Smart(er) philanthrophy

Over the past decade, charitable giving has soared to new heights. In 2019, Americans donated more than US$440 billion, with nearly 65% coming directly from households. Foundations, bequests and endowments accounted for about 30%, whereas corporations only contributed 5%.¹

In Canada, figures are slightly lower on a per capita basis, but the US and Canada rank first and third in individual donations as a percentage of GDP.² Charity is deeply rooted in North American culture; more than 80% of Canadians donate money every year (with high-net-worth donors giving an average of US$29,269 to charity in 2017³), and close to 50% volunteer their time.

Although religion remains the largest cause supported (28%), giving in 2019 increased in nearly every sector, with double-digit growth in education (12.1%); public-society benefit (13.1%); arts, culture and humanities (12.6%); and environment and animal organizations (11.3%).⁴

High-net-worth households are at the forefront of that benevolence, and tax, wealth and legal advisors have striven to find more economically beneficial ways to donate funds. Interest groups from several industries have lobbied governments to continue offering fiscal incentives to individuals (and corporations) seeking to do some good.

Families are looking to their wealth management advisors to discuss philanthropy and identify tax-efficient action plans to create lasting impact. Compared to charitable giving, philanthropy is a more enduring strategic gifting approach rooted in the individual’s or family’s interests and values.

Several studies have shown that clients consider philanthropy an integral facet of their relationship with their advisors. But a survey of wealth advisors and individuals with at least C$3 million in investable assets engaged in philanthropy identified certain disconnects between the two groups when it came to giving.

Indeed, although 89% of financial advisors surveyed say they discuss philanthropy with some of their clients, only 55% of high-net-worth individuals report that this topic has come up. One-third of those individuals say philanthropy ought to be raised during the very first meeting, and 90% agree that the discussion should occur within the first several meetings with an advisor.⁵

The combination of motivated individuals and tax-efficient strategies for accomplishing their philanthropic objectives represents a tremendous opportunity for transformative societal impact. This article focuses on the “what” and the “how” of philanthropy, highlighting the most tax-efficient and practical ways to donate funds in Canada. We invite you to reach out to us or your tax professional for more in-depth discussion.

What to donate

There are several asset types to consider donating to charities. Here, we briefly cover the most common, but this list does not represent every possible way of gifting assets.

Simple cash gift

Writing a cheque, or any kind of direct payment, to your favourite registered charity is the easiest and most common way to make a donation. Tax credit at the federal level is 15% on the first $200 donated and 29% above. Under certain rules, the credit can reach 33% for those in the highest tax bracket. All provinces also have similar credits, which fluctuate between 4% and 24%. Put simply, every dollar over $200 donated to charity could cost a donor roughly 50%, depending on the province of residence.

Gift in kind

Instead of cash, a donor may want to give tangible property, as there can be significant improvements in tax and giving efficiency. The five main areas of property donated include:

1 - Public securities

Publicly traded securities are exempt from taxes on capital gains when donated to a qualified entity (such as a registered charity). This category includes shares of public corporations, rights on those shares (if listed, like warrants), bonds and units of mutual funds, exchange-traded funds (ETFs), segregated funds and other debt obligations. It makes sense to target securities with higher capital gains (lower average cost base) to donate for maximizing tax savings.

Stock options

To benefit from the same tax exemption, donors must have acquired shares from the exercise of stock options at no less than the fair market value (FMV) at the time the option was granted. They must also donate the shares in the same year and within 30 days of exercising the option.

Unlisted shares

Some exchangeable unlisted shares may also be exempt from capital gains tax in certain instances. Ensuring unlisted shares can be exempted from these rules can be complicated, and professional legal and accounting advice is essential.

Benefits of gifting public securities

Donating securities under these circumstances offers more tax benefits than donating cash. Table 1 below provides a clear example.

Table 1: Donating cash versus donating public shares

Marginal tax rate: 50%
	Shell shares and donate cash	Donate shares directly
FMV of donation (a)	$10,000	$10,000
Adjusted cost base	$6,000	$6,000
Capital gain	$4,000	$4,000
Taxable portion of capital gain	$2,000	-
Tax on capital gain (b)	$1,000	-
Donation tax credit (b)	$5,000	$5,000
Total cost of donation = (a)+(b)-(c)	$6,000	$5,000
*Net savings: $1,000

2 - Capital property and personal property

Capital property refers to tangible items, such as art, cars, boats or buildings, but it can also include intangible property, such as tenancy rights, patents or trademarks.

