Fall is often charitable giving season in Canada. It is the time of year that sees a lot of activity around charitable donations from those who are, after having put it off until the last moment, scrambling to meet the December 31 deadline to make charitable donations for the given tax year.
The timing couldn’t be better for Jo-Anne Ryan, vice-president, philanthropic advisory services, TD Waterhouse Canada, to examine various philanthropic ways high-net worth (HNW) clients can, and in many cases do, minimize tax implications of their wealth.
“Charitable giving is becoming more and more important with our boomers,” said Ryan during a presentation at the Strategy Institute’s 12th annual Marketing Wealth Management Services to High Net Worth Individuals Summit. “They are changing the face of philanthropy, just like they are changing everything else.”
They look at their charitable donations as an investment. “They look at what types of results (their donations) are going to get them, which can be anything from how many people are going to come off welfare, to how many lives they’re going to save.”
Philanthropic giving is increasingly important in the financial and estate plans for clients. Boiled down, charitable gift planning is the process of creating a complete and balanced approach to philanthropy that addresses estate, tax and financial planning objectives enriched by personal philanthropic hope and dreams.
Yet until recently, there seemed to be little or no strategy around much of the charitable giving taking place in Canada. By the end of each year, clients could be found saddled with a pile of tax receipts that represented a mishmash of charitable causes not necessarily representing values that are important to them.
Things are getting better, though. Donors are becoming increasingly savvy by learning the importance of strategic philanthropy. “People want to become much more strategic with their philanthropic giving having an impact,” said Ryan. “We want to really be working with our clients, understanding those values, helping clients to articulate them, and put a plan in place.”
This sort of strategic planning is especially relevant in Canada, one of the most charitable countries, according to the first ever World Giving Index (WGI). Published by UK-based Charities Aid Foundation, the index ranks Canada third — behind Australia and New Zealand — in “global generosity” among 153 countries comprising 95% of the world’s population.
There’s no denying that tax, although only one of the many motivations for giving, is an important consideration. “Most people want to give it away to maximize the tax benefits (and) give in a very tax effective manner,” said Ryan.
In the absence of strategic planning, the client’s capital will make its way to the government, which decides how to allocate those dollars. “Of course, charities are a very small proportion as to how those dollars get allocated (by the government).”
With strategic planning in place, however, donors take control of that capital and can direct it to causes in which they most strongly believe, while taking advantage of tax credits.
“It’s really redirecting what’s already going to the government, to things that are important to you,” said Ryan. “Most people would want to minimize what the CRA inherits and maximize what family, friends and charity receive.”
Ryan wasn’t short on tips on how that can be achieved. The first on the list was donating securities as opposed to making cash donations. “You’re always better off giving securities with appreciated gains versus selling the stock and donating cash.”
For those who expect further upside from their stock, she recommends they can still donate, eliminate the capital gains, and buy it back immediately. The temptation to market time donations, however, must be resisted at all costs, she said.
Another equity-based idea: donate stock from a holding company. “When you donate from a corporation you get a tax receipt that gives you a deduction (which) reduces income,” she said. “You also eliminate the capital gains taxes when you donate a stock from a holding company.”
Ryan also offered one of the best kept secrets of charitable giving. “The full capital gain that is eliminated gets credited to the corporation’s capital dividend account which allows the shareholder to withdraw money tax-free.”
These tax-free withdrawals drive down the value of the corporation, reducing estate taxes, by lowering the value of corporate shares at the time of death, which triggers a deemed disposition.
Charitable giving of employee stock options is another great way to slough off unwelcome taxes. When sold, these generate returns which, despite technically being employment income, are taxed as capital gains. “If you donate the stock within 30 days and in the same calendar year, you can totally eliminate that tax,” said Ryan.
Using up tax credits and donating RRIF income to charity are also good ways to minimize what will invariably land in CRA’s coffers.
Incorporating philanthropy as part of the overall financial and estate plan is a great way to find the happy balance between what is bequeathed to the next generation and what goes to charity, she said.