Gifts from an Advisor’s Perspective

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Most applicable to:

• everyone, any age,
• individual or
• Corporation

Advantages — straightforward, generally well understood.

Disadvantages — is not eligible for the extra tax savings available for gifts of publicly traded securities . Some relevant Income Tax Act (ITA) sections (not exhaustive)

• 118.1 (3) gifts by individuals (tax credit)
• 110.1 gifts by corporations (tax deduction)
• 118.1 (1) “total charitable gifts” – to allow gifts to be claimed by spouse or common law partner (not in a will)
• 118.1 (1) “total gifts” – donation limits for individuals (usually 75% of income in a year) but see “Gifts in Wills”

Tax effect – creates a tax credit for individuals – tax savings generally of 50% of gift amount in Alberta*

*Note: first $200 of total gifts in the year is 25% – gifts from income over $200,000 is 54% Calculate the tax savings here: Charitable gifts of cash create a tax deduction for corporations (tax savings will depend upon corporate tax rates)

Download the Publicly Traded Securities Fact Form here.

Most applicable to:

• individuals that hold (or will hold in their estates) or
• corporations

with  publicly traded securities that have appreciated in value.

ECF has appropriate forms for transferring shares and mutual funds in-kind to ECF. Phone or e-mail for the most appropriate form in each situation:

Kathy Hawkesworth 780-257-9566 khawkesworth@ecfoundation.org
Noel Xavier 780-984-2799 nxavier@ecfoundation.org
Matt Mandrusiak 780-974-7923 mmandrusiak@ecfoundation.org

Publicly traded securities include:

• shares, obligations or rights listed on a designated stock exchange;
• shares of the capital stock of a mutual fund corporation;
• units of a mutual fund trust;
• interests in a related segregated fund trust;
• prescribed debt obligation (for example, government savings bond)

Some relevant ITA sections – (not exhaustive)

• Section 38 (a.1)
• Caution re: Sec.40(12) limiting how the capital gains are treated for flowthrough shares
• Section 83(2) and 89(1) relate to capital dividend accounts of certain corporations Section 110(1)(d.01) re gift of shares acquired by option to charity
• Section 110(1)(d.01) re gift of shares acquired by option to charity
• Caution regarding other loss limitation sections

Advantages – the ITA provides special tax treatment if appreciated publicly traded securities held personally (acquired other than by way of employee stock option) or by a corporation and NOT in an RRSP/RRIF/TSFA) are given in kind to a registered charity.

Disadvantages – sometimes the securities are not held by the person or entity that most requires the tax relief. For example, challenges exist if an individual has sold land with tax consequences but publicly traded securities are held in company. The individual may need the tax credit more than the company or vice versa.

Tax Effect — For an Individual

The value of the securities on the date the charity receives them creates a tax credit — tax savings generally of 50% of gift amount in Alberta.*

Estimate the tax credit here using the value of the securities to be transferred.

Plus: no tax is payable on the amount by which the securities have appreciated in value (i.e. the capital gain)

*Note: first $200 of total gifts in the year is 25% – gifts from income over $200,000 is 54% in Alberta.

The favourable tax rules that apply to gifts of publicly traded securities “in-kind” can also apply to a gift made in a will (where the executor is able to choose to make a gift of estate assets “in-kind” . This requires that the charity receive the gift within 5 years of the date of the donor’s death from a Graduated Rate Estate (GRE) or former GRE that would otherwise continue to qualify as a GRE if the 36 month time limit for GRE’s did not apply.

Tax Effect — For a Corporation

The value of the securities on the date the charity receives them creates a tax deduction so that the tax savings will be based on the rate of tax the corporation would otherwise pay.

Plus: no tax is payable on the amount by which the securities have appreciated in value (i.e. the capital gain)

Plus: in some cases – depending upon the type of corporation, the non-taxable portion of the capital gain (i.e. the whole capital gain) is added to the capital dividend account of the corporation. That capital dividend can then be paid out to shareholders (if the rules of the ITA are followed) on a tax free basis (subject to some restrictions such as, but not limited to, the shareholder being taxable on the dividend in the US) . RDTOH planning can also be done.

Publicly traded securities acquired through employee stock options also have beneficial rules apply, though different from the capital gains tax elimination noted above and subject to strict and short time limits.

