaration of a person’s wishes as to the disposition of his or her property or estate after their death. It is the most important document you have to ensure that your wishes are carried out after you are gone. Many people delay writing their Will under the assumption that being young, or in good health or without dependants, justify waiting. However, if your assumption is wrong, your beneficiaries will get what the province mandates. In addition, the absence of a prepared Will invariably causes delays and extra expense for surviving loved ones.

A will is important for planned gifts because by far, the most common way to plan a gift is a simple bequest through a will. The deceased will receive a tax receipt and can claim up to 100% of net income for charitable donations in the year of death and in the year prior. This is appealing for donors who wish to minimize their taxes at death and increasingly, advisors are recommending charitable donations as part of the overall estate plan for clients.

A POA for property is a legal document that gives someone the authority to manage and govern your property and financial affairs while you are still living if you become incapable of doing so. There are different roles a power of attorney can take on, over a limited period of time (i.e. during your absence on vacation) or in more enduring situations and with broader control (i.e. managing all of your financial affairs if you are somehow incapacitated).  POA’s are an important tool in planned giving. The POA’s key function is to allow the attorney to keep a planned gift strategy viable. For instance, if the attorney is not permitted to make charitable donations, a comprehensive tax strategy using charitable gifts to reduce estate taxes may collapse.

Naming beneficiaries

Careful consideration should be given to the value of your estate and those people and charitable organizations you wish to benefit from it. Questions that should be considered are who should receive what, and under what circumstances. In order to avoid disputes, it is important that life policy and registered plan policy beneficiaries are clearly outlined, both in your will and in supporting beneficiary designation documents with your plan providers.

When considering using a beneficiary designation in charitable giving, care must be exercised to ensure that a tax receipt can be issued for the actual transfer of the property. Upon death, a tax receipt can be issued for property received by virtue of a charity being named the beneficiary of a life insurance policy (including life insurance segregated funds and life insurance annuities), and as a beneficiary of a RRSP or RRIF. However, in other situations such as a charity being named the capital or income beneficiary of a trust, the payment to a beneficiary may be legal obligation of the trust and not a voluntary act. Therefore, such a transfer is not eligible for a tax receipt (yet the property was actually transferred to the charity).

Choosing an executor

Your executor is responsible for administering your estate according to the wishes in your Will. Not only should you choose a primary executor, but also an alternate (a contingent) if you are concerned whether or not an individual you appoint would be up to the task. You can also consider naming a corporate executor, such as a trust company, to undertake this role for you.

The duties of an executor are many and complex, and the emotional strain can be high, so choose this person carefully. Letting them clearly know your wishes will give you peace of mind, and will allow them to act decisively during a potentially unsettling time.

Whatever stage of life you are at, Wills and powers of attorney are two cornerstones of prudent estate and charitable gift planning. They can help ensure that your worldly assets are properly cared for, and that the most important people and causes in your life are properly considered at an important time.

Helping you to build closer client relationships with values based coversations.

Education on gift planning which can help to both grow and protect your business.

Differentiation for advisors who want to incorporate planned giving into their practice.

High net worth clients increasingly expect their advisors to be able to provide objective, unbiased advice about how to realize their philanthropic objectives. Advisors who can link information about charitable giving choices to a larger philanthropic process, one that embraces strategic planning will lead the way in meeting those expectations. If you are not yet comfortable talking to your clients about strategic philanthropic giving, you need to get informed. You have an important role to play in assisting clients and their chosen charities with planned gifts.

Planned giving involves trying to assist people with their philanthropic desires and goals in a way that is consistent with their estate planning objectives. Some of those objectives include providing for family members, minimizing taxes , having enough cash flow to support your client’s lifestyle needs, carrying out a plan that is consistent with the donor’s values and interest and, increasingly, leaving a legacy for future generations.

As a CAGP member, you will receive the following benefits:

• In-depth education and resources on the full range of gift planning issues: from detailed information on the tax aspects of gift planning to topics such as working with donors, stewardship, and ethics;
• Regular local area Roundtable sessions on topics of interest. Technical sessions often provide CE credits to advisors;
• Timely communications about the not for profit sector including advocacy and legislation;
• Opportunities to raise your profile amongst the not for profit community by giving presentations and holding technical sessions on your areas of expertise;
• A listing on the CAGP website in your local round table area.
• Opportunites to network with like-minded advisors including financial planners, chartered accountants and lawyers.