charitable gifting issues and strategies
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Charitable Gifting Issues and Strategies. Presentation to the Edmonton Estate Planning Council Chris Ireland. November 18, 2009. Agenda. Overview of charitable gifting rules Split receipting rules Excess corporate holdings regime Planning opportunities. - PowerPoint PPT PresentationTRANSCRIPT
Charitable Gifting Issues and Strategies
Presentation to the Edmonton Estate Planning Council Chris Ireland
Presentation to the Edmonton Estate Planning Council Chris Ireland
November 18, 2009November 18, 2009
Agenda
Overview of charitable gifting rules Split receipting rules Excess corporate holdings regime Planning opportunities
Overview of charitable gifting rules Split receipting rules Excess corporate holdings regime Planning opportunities
Overview of Charitable Gifting Rules
Donation claim limits:– Pre 1996 – 20% of net income– 1996 – 50%– Post 1996 – 75%
100% for year of death and immediately preceding year
Donation claim limits:– Pre 1996 – 20% of net income– 1996 – 50%– Post 1996 – 75%
100% for year of death and immediately preceding year
Overview
Gifts to the Crown Canadian Cultural Property
– 100% of net income– No taxable capital gain
Ecologically sensitive land gifts– 100% of net income– No taxable capital gain
Gifts to the Crown Canadian Cultural Property
– 100% of net income– No taxable capital gain
Ecologically sensitive land gifts– 100% of net income– No taxable capital gain
Overview
Budget 2000– Designation of insurance proceeds– Designation of RRSP and RRIF proceeds
Split receipting rules– December 20, 2002 draft legislation– Income Tax Technical News #26
Budget 2000– Designation of insurance proceeds– Designation of RRSP and RRIF proceeds
Split receipting rules– December 20, 2002 draft legislation– Income Tax Technical News #26
Overview
Gifts of publicly traded securities– 1997 – 37.5% Capital Gains inclusion rate– Feb. 28, 2000 to Oct. 17, 2000 – 33.3% Capital Gains
inclusion rate– Oct. 18, 2000 to May 1, 2006 – 25% Capital Gains
inclusion rate– After May 1, 2006 – nil inclusion rate
Budget 2007– Private foundations
Budget 2008– Exchangeable securities
Gifts of publicly traded securities– 1997 – 37.5% Capital Gains inclusion rate– Feb. 28, 2000 to Oct. 17, 2000 – 33.3% Capital Gains
inclusion rate– Oct. 18, 2000 to May 1, 2006 – 25% Capital Gains
inclusion rate– After May 1, 2006 – nil inclusion rate
Budget 2007– Private foundations
Budget 2008– Exchangeable securities
Split Receipting Rules
Intention to give - amount of advantage cannot exceed 80% of the FMV of transferred property
Eligible amount of gift = FMV of property less amount of advantage
Amount of advantage = amount of property, service, compensation or other benefit received
Intention to give - amount of advantage cannot exceed 80% of the FMV of transferred property
Eligible amount of gift = FMV of property less amount of advantage
Amount of advantage = amount of property, service, compensation or other benefit received
Anti-Avoidance Rules
Watch out for subsections 248(35) to (41) 3 year and 10 year rules Look back rule for certain non-arm’s length transactions Exceptions – egs. Canadian cultural property, ecologically
sensitive land, certain rollover transactions
Watch out for subsections 248(35) to (41) 3 year and 10 year rules Look back rule for certain non-arm’s length transactions Exceptions – egs. Canadian cultural property, ecologically
sensitive land, certain rollover transactions
Excess Corporate Holdings Regime
Rules apply to both publicly listed and unlisted shares Three ranges of shareholdings
– Safe Harbour– Monitoring phase – Divestment required– 2008 Federal Budget added proposals for unlisted shares
and shares held by a trust
Rules apply to both publicly listed and unlisted shares Three ranges of shareholdings
– Safe Harbour– Monitoring phase – Divestment required– 2008 Federal Budget added proposals for unlisted shares
and shares held by a trust
Examples of Actions Required by a Foundation
Private Foundation(Holdings of Share Class)
Non-Arm’s Length Person(Holdings of Share Class)
Action Required by A Foundation
Safe Harbour 2% or Less Any Percentage None
5% 10% Reporting required
Monitoring Phase
10% 10%
20% 0% Reduce holdings to 20%
Divestment Phase
25% 0% Reduce holdings to 20%
8% 14% Reduce holdings to 6%
10% 17% Reduce holdings to 3%