Download the Gifts in Wills Fact Form here.

Most applicable to:

• individuals with or without family — the amount and nature of the gift will generously consider family needs — gifts to Canadian registered charities saves taxes and allows clients to choose how to distribute more their estates.
  • Example: client has three adult children — does it REALLY matter if each child receives 1/3 of the estate or 30%? If it doesn’t REALLY matter, the client could give 10% of the estate to charity and save half of that in taxes.

Advantages — the timing of such gifts allow ordinary people to make extraordinary gifts.

Disadvantages —unless there is full and clear understanding of what the client wants at the time the will is drafted, errors and misunderstandings can arise at a time when the donor is no longer able to clarify. ECF can help with setting up “intention wording” ahead of time that does NOT create a binding obligation on the donor, but can avoid misunderstandings later. (These are some of our favorite conversations and we have an excellent process).

Just as gifts during a client’s lifetime can take many forms such as cash, publicly traded securities, property, trusts so too can the variety of gifts made in wills. Therefore reference always must be made to any specific rules that apply to about each specific form of gift (e.g. the great tax incentive for gifts of publicly traded securities).

Share with your client an estimate of the tax credit here based on the anticipated value of the gift.

The overarching rules about how tax savings are claimed for a gift made in a will have changed. Now the best tax savings are reserved for the situation where the charity actually receives the gift within 5 years of the date the donor dies and the estate has been designated as a “graduated rate estate” (GRE).

Some relevant ITA sections – (not exhaustive)

• Section 118.1 (4.1) – (5.2) claiming charitable gifts in a will for deaths after 2015
• Section 118.1 “total charitable gifts”
• Section 118.1 “total gifts”

The gift is deemed to be received by the charity only when the charity actually receives the gift. If received by the charity within 5 years of the date of the donor’s death (and if the gift is made by what had been the GRE and would continue to be a GRE if the 36 month time limit for a GRE did not apply). The donation receipt issued for the gift may be claimed in the tax returns for any or all of:

• The estate year in which the charity receives the gift
• Any prior year of the estate while it was a GRE (36-month limit)
• The last tax year of the donor’s life
• The year immediately preceding the last year of the donor’s life

A gift in a will cannot be claimed by a spouse or common law partner. If not received by a charity within 5 years, or if the estate is not designated as a GRE, no amount of the gift may be claimed in the last year of the donor’s life or the year immediately preceding that last year of the do-nor’s life or “carried back” to a prior year of the estate. Instead the gift is claimed in the year it is made and in the 5 subsequent years of the estate.

Limits apply to how much of a gift can be claimed in a year:

• Up to 75% of income in each of the estate years; and
• Up to 100% of the individual’s income in each of the year of death and immediately preceding taxation year.

The favourable tax rules that apply to gifts of publicly traded securities “in-kind” also require that the charity receive the gift within 5 years of the date of the donor’s death from a former GRE that would otherwise continue to qualify as a GRE if the 36 month time limit for GRE’s did not apply.

Gifts of private company shares are not given similar favorable tax treatment and even amendments to the ITA have not addressed all the challenges of donating such shares.

It is not uncommon for a trust for family in a will to provide a gift for charity at the end of the trust. These can be very suitable gifts even without creating tax savings (e.g. a trust for a disabled child that provides an ultimate gift to support the charity that helped that child). Significant tax planning needs to occur in advance in order for any tax savings to result.

Please contact us to discuss options further:

Kathy Hawkesworth 780-257-9566 khawkesworth@ecfoundation.org
Noel Xavier 780-984-2799 nxavier@ecfoundation.org
Matt Mandrusiak 780-974-7923 mmandrusiak@ecfoundation.org

Download the Gifts of Life Insurance Fact Form here.

Most applicable to:

• younger clients; or
• older clients where a joint-last-to-die policy makes premiums more affordable; or
• clients who have a policy that has outlived its original purpose (e.g. purchased when the children were small).

Advantages – can be straightforward and more private than a gift in a will giving family members the sense that the client has “provided specially” for a charity instead of “giving my inheritance” to a charity. Do not underestimate the privacy feature.

Disadvantages – some insurance plans are too complex to appeal to most donors.