Capital property

Donating capital property, such as real estate, triggers a deemed disposition of the property for tax purposes, and taxes could therefore be due on any capital gain and recaptured capital cost allowance. A charitable tax credit is given based on the donated property’s FMV and can help offset the tax liability. For donations of property, it’s important to obtain one or more independent professional appraisals as proof for CRA (as it could take a close look at the valuation of the gifted property).

Personal property

For personal use property (PUP), such as jewellery or clothing, there is an ACB floor of $1,000 to avoid keeping track of very small transactions.

Special additional cases:

Canadian cultural property: If the gifted property qualifies as a certified Canadian cultural property by the Canadian Cultural Property Export Review Board, a donor will receive a tax credit for the FMV, and as with donating public securities, will not have to pay capital gains tax on the appreciated value. Cultural property can include paintings, sculptures, books, manuscripts or other objects. Special rules also apply for artists who want to donate their work.
Land: Gifting land that qualifies as ecologically sensitive would receive the same preferential treatment outlined above. The qualification process can be long and arduous, but it can provide significant tax benefits. Unlike other inkind donations, where the taxable portion of capital gains is set at 50%, ecological gifts reduce this taxable portion to 0%.⁶

3 - Giving through a corporation

When donating to a charity, a corporation is entitled to many of the same benefits as individuals. Some of these benefits include:

The corporation receives a tax deduction against its taxable income.
It may donate up to 75% of its income and carry forward donations for up to five years. There is no need to claim the full donation in the same year it’s made.
There is no tax on capital gains for donations of eligible securities, and the corporation can deduct the FMV of the donated shares against its income.

However, corporate donations also have some unique benefits. In particular, the full taxable capital gain is added to the corporation’s capital dividend account (CDA). This mechanism increases the notional account/CDA balance that can be withdrawn from the corporation free from personal tax for the corporation’s shareholders.

As shown in Table 2 on the following page, thanks to the elimination of the tax on capital gains, the cost of giving $100,000 from a donor’s corporation would be reduced by $15,000. At the same time, the amount of tax-free funds available to the shareholder would double.

Table 2: Donation of cash versus securities within the corporate structure

	Shell securities and donate cash	Donate securities directly
FMV donation (a)	$100,000	$100,000
Adjusted cost base	$40,000	$40,000
Capital gain	$60,000	$60,000
Taxable portion of capital gain	$30,000	-
Tax on capital gain @ 50% (b)	$15,000	-
Value of tax deduction @ 50% (c)	$50,000	$50,000
Amount added to CDA	$30,000	$60,000
Total cost of donation = (a)+(b)-(c)	$65,000	$50,000
Tax-free capital dividend paid to shareholder	$30,000	$60,000

4 - Flow-through shares

A flow-through share (FTS) is a tax-based financing incentive available (but not limited) to junior mining companies in Canada. In this case, the mining corporation “renounces” its exploration- and development-related expenses and enters into an agreement with the taxpayer to flow through those expenses (up to the consideration paid by the taxpayer for the shares). The shareholder then deducts these expenses as if incurred directly.

Combining the flow-through tax credits (exploration and investment) with charitable donation tax credits can have a significant impact. Compared to the traditional cost of giving (typically about 50%), the tax rate for well-structured donations of flow-through shares may be as little as 1%–5%. This strategy has enabled qualified donors to significantly increase their charitable giving, to the benefit of charities.

Also, as general rules of thumb, taxpayers can buy about onethird of their annual income in flow-through or donate about one-tenth of that income without triggering the alternative minimum tax, thus maximizing the tax deductions. Note that although the tax deductions work differently, this strategy is also available for corporations. By and large, the net impact is also quite attractive.

Table 3: Maximizing donations via flow-through shares

Combination: $0.01 cost to donate a dollar

_{* Income inclusion can be mitigated if program is repeated in 2021.}

5 - Life insurance policy

Gifting during one’s lifetime

The first option is to donate an existing whole life policy with a cash surrender value (“present gift”). The donor will receive a tax receipt for the cash surrender value and any accumulated dividends or interest less any outstanding policy loans. The difference between the cash surrender value and the ACB is fully taxable when transferred, but a tax credit from the donation could help offset the tax liability. Further premiums paid by the donor to keep the policy in force will generate tax-deductible donation receipts.

Here are some other advantages to making a gift of a life insurance policy to a charity during one’s lifetime:

Make an impact: Depending on the donor’s age and health, a reasonably small outlay could fund a significant payment at death.
The charity can cash the insurance policy or even obtain a loan against it if it needs immediate cash.
There are no probate fees.
The charity is guaranteed its money no matter what happens to your estate.

Estate donation

The second option is to retain ownership of the life insurance policy while still naming a charity as the beneficiary (“deferred gift”). In this case, the donation tax credits will be claimed on the deceased’s final-year tax return, and the value of the donation will equal the amount of the policy’s death benefit.

