BDO Dunwoody LLP National Tax Conference

Toronto - January 18, 2004

Robert B. HayhoeMiller Thomson LLP, Toronto

416.595.8174rhayhoe@millerthomson.ca

Planned Giving For High Net Worth Individuals & Owner-Managers

PLANNED GIVING DEFINED

• “The process of designing charitable gifts so that the donor realizes philanthropic objectives while maximizing tax and other financial benefits”, Minton & Somers

• Deferred gifts• Outright gifts• Inter Vivos gifts• Testamentary gifts

INDIVIDUAL GIFTS

• ITA 118.1– 16% federal tax credit (approx 22% total

tax credit) for first $200 per year– 29% federal tax credit (approx 40-50%

total tax credit) for donations over $200 per year

• ITA 118.1(1) “total gifts”– Up to 75% of annual income

INDIVIDUAL GIFTS (cont’d)

• ITA 118.1(1) “total charitable gifts”– 5-year carry forward for excess gifts

• Deemed disposition of property given

TESTAMENTARY GIFTS

• ITA 118.1(4)– gift made by will deemed to have been made

immediately before death

• Same tax credits applicable as inter vivos gifts

• ITA 118.1(1) “total gifts”– gifts up to 100% of income in year of death– 1-year carry back for excess gifts (also up to 100%

income)

TESTAMENTARY GIFT TRAPS

• ITA 118.1(5)– gift must be made “by the individual’s will”

• CCRA used to take the position that this required ascertainable amounts to ascertained charities

– otherwise the gift was a gift from the estate (which usually does not have income to make a tax credit useful)

TESTAMENTARY GIFT TRAPS (cont’d)

• technical interpretations now accept that a gift of a specific or ascertainable amount to charities to be determined by the executors is a gift by will

CCRA 2001-0090205

• Always safest to list beneficiary charities

CORPORATE GIFTS

• ITA 110.1(1) “charitable gifts”– tax deduction for gifts

• up to 75% of income• 5 year carry forward of excess gifts

• Deemed disposition of property given

CORPORATE GIFTS (cont’d)

• Publicity expense deduction– Olympia Floor & Wall Tile (Quebec) Ltd. v.

M.N.R., 70 D.T.C. 6085 (Ex. Ct.)– Bucholzer v. The Queen, 2003 T.C.C. 573:

need real business purpose

GIFT DEFINED

• “A voluntary transfer of property from one person to another gratuitously and not as a result of a contractual obligation without anticipation or expectation of material benefit”, Woolner v. The Queen, (F.C.A.)

• “Detached & disinterested generosity”– public benefit, not private benevolence

SPLIT RECEIPTS

• ITA 248(30)-(33)– Tax credit / tax deduction available for

“eligible amount of a gift”• “eligible amount” = FMV of property

donated – “advantage”

SPLIT RECEIPTS (cont’d)

• “advantage” is benefit to donor (or non-arm’s length person) resulting from the gift

– very broad definition» third party advantage» no timing requirement

– limited recourse debt– advantage cannot exceed 80% of FMV

unless CCRA validates intent to give

SPLIT RECEIPTS (cont’d)

• CCRA Technical News No. 26 sets out tax treatment of common fundraising events

• Mortgaged Property

NON-CASH GIFTS

• Tax credit/deduction available for FMV– qualified appraisers (see CCRA Pamphlet

P113 for details)

• Personal Use Property– no taxable capital gain for disposition of

personal property worth less than $1,000– ITA 46(3) set rules– ITA 46(5) exception for property acquired

for purpose of donation

NON-CASH GIFTS (cont’d)

• December 5/03 amendments

• ITA 248(35): FMV for credit/deduction purposes is limited to cost/ACB of donated goods unless:– Property acquired more than three years

ago, and– No intention to donate at time of acquisition

NON-CASH GIFTS (cont’d)

– exceptions for gifts of inventory, publicly traded securities, certified cultural property, ecological gifts or Canadian real property