Unless there is full and clear understanding of what the client wants at the time the insurance gift is received errors and misunderstandings can arise at a time when the donor is no longer able to clarify. ECF can help with setting up “intention wording” ahead of time that does NOT create a binding obligation on the donor, but can avoid misunderstandings later. (These are some of our favorite conversations and we have an excellent process).

There are two distinct ways to plan the tax effect of a straightforward gift of insurance:

1. Making the charity both the owner and the beneficiary of the policy
2. The client remains as the owner of the policy and the charity becomes a beneficiary of the proceeds of insurance

Many innovative insurance plans have been developed that uniquely apply to a particular client and that are outside the scope of this brief overview.

Please call us to discuss these further:

Kathy Hawkesworth 780-257-9566 khawkesworth@ecfoundation.org
Noel Xavier 780-984-2799 nxavier@ecfoundation.org
Matt Mandrusiak 780-974-7923 mmandrusiak@ecfoundation.org

Charity Becomes Owner and Beneficiary

This creates an irrevocable gift. The charity issues a donation receipt for the fair market value of the policy at the time the charity receives it. This is different than the cash surrender value (CSV) and unless “nil” requires the policy to be valued by the charity (not by the donor or donor’s advisor). The charity then also issues donation receipts for all future premium payments made by the donor after the ownership is transferred.

This approach is most advantageous if the client can better use the tax credit at the time premiums are being paid, instead of to reduce taxes in the estate at a far distant date. The tax credit on the premiums essentially cuts the premium costs in half to provide a wonderful benefit to a favorite cause or organization at a future date.

Share with your client an estimate of the tax credit here based on the estimated fair market value of the policy when ownership will be transferred plus the ongoing costs of premiums

EXAMPLE:

Old Policy:
CSV on date transferred — $10,000
FMV — $10,000 (for illustration purposes)
Annual premium payments — $1,000 for the next 10 years
Insurance proceeds — $100,000
Donation receipt(s) — $10,000 for fair market value
$1,000 every time the annual premium is paid (either directly to the insurance company or to the charity). Charity receives $100,000 of proceeds and does NOT issue a donation receipt for this amount — it is an amount payable on a policy owned by the charity.

We have found it most efficient to have the premiums paid to ECF and ECF then pays the insurance company. A practical question arises for the charity if the donor ceases to make premium payments. Depending on many factors the charity may opt to cash in the policy for the CSV (or let a policy without a CSV lapse) or continue premium payments.

Charity is Beneficiary Only

This creates a revocable gift. The client can change the beneficiary designation on the policy at any time. The charity will issue a tax receipt for the insurance proceeds when those are received by the charity. This approach is most advantageous if the client can better use the (significant) tax credit to reduce taxes in the estate and in the last two years of the client’s life. (e.g. if the client will have to pay tax on RRSP/RRIF plan values, capital gains on property or business etc.). This allows a client to provide a very substantial gift in support of a favorite organization or cause. A great opportunity for an extraordinary gift from a client who would describe himself or herself as “ordinary”.

Cautions:

• The client’s will needs to work well with a direct designation of beneficiary on the policy so the will does not provide a different beneficiary than does the direct designation, thereby causing confusion and costs.
• Because the insurance company will ultimately need health information related to the donor to process the claim, it is very helpful for the charity to be provided the name of the client’s usual physician and/or clinic.
• The client’s enduring power of attorney should direct the attorney to continue premium payments on such a policy.

Some relevant ITA sections (not exhaustive):

• 118.1 (5.2) (direct designations)
• 118.1 (5) (5.1) gifts when a donor has died
• 118.1 (1) “total gifts” for limits
• 118.1 (1) “total charitable gifts”

Like gifts in wills, the rules about how tax savings are claimed for a gift of the proceeds of insurance have changed. Now the best tax savings are reserved for the situation where the charity actually receives the gift within 5 years of the date the donor dies and the estate has been designated as a “graduated rate estate” (GRE).

If received by the charity within 5 years of the date of the donor’s death (and if the gift is deemed to be made by what had been the GRE and would continue to be a GRE if the 36 month time limit for a GRE did not apply) the donation receipt issued for the gift may be claimed in the tax returns for any or all of:

• The estate year in which the charity receives the gift
• Any prior year of the estate while it was a GRE (36-month limit)
• The last tax year of the donor’s life
• The year immediately preceding the last year of the donor’s life A gift of insurance proceeds cannot be claimed by a spouse or common law partner.