Above 25% Above 18% Reduce holdings to 2%
Planning Opportunities
Wasting freezes and Canadian cultural property/ecologically sensitive land
Gifting publicly traded securities through a corporation Flow through shares Gifts by will and via trusts Donation of private company shares Donation of life insurance
Wasting freezes and Canadian cultural property/ecologically sensitive land
Gifting publicly traded securities through a corporation Flow through shares Gifts by will and via trusts Donation of private company shares Donation of life insurance
Wasting Freezes and Canadian Cultural Property/Ecologically Sensitive Land Use the donation credit to offset taxes arising on the
redemption of preferred shares Example
– shareholder of Family Co - $5 million of freeze preferred shares
– wants to donate $1 million of Canadian cultural property– the resulting donation credit would offset $1.8 million
of preferred shares (deemed dividend)
Use the donation credit to offset taxes arising on the redemption of preferred shares
Example– shareholder of Family Co - $5 million of freeze
preferred shares– wants to donate $1 million of Canadian cultural property– the resulting donation credit would offset $1.8 million
of preferred shares (deemed dividend)
Gifting Publicly Traded Securities Through a Corporation What if shareholder owns the securities (with reasonable
amount of ACB); wants to donate; wants to extract corporate funds?
Consider:– Shareholder transfers securities to private corporation
at ACB in exchange for promissory note and shares – section 85 election
– Corporation donates securities; claims deduction and paragraph 38(a.1) treatment
– CDA created on donation
What if shareholder owns the securities (with reasonable amount of ACB); wants to donate; wants to extract corporate funds?
Consider:– Shareholder transfers securities to private corporation
at ACB in exchange for promissory note and shares – section 85 election
– Corporation donates securities; claims deduction and paragraph 38(a.1) treatment
– CDA created on donation
Gifting Publicly Traded Securities Through a Corporation (continued) Corporation must have cash flow; shareholder
wants/needs funds GAAR?
Corporation must have cash flow; shareholder wants/needs funds
GAAR?
Donating Flow Through Shares
Flow through share deduction plus the donation credit Example
– $100,000 of flow through shares– $39,000 of tax savings from the flow through deductions– $50,000 of tax savings from the donation (assuming the
$100,000 value has been maintained) Issues
– value of the donation– use of a “liquidity provider”– CRA rulings
Flow through share deduction plus the donation credit Example
– $100,000 of flow through shares– $39,000 of tax savings from the flow through deductions– $50,000 of tax savings from the donation (assuming the
$100,000 value has been maintained) Issues
– value of the donation– use of a “liquidity provider”– CRA rulings
Gifts By Will and Via Trusts
Gifts by will - post-mortem planning issues: Must consider donation planning via will with post-mortem
planning alternatives – size of donation vs. expected income for the year of death– deemed capital gain for private company shares
CDA RDTOH
Draft will so that donation is claimed by the estate?
Gifts by will - post-mortem planning issues: Must consider donation planning via will with post-mortem
planning alternatives – size of donation vs. expected income for the year of death– deemed capital gain for private company shares
CDA RDTOH
Draft will so that donation is claimed by the estate?
Example #1
Potential donation on death - $500,000 Post mortem capital loss planning – using the RDTOH would
eliminate the deemed capital gain on death How/where to claim the donation? – terminal return (and/or
return for the immediately preceding year) vs. estate return
Potential donation on death - $500,000 Post mortem capital loss planning – using the RDTOH would
eliminate the deemed capital gain on death How/where to claim the donation? – terminal return (and/or
return for the immediately preceding year) vs. estate return
Mr. WW Co.
$3 Million FMV +Capital
Gain
RDTOH $1 Million
Example #2
Potential donation on death - $500,000 No post mortem capital loss planning
Potential donation on death - $500,000 No post mortem capital loss planning
Mr. X
$3 Million FMV +
Capital Gain
RDTOH and CDA - Nil
X Co.
Spousal Trusