Bear market changes charitable giving landscape

The donation of securities to charity proved lucrative for charities and advisors the past two holiday seasons. This year, with a historic bear market, advisors are probably going to want to look at other more efficient strategies to help their clients donate.

The elimination of the capital gains tax on gifted securities created a go-to strategy for advisors and clients looking to improve tax efficiency and give something back in the process. Few clients are likely to be in an immediate capital gains situation this year, leaving limited options to maximize giving.

One simple answer, of course, is not to give this year. But research and polling show that Canadians, particularly those in the mass-affluent and high-net-worth space, want to give. On Tuesday, for example, Scotiabank released a survey conducted by Harris/Decima that reveals that 72% of Canadians are planning to make a personal donation to charity this holiday season.

Advisors have to find a way to make that happen. This year, immediate gifting opportunities are limited, says Jo-Anne Ryan, vice-president of philanthropic advisory services at TD Waterhouse.

“The reality is that there aren’t a lot of capital gains. We are certainly not seeing the stock donations we saw in the past. There still certainly is the opportunity to donate cash if you have it,” she says.

For instance, clients who are intending to do some tax-loss selling could consider donating part of their cash proceeds to charity, Ryan says.

“A common situation is people having securities that have depreciated. If they have capital gains elsewhere, or capital gains in the last three years, they can sell the stock, donate the cash and trigger the capital loss. It will generate a capital loss in the current year that can be used against gains in the past three years,” she says. “It’s still effective to make a tax donation if you’ve got the cash. You’ll get a tax receipt for 46% of the stock’s sale value if you’re at the highest marginal tax rate in Canada.”

Many clients don’t want to sell stocks this year and lock in losses in a down market. Unless the client is specifically set on tax-loss strategies, it will be a hard sell to create the immediate gifting opportunities from securities.

“The landscape has completely changed. The last two years, I’ve dealt with $100 million in stock donations alone. As of September this year, it was almost zero,” says Malcolm Burrows, head of philanthropic advisory services for Scotia Trust. “We do a lot of work around various liquidity events. Buyouts in the public market are a big liquidity event. For example, if BCE had been bought out, that would have spurred a lot of giving.”

With a lack of liquidity events in the market, Burrows, who helps high-net-worth clients of Scotia’s advisors create strategic philanthropic strategies, says he is seeing an uptick in clients creating estate plans with gifting arrangements.

“We’ve been a lot more involved in putting in place estate plans for a fall. It may not be now, but the commitment is [still there] for charity,” he says. “Most of the endowment assets come through estate plans. We have a historical business with private foundations that is in excess of $1 billion. Almost all of them have come from bequests over time. I think we lived through this short-term period where we were very focused on current gifts. Now we’re going to be focusing back on clients’ ultimate charitable intent and engaging in the planning process to make that happen.”

Ryan says one strategy TD Waterhouse is advocating is creating a gifting arrangement to coincide with the annual mandatory RRIF withdrawal of wealthy retirees. Typically, clients who don’t need their RRIF money are annoyed they have to pay tax on the forced withdrawals.

According to TD Economics, if the client was planning to bequeath a large sum of money upon death, he or she could instead look at immediate gifting arrangements, donating their mandatory RRIF withdrawals. Of course, the entire amount will go to charity, but a client who lives in Ontario and is taxed at the highest marginal tax rate will get a 46.4% tax rebate — the same amount he or she would have paid in taxes to the government. In effect, the taxes go to charity.

“The population isn’t getting any younger. We believe if wealthy boomers adopt this strategy, the impact for charities could be significant,” Ryan says. “In the TD Economics report, they estimate there are about $680 billion of RRSP assets in 2008, but [that is] potentially rising to more than $1.8 trillion by 2020.”

Burrows says charitable giving may be a tough sell in the current environment, and much of that has to do with the psychology of donors. In his experience, clients generally prefer to donate when times are good for them personally or as part of a legacy they wish to leave behind in their estate.

“Psychologically, people tend to give when they’re feeling wealthiest. I don’t see much multi-year planning irrespective of the market conditions. It’s not consistent with the psychology of the majority of clients I deal with,” he says. “I don’t find that it necessarily appeals to clients, because they look at it as a donation or a gift as opposed to building up savings [that create greater wealth].”

(12/16/08)