Limits apply to how much of a gift can be claimed in a year:

• Up to 75% of income in each of the estate years; and
• Up to 100% of the individual’s income in each of the year of death and immediately preceding taxa-tion year.

Share with your client an estimate of the tax credit here based on the anticipated proceeds of insurance.

Caution:

A direct designation on a registered account could be fatal to a tax effective transfer of that asset to a spouse or certain dependent children (i.e. a rollover). An alternative asset may be more appropriate in such cases. It is important to note that no special tax incentive beyond the usual charitable tax credit applies to making a charity a beneficiary of a RRSP/RRIF/TSFA by way of direct designation on the account.

Such a gift is treated as being from the estate of the deceased and so the general tax rules that apply to gifts in wills will apply to these designations. (See Gifts in Wills).

The tax credit that a client and the client’s estate enjoys is generally not “source dependent” except in the case of publicly traded securities. That is, a client does not have to make a charity the beneficiary of an RRSP in order for the gift to relieve the taxes otherwise payable on the RRSP.

For example:
Client does not have a spouse (i.e. no effective transfer (rollover) of the RRSP exists). Client’s assets includes:

• Bank account $100,000
• Home $400,000
• RRSP $20,000

If RRSP designation is “estate” and will gives $20,000 to Charity. Will deals with $520,000 of value.

If RRSP designation is Charity. Will deals with $500,000 of value and RRSP is direct to Charity.

Tax credit is based on $20,000 in both cases (approximately $10,000 in tax savings in Alberta)

Share with your client an estimate of the tax credit here based on gift anticipated.

It is important to note that, currently, no special tax incentive beyond the usual charitable tax credit applies to giving a charity an interest in real estate (other than ecological land – see Gifts of Ecological Property). In other cases, the gift triggers a taxable disposition generally deemed to occur at fair market value which may give rise to a capital gain, unless an election is made for the transfer to be treated as being at a lower value (which effects the tax credit too (e.g. see 118.1(6) ITA).

The gift also entitles the client to a charitable tax receipt for the eligible amount of the gift. This means that if the client sells the asset to a charity for an amount below fair market value the charity may be able to issue a donation receipt for the difference (all dependent on specific tax rules).

The charity will need to arrange for a professional valuation of the property. Given this and all of the due diligence required in acquiring land, it may be most effective to arrange instead for the sale of real estate and donation of the proceeds of sale rather than transferring the real estate itself to the charity.

Remainder interests in real estate

It is also possible to divide interests in land on a timeline basis and register a life interest or term of years interest on title and give the remainder interest in the land to a charity (also registered on title). There might exist an ability to value the remainder interest in the land on a present value basis and issue a donation receipt for that value at the time the interest is registered (rather than at the time the prior interest ceases to exist at a future point in time). There will be only certain limited circumstances where such an approach may have application.

Please call us to discuss any proposed gift of real estate:

Kathy Hawkesworth 780-257-9566 khawkesworth@ecfoundation.org
Noel Xavier 780-984-2799 nxavier@ecfoundation.org
Matt Mandrusiak 780-974-7923 mmandrusiak@ecfoundation.org

Charitable gift annuities combine two different elements that need not be combined.

An amount is transferred by a donor to a charity the charity keeps part of that amount as a gift and issues a donation receipt for it. The other part is used to either purchase from an insurance company or “self-insure” an annuity that pays the donor for either a set amount of years or for life (with or without a guarantee period such as 5 years).

The payments the donor receives are sometimes inaccurately described payments of “income”. What the donor receives from the annuity is a combination of earnings and return of the capital the donor has contributed.

Very few charities “self-insure” the annuity because of the liability for ongoing payments. More common are “reinsured” annuities where the charity purchases an annuity payable to the donor from an insurance company.

Foundations are not permitted to issue self-insured or re-insured annuities because in both cases the annuity is interpreted by CRA as an unpermitted indebtedness of the foundation.

A “charitable remainder trust” (CRT) is created where a trust is set up for the benefit of a person during that person’s lifetime and at the end of the trust, whatever is left (the “remainder”) is to be transferred to a charity.