Table 4: Gift of insurance policy during life versus gift of insurance proceeds after death

	Gift of policy	Gift of proceeds
Who owns policy?	The charity owns the policy.	You own the policy.
Who is the beneficiary?	The charity: You lose flexibility to change it, as do other claimants/ creditors.	The charity: You have the right to revoke it. Other claimants/ creditors also may be able to challenge it.
Who pays premiums?	The charity, as owner, pays, but you can donate the premium.	You pay.
Who has access to policy cash values?	Only the charity has the right to access cash values.	You, if necessary, can access the cash values.
What tax donation receipts can you get?	The FMV of the policy, if any, when donated. Premium payments, if donated.	Full value of policy death benefit proceeds paid after death.

_{Source: Adviceon.}

How to donate

There are several ways for high-net-worth individuals to donate funds. The most appropriate method will depend on the size of the donation, the timeline to spend those charitable funds and the individual’s or family’s desired level of involvement.

This article covers four different methods:

A simple direct gift during one’s life
Donating funds upon death via one’s will
Using public or private foundations
Setting up a charitable remainder trust

Which method is best depends on the donor’s wants and needs. The advisor’s role is to help the individual or family choose the best course of action.

1. Straight gift: This is the simplest and cheapest way of donating. The donor writes a check, donates securities or a life insurance policy, and gets a tax receipt in the same year. An individual may donate up to 75% of net income in the current year, and donation credits can be carried forward for up to five years.

2. Testamentary gift: Instructions are left in the donor’s will. The executor will make those gifts. This is a simple way to make an impact, but you should first ensure that you have sufficient capital to meet your lifestyle and financial needs while you’re alive. In the final two tax returns of an individual’s life, a taxpayer may donate up to 100% of net income.

3. Foundations: Donating funds to a private or public foundation provides immediate tax relief to the donor and allows for a more measured pace of distributing those funds across different charities — and over a longer period if desired.

Private foundations have higher costs for setup, annual compliance and reporting but offer the family greater potential for recognition and linking impact to an individual, family or business. The minimum annual disbursements are more rigid than for public foundations and are currently set up by CRA at 3.5% of the foundation’s capital. Keep in mind that private foundations must disclose their fundraising and disbursement activities. This information is in the public domain.
Public foundations, such as donor-advised funds, have gained tremendous traction in the past few years, as they represent an efficient way to “park” philanthropic funds cheaply and flexibly. They offer more privacy to donors and relieve the family or business of the administrative burden of issuing payments and filing annual returns.
A rule of thumb in the industry suggests that a minimum of $5 million in assets is needed for a private foundation to be worthwhile. Under both private and public structures, donors can give marketable securities without triggering capital gains. In a private foundation, funds can be invested according to the family’s guidelines. Depending on the size of the donor-advised fund, this may also be the case with a public foundation.

4. Charitable remainder trusts: A charitable remainder trust is tax-exempt and irrevocable. The individual’s philanthropy is spread out over a longer period and creates meaningful and lasting impact. This structure works best for individuals age 60 and over and even more so for those over age 75. A charitable remainder trust has a few key elements:

Property: The property (cash, real estate, funds, securities, etc.) is transferred to a trust managed by a trustee.
Income: The net income earned by the trust can be paid to the individual or any other income beneficiary.
Capital: The capital donated remains in the trust and cannot be used. When the trust ends (at the time of death of a specified person or after a select number of years), the remaining funds are donated to the designated charities.
Tax treatment: The donation receipt is prepared when the trust is established, and the receipt amount is the value of today’s gift in future dollars that the charities will receive when the trust arrangement ends.
Key drawbacks: Unlike donating directly to a charity, any asset with appreciated value donated through a remainder trust triggers a tax disposition. Any subsequent deposits to this vehicle will not result in a tax receipt. It is therefore more appropriate to settle this type of trust with cash.

Conclusion

Undeniably, philanthropy occupies a place of choice in the hearts and minds of affluent investors. And several efficient strategies exist to help clients achieve those philanthropic objectives. This article offers a high-level overview of what to donate and how to maximize philanthropic goals. However, as with all financial goals, the most important question is why. Why give away assets at all?

Philanthropy provides a unique ability for a family not just to improve its community but to communicate and express values within the family. Integrating the professional advisors at the inception of the strategy will help the taxpayer optimize the cost of giving while maximizing impact for a brighter tomorrow. We encourage philanthropy-minded families to reach out to their tax, estate and investment advisors to discuss why they give and how they can use this giving to connect and grow relationships across many generations.