10/6/17. Tips and Traps For Tax Time(d) Donation Planning. Kathy Hawkesworth, Edmonton Community Foundation. George Lois. Holdco.

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1 Tips and Traps For Tax Time(d) Donation Planning Kathy Hawkesworth, Edmonton Community Foundation George Lois Holdco RRSP Shares Mutual Funds Personal Investing Personal Investing Opco Old Life Insurance Whether George and Lois realize it or not: they support charitable activities Donation? or perhaps donating time (volunteer) Charity? do they even identify the organization as a charity? arts organizations/libraries/schools and many other entities are often not comprehended as being charities Tax Savings? if the donations are each small, clients may overlook or undervalue claiming them 1

2 Where a plan must result in tax at some level Can a charitable gift be planned in time by the right taxpayer with the right asset to relieve that tax? Cannot carry the gift back to a prior year unless death Now even death has a few additional obstacles 2017 If Gift A useful conversation about tax savings of gifts needs to be part of planning checklists early on and throughout If George sold his business LAST year. and he is finding out about his tax saving possibilities THIS year.. 2

3 91% of advisors report they are having giving conversations with many of their clients. only 13% of clients report having meaningful conversations with their advisors. Canadian Association of Gift Planners, BMO Harris Private Banking, GIV3, and Philanthropic Foundations of Canada 2014 Common donor profile Age Stage of Life Reflection Ability New tax issues Imagine Canada September 2017 Regarding Advisors While most demonstrated a general understanding of basic tax implications, there was also a relatively wide knowledge gap on matters dealing with the purpose and benefits of private foundations, the use of donoradvised funds, services offered by community foundations and the role of specialist consultants. That said, all participants expressed a keen interest in usable information in these areas including success stories that they could integrate into conversations with their clients. 3

4 Additional client-building assets for your practice Most examples here based on actual gifts received by Edmonton Community Foundation Personal in Alberta A credit - after giving $200 in aggregate each additional amount 50% 54% - to the extent the gift is out of income over $200,000. Corporate A deduction - so dependent on corporate tax rate Claimable donations limited to a maximum of: Usually 75% of income in a year Year of death and immediately preceding year 100% of individual s income 4

5 Tax Savings Sometimes Asset Sensitive Cash Publicly traded securities (generally shares and mutual funds) special incentive Private company shares special restrictions Life Insurance owned by individual owned by company Registered fund assets create taxable event Real estate incentive for eco gifts Often assumed that personal donations are best BUT Requires consideration of: income sources/liabilities/tax rates donation asset source tax liabilities triggered in order to access the funds to make the gift how a gift could assist in providing tax effective access to corporate funds (e.g. CDA account, RDTOH planning etc.) how proposed section ITA might impact availability of capital dividends? Popularity has exploded over the past few years Given in kind directly to a registered Canadian charity (foundation or organization) No tax on the capital gain Plus Donation credit/deduction based on value of asset transferred 5

6 EXAMPLE: Shares ACB CDN Value CDN $ 112,204 $ Gain 320,541 $ 208,337 If Held in Holdco Taxable Income Donation If Sold If Sold and Donated If Donated in Kind $ $ If Held Personally Taxable Income Donation If Sold If Sold and Donated If Donated in Kind $ $ Deduction Available to Offset Other Income 104, ,169 $ 320,541 $ 0 $ 320,541 $ Income Difference $ CDA* 0 $ 216,372 $ 320,541 $ 104,169 Credit Available to offset Other Income (50% or 54%) 104,169 $ 0 104,169 $ 320,541 $ 123,091 0 $ 320,541 $ 173,092 Tax Difference $ 50, , , ,541 Assumption * Is proposed ITA now an obstacle? Flowthrough shares Careful about deemed ACB Once the darling of gifts of securities Now gift may also trigger a liability for tax Publicly traded securities acquired through employee stock option (i.e. ITA 7(1) applies) Special tax incentive ITA 110(1)(d.01) reduces the benefit by ½ of the lesser of: Value of benefit Value of security at time of disposition Time limit for making gift Within the same year Within 30 days of the donor acquiring the share Conditional upon the taxpayer also being entitled to deduction under ITA 110(1)(d) 6