– exception for gifts at death

– ITA 248(37) anti-avoidance rule• series of transactions designed to increase

248(35) deemed FMV results in lowest cost ever to acquire the property

– could apply even if donor not part of series

DANGERS OF DECEMBER 5 AMENDMENTS

• No exception for replacement property

• Freeze shares replace common shares– ITA 248(35) applies for three years– ITA 248(35) may always apply if eventual

donation was contemplated at freeze time

• Substantial opposition to these rules – may be amendments

APPRECIATED SECURITIES

• ITA 38(a.1) and (a.2)– Gift of a share or debt obligation or right listed on a

prescribed stock exchange, a mutual fund or segregated fund unit or a prescribed debt obligation (federal or provincial debt) to charitable organization or public foundation

• full tax credit or tax deduction• only half of capital gain is taxed

– See Registered Charities Newsletter No. 12 for discussion of valuation of donated securities

LIFE INSURANCE

• Gift of policy– Receipt cash surrender value

• Gift of premiums– Charity owned policy

• premium payments are currently receiptable

• beware irrevocable beneficiary designations

LIFE INSURANCE (cont’d)

• ITA 118.1 (5.1) and (5.2) beneficiary designation– Estate of deceased receives tax

credit for eventual donation (eligible for carryback into year of death)

• Disbursement quota issues

LIFE INSURANCE (cont’d)

• Split Dollar Insurance– pre December 2002: donor benefit so no

gift– CCRA now appears to accept split dollar

policies (Document No 2003-000411)• no CCRA guidance on premium split

valuation

LIFE ANNUITIES

• Current donation to charitable organization with promise to provide an income stream to donor– Self-insured, reinsured or facilitated– Partial donation receipt– CCRA mortality tables

• Licensing / corporate authority issues

LIFE ANNUITIES (cont’d)

• Technical News 26– eligible amount is difference between annuity price

and price of commercial annuity– capital/income calculation done in ordinary way

• Previous position relied on annuity table and resulted in a lower donation receipt but a higher tax-free payment – generally more advantageous to income poor / capital rich retirees

RRSP / RRIF GIFTS

• ITA 118.1 (5.3) beneficiary designation– Receiptable to deceased annuitant

CHARITABLE REMAINDER TRUSTS• US tax advantaged gift technique• Declaration of trust in favour of charity as

remainder beneficiary but retaining income stream– Donation receipt for actuarial value of remainder– Deemed disposition of whole asset

• Alter ego and joint spousal trusts • CAGP proposal

ESTABLISHING A PRIVATE FOUNDATION

• ITA 149.1 trust or corporation with exclusively charitable purposes registered with CCRA

• Advantages– control

• Disadvantages– less beneficial tax treatment– administrative headaches

DONOR ADVISED FUNDS

• Public foundations / charitable organizations (often community foundations)– permit donors to establish a fund and

“advise” on distribution from fund– less control than private foundations, but

no administrative responsibility

NON-QUALIFYING SECURITIES

• ITA 118.1(13) Non-Qualifying Securities– gift of NQS deemed not to be made unless in 60

months:• shares cease to be NQS, or• donee disposes of NQS

• ITA 118.1(18) NQS is non-listed share or obligation of corporation with which the donor does not deal at arm’s length immediately after the gift

NON-QUALIFYING SECURITIES (cont’d)

• ITA 118.1(19) NQS rules do not apply to “excepted gift” – shares donated to public charity where donor deals at arm’s length with the donee charity and its directors, officers and trustees

LOANBACKS

• ITA 118.1(16)– individual gift to a charity followed by or

preceded by a loan to individual in next or past 60 months reduced by then FMV of loan amount

• ITA 189– private foundation owed money by

taxpayer is liable for a tax equal to prescribed rate less interest actually paid

CIVIL PENALTIES

• ITA 163.2 penalties for providing grossly negligent tax advice

• Apply to professional advisors who provide gift planning advice

• May also apply to charities or their officers who provide gift planning advice

• CCRA specifically plans to apply penalties to donation shelters

TAX SHELTER RULES

• Post 2003 budget ITA 237.1: any representation that a gift can be profitable makes the gift a tax shelter– Tax shelter ID number requirement

• no ID – no donation credit/deduction– No promoter required– Inadvertent tax shelters

• penalties

BDO Dunwoody LLP National Tax Conference

Toronto - January 18, 2004

Robert B. HayhoeMiller Thomson LLP, Toronto

416.595.8174rhayhoe@millerthomson.ca

Planned Giving For High Net Worth Individuals & Owner-Managers