CRT’s are rarely created during a donor’s lifetime because:

• the transfer of assets into the trust usually creates a disposition of the assets at fair market value; and
• the capital of the trust must be required to remain completely intact in order for the charity to be able to issue any donation receipt (calculated on a present value basis)
• in order for the capital to remain intact both the fees and amounts payable to the income beneficiary must come out of income. Such restrictions are not very workable at current interest rates.

CRT’s are more commonly created in a will to provide for one or more family members during their lifetimes followed by a charity gift. These trusts can have very practical purposes and effects notwithstanding that even the new taxation rules for wills have not resolved the difficulties in planning such trusts in a way that can save taxes.

Please contact us to discuss trusts that involve charitable gifts:

Kathy Hawkesworth 780-257-9566 khawkesworth@ecfoundation.org
Noel Xavier 780-984-2799 nxavier@ecfoundation.org
Matt Mandrusiak 780-974-7923 mmandrusiak@ecfoundation.org

Download the Succession Planning Fact Form here.

It is important to note that, currently, no special tax incentive beyond the usual charitable tax credit applies to giving a charity shares of a private corporation. Indeed several specialized sections of the ITA apply that can limit the value of the gift and the ability and timing for issuing a charitable donation receipt. Gifts to private foundations pose even more challenges than those to a public foundation or charitable organization. Because each of these situations needs specialized planning, please contact us to discuss any gift of private company shares.

Canada’s Ecological Gifts Program offers tax benefits to Canadians who donate ecologically sensitive land or a partial interest in such land to a qualified recipient. The Minister of the Environment must certify the land, approve the recipient that receives the gift, and certify the fair market value of the donation.

Land (including a covenant, an easement or a real servitude to which land is subject) qualifies if it is donated to a qualified recipient, and it has been certified by the Minister of the Environment to be land the conservation and protection of which is important to the preservation of Canada’s environmental heritage.

An eligible environmental charity is a registered charity that has, in the opinion of the Minister of the Environment, the conservation and protection of Canada’s environmental heritage as one of its main purposes. The Edmonton & Area Land Trust (EALT) is one such local example. Similarly the Nature Conservancy of Canada is a national example. ECF holds endowment funds for EALT to assist with the ongoing stewardship and maintenance costs of interests in land that have been donated. These are key costs that must be planned for with every gift of ecological land.

Tax certification is a process defined in the Cultural Property Export and Import Act, Canada that encourages the transfer of cultural property from private hands to the public domain. This process ensures that cultural property of outstanding significance and national importance is preserved in Canadian organizations and made accessible to the public. The tax certification process is administered by the Canadian Cultural Property Export Review Board.

The following incentives in the Income Tax Act encourage Canadian taxpayers to donate or sell significant cultural property to designated organizations:

• exemption from capital gains tax on the certified cultural property; and
• non-refundable tax credits for the full fair market value of the certified cultural property.

To be eligible to become a designated organization, applicants must be either a public authority or an institution as defined under the Cultural Property Export and Import Act.

Applications for certification of of Canadian cultural property are submitted to the Review Board by designated organizations on behalf of identified donors or sellers of cultural property.

The Review Board decides if:

• the object is of outstanding significance, due to its close association with Canadian history, its close association with national life, its aesthetic qualities, its value in the study of the arts, or its value in the study of the sciences; and
• the object is of such national importance that its loss to Canada would significantly diminish the national heritage.

Fair market value is determined by the Review Board for objects that meet the above criteria. A Cultural Property Income Tax Certificate (Form T871) is then issued to the donor or seller.

As with any tax planning there exist provisions that can limit the positive tax features of charitable gifts. Some of these include (not exhaustive):

• Beware sections 248(35) and 248(37) which deems certain gifts of property to be made at ACB or adjusted cost basis of insurance if acquired in certain circumstances
  • 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
• Section 40(12) limits the portion of the capital gain on a flow-through class of property that can claimed as being non-taxable under 38(a.1)(i)
• Section 118.1 ITA has many provisions that deal with gifts to a non-arms-length charity (e.g. private foundation) or assets that continue to be used by donor or non-arm’s length parties such as, but not limited to:
  • Sections 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