7 The gift is not made until the charity receives the asset into its account May not be immediate Mutual funds take notoriously longer to settle Important consideration at year ends and for insiders Timely transfer requires the cooperation of the donor s investment advisor losing an asset under management cannot pull from donor s account must be pushed Not all charities are set up to receive securities ECF can refer you to some alternatives based on type of gift being made Charities heavily regulated by CRA in how donation receipts are issued Must be to the owner of the asset (e.g. securities account holder) Date must be upon receipt in charity s accounts Value must be based on consistent practice E.g. end of day/middle of day/ average but consistent Punitive penalties can be imposed on charity Deregistration as a charity (and loss of all assets) Up to 125% of the eligible amount (i.e. gift amount) Inter vivos gifts Spouses/Common-law Estate/Insurance/Plan Designation Gifts on Death 7

8 Share Sale?/Asset Sale? Capital gains? Income? Tax rate? Credit/Deduction for gift? Year end? (time limit for the gift) Gift private company shares Valuation an issue and expense May be resolved by gift of fixed value redeemable retractable preferred shares Followed by an immediate redemption for full value No special tax incentive for private company shares Indeed some additional obstacles Many additional ITA rules/obstacles for gifts to a non-arms-length charity (e.g. private foundations) assets that continue to be used by donor or nonarm s length parties such as, but not limited to: 110.1(6), 118.1(13), (14), (15), (18) and (19) certain gifts of non-qualifying securities Sections 110.1(6) and 118.1(16) loanbacks CSP-S07 CRA Summary Policy Donation Schemes 8

9 Private Foundations Public foundations divestment obligation percentages and penalties for excess corporate holdings ITA 188(3.1) and (3.2) not allowed to acquire control ITA 149.1(3) BUT control defined differently only for 149.1(3) if shares have been gifted ITA 149.1(12) BUT dividends from a controlled corporation subject to a financial penalty - ITA 188(3) Beware ITA 248(35) deems certain gifts of property to be made at ACB or adjusted cost basis of insurance if acquired in certain circumstances such as: within 3 years within 10 years if reasonable to believe reason acquired was to make a gift anytime if acquired as part of gifting arrangement that is a tax shelter Some relief if gift is as a consequence of death ITA 248(37) provides some exceptions No special incentives unless ecological land Gift triggers a taxable event BUT Opportunity election available for lower proceeds on gifts of capital property corporate ITA 110.1(2.1) and (3) personal ITA 118.1(6) 9

10 Donation of remainder interest in real property ITA 43.1(1) deems the life estate to also be disposed of exception exists where remainder interest given to a qualified donee (e.g. a charity) Value an issue Making gift directly from RRSP/RRIF triggers tax Publicly traded securities tax incentive does not apply to securities coming from RRSP/RRIF BUT Opportunity Consider making the gift from other assets If must pull from RRIF i.e. donor does not need these resources Do consider a charitable gift The charity does not have to receive assets or cash FROM the RRIF I.e. could give from any asset source and offset the tax arising on the RRIF withdrawal 10

11 Lois Withdrawal is taxable Is it required? Personal Investing Special tax incentive Charity for publicly traded securities personal tax credit plus relief from tax on capital gain Tax-wise Philosophically RRSP /RRIF Creates barrier to spousal tax rollover withdrawal creates tax plus no special tax incentive other than personal tax credit often better to state an amount equal to the value of my RRSP/RRIF rather than giving the RRSP/RRIF itself avoids spoiling a rollover beneficiary designation can simplify estate administration how much support does the donor actually wish to provide? provide for this value, rather than relying on a moving value target Overlooked opportunities Finding a new and meaningful purpose for an old asset Gifting proceeds (i.e. beneficiary designation): or ownership of the redundant insurance policy 11

