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.

The Webster’s Dictionary definition of a philanthropist is, “a benevolent supporter of human beings and human welfare.” But who is this person? Someone who potentially gives up approximately one quarter of his or her capital gains and/or up to roughly one-half of his or her income to support the general welfare of our country? Of course the answer is … most of us!In other words, as taxpayers we could all be considered “involuntary philanthropists.”

The chart below details how a dollar raised by government through taxation (i.e., $631billion in 2010) is spent.So here’s the question, “Given a choice, is this how you would choose to donate your money?” If the answer is “no,” then perhaps you may wish to investigate how you could redirect your involuntary philanthropy, also known as tax dollars, to voluntary philanthropy.

Please do not misunderstand me, I realize that taxes are absolutely necessary and I fully appreciate the fact that if it were not for the taxes we pay, Canada would most certainly not be the wonderful country it is today. However, it goes without saying that many of us would like the option of redirecting a percentage of our involuntary social capital to those causes that are important to us.

This approach is significantly different between traditional estate planning, with its focus primarily on the money, and what I feel is a more effective approach, which is driven by life’s most important treasures: relationships and values. Fortunately, our government encourages this type of approach. How do we know this to be true? Because Ottawa provides incentives to encourage activity in certain sectors of the economy. As an example, if our government wishes to increase real estate ownership it allows a number of tax breaks for the purchase, ownership and sale of this asset class. In much the same way, since 1996, in order to encourage philanthropy it has introduced into our Income Tax Act over 20 incentives to facilitate giving.

This has now created what many would argue is the most generous tax environment to promote charitable activity in the world today. If this type of voluntary philanthropic planning, with its focus on relationships and values resonates with you, I would encourage your family to seek out a financial advisor with a specialization in charitable planning and investigate the numerous strategies that could also help you to focus on what is important and significant to you.

Many advisors worry that starting a conversation about giving will be seen as uncomfortable or even threatening to clients or to their family. Nothing could be further from the truth.  More and more wealthy individuals are becoming involved in philanthropy, but many simply don’t know where to start, and are turning to their trusted advisors for guidance on how to get started.  In response, professional advisors of all types are increasingly seeking to offer bespoke philanthropy services to their private clients, but often are unsure about what clients really want and what services advisors should provide.

Below we bust some popular myths about philanthropy advice, and offer some food for thought.

Myth 1: My clients are not interested in philanthropy

Fact: Well, you won’t know if you don’t ask… In fact, the last ten years has seen a sea change in philanthropy in Canada and around the world. The newly wealthy are increasingly using their wealth and business experience to create private foundations, start up or support emerging models in philanthropy, test innovative approaches to social issues, and volunteer their time and expertise. Even in these changing times, philanthropists remain committed to their causes, knowing that this is a time when charities especially need their support, and many are giving even more.

Myth 2: My clients do not want philanthropy advice

Fact: Today’s philanthropists have an array of options for their giving, but many simply do not know where to start, and increasingly are turning to their trusted advisors.

In fact research shows that, clients initiate conversations with advisors about charitable giving as much as, or more than, their advisors. Some common areas in which advisors help clients are setting up a charitable trust, advising on tax benefits, involving the family, and introducing clients to other philanthropist clients and to charities they might support. Yet too few wealth management advisors are fulfilling their clients’ philanthropic needs.

Myth 3: My clients would not want me to pry

Fact: Like other sensitive issues on which you advise your clients, discussing philanthropy with your clients can be done unobtrusively, in a way that respects their privacy, values and independence. Of course, clients want advice on taxation and on the best vehicles for their giving. But giving is not just about tax. It’s about what’s in people’s hearts.

Helping clients to give effectively means taking the time to understand what they really want. What they want is professional advice on how to give more effectively, and to make a positive impact with their giving.

” It broadens our relationship with our clients, as it addresses an area of clients’ lives that they are passionate about. ” anonymous wealth manager

Myth 4: Philanthropy advice does not provide a positive return to my business

Fact: Offering philanthropic advice can help attract and retain clients by expanding the menu of services you offer them. More wealthy clients are becoming philanthropic, and are increasingly seeking professional advice for their giving.

Many wealthy people already have more than one advisor and those who offer the better philanthropic advice may win more of the overall business. Clients who want to be philanthropic will do so anyway, and if you do not offer them this service, there are many others who will!

Even in the current economic environment, 60% of European wealth advisors surveyed expect philanthropy to continue to grow over the next five years and become a core pillar of their private client services.

” It opens up new areas of trust and tax law in which we can advise, and a continuing interest on the part of the client means continuing involvement on our part if we get it right. ” solicitor

Myth 5: I need to be a philanthropy expert in order to advise my clients

Fact: Clients won’t expect you to have every answer at your fingertips, but they will expect you to be able to find out or at least point them in the right direction.

Fortunately, you can find help here at www.benefaction.ca

Replacing a taxable asset with tax-free cash

The tax-free nature of the death benefit is a powerful incentive to use life insurance as part of their tax planning strategies for clients. A common use of insurance has been to replace taxes paid by the estate (AKA wealth replacement). The estate would still pay the tax, but the death benefit would restore the estate to its pre-tax level.

Given the rule change for claiming tax receipts on the year of death, another use for life insurance has emerged. Taxable property is gifted to charities, and tax-free death benefits are used to replace the gifted assets. The resulting tax savings from the gift are sufficient to purchase a life insurance contract of equal or greater value than the property gifted.

The end result, a taxable asset that no one really wanted is converted into tax-free cash that everyone wants at no cost to the donor!

Here is how it works:

Sylvia age 73 and a non-smoker cannot use her cottage any longer. All of her children have moved out of province and she has been assured that they do not want the family cottage.

Sylvia is a regular contributor to XYZ charity. After discussing the issues with her advisors, she decides to donate the cottage to XYZ charity for a $150,000 tax receipt. The resulting tax saving of $67,500 (assuming a 45% tax rate) was sufficient to purchase a $250,000 insurance policy with her children as equal beneficiaries.

In short, XYZ charity sold the cottage to help fund its activities, and Sylvia left $250,000 tax-free cash to her family.

The power of insurance is best realized when it is used in combination with other estate planning tools to create unique planned gift strategies. Such strategies provide a clear win-win situation for both the donor and the charity.

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.