12 Gift of ownership - irrevocable FMV of policy and premiums after ownership is transferred are claimable donations Relieves tax now Designate charity only as beneficiary revocable Proceeds when received by charity are claimable donations Relieves tax later Does the gift trigger tax? Need to assess adjusted cost basis Costs of obtaining valuation for gift of ownership Applies Not Only to Wills Life Insurance Plan Designations 12

13 Donation tax changes: Gift receipted only as it is received by charity No longer deemed as of date of death May be claimed in year received by charity If received from GRE (or former GRE) within 60 months of death May also be claimed in last two years of individual s life (terminal T1 and immediately prior T1) And in prior years of the estate (caution re ITA wording) Deemed dispositions but not deemed Gifts Immediatel y Prior Year T1 Year of Death T1 GRE Year 1 Post GRE Year 1 Post GRE Year 2 GRE Year 2 GRE Year 3 Lifetime 100% Income limit 36 months from date of death maximum 60 months from date of death maximum Resolves some tax issues for percentage gifts to charity (overcomes circular calculations) Time limits problematic especially: selling operating business after death may take time disputed estates under-active personal representatives (PR s) 13

14 Satisfy charitable gifts with publicly traded securities where possible don t exclude potential transfers in kind in will wording Encourage PR s to work promptly for charitable gifts to be most tax effective Raise 60 month limit as an issue and deadline in all cases but especially in disputed estates Recall Imagine Canada Research Private Foundation Community Foundation Commercial Gift Funds Control Permanence Who speaks for the Founder? Who maintains the vision/legacy? Who assesses the recipients? That is: Where is the philanthropist in this picture? Investments Decision making Charitable work to be accomplished Qualified Donees to benefit Immediate support Semi permanent support Permanent support LOSS OF CAPACITY OF FOUNDER 14

15 Private Foundation Separate entity Reporting Investing May have own CRA approved charitable activities Granting - only to registered charities Donor Advised Funds Within a public foundation Commercial gift fund Community foundation Foundation handles reporting Generally grants i.e. limited activities Granting only to registered charities Commercial Gift Funds (often through banks) Registered as a charity Primarily (not exclusively) non endowed Donors investment advisor may retain investing ability and receive remuneration Any Canadian registered charity Community Foundations Registered as a charity Primarily (not exclusively) endowed Generally invested by community foundation through its asset management plan Any Canadian registered charity Deep community knowledge A resource for philanthropic information/ideas Opportunities Offer fuller control - initially and can unwittingly facilitate full loss of founder s purpose later Can undertake its own charitable activities Issues: ITA issues restricting treatment of some gifts Initial and ongoing costs of maintaining the structure Succession planning can be difficult but is essential Note: please avoid use of words charitable organization in wind-up clauses too limiting more likely a charitable foundation successor will be suitable reference the word charity to cover both foundations and organizations 15

16 Essential to contemplate and provide for succession May have a gift over clause for lump sum contributions after the donor no longer is able to give advice If no gift over clause who is to make granting decisions? Most commonly grants May also have some of their own charitable activities Agreements Scholarships Tailored to donor wishes Advocate for the founder s philanthropic vision agreements determine how successive generations have input agreements establish the succession plan and contemplate the inevitable changes that occur over long periods of time Avoid the name that charity game people do not know what they do not know assumptions do not lead to the best gifts Do discuss client interests, issues and values addresses who your client is as a person enhances client relationships Especially as part of retirement planning likely a time for reflection thoughts of legacy and meaning 16

17 Lack of comfort about who does what well in the charitable sector Know where to turn for assistance 17

18 Or more information Kathy Hawkesworth Matt Mandrusiak Noel Xavier Edmonton Community Foundation Street, Edmonton T5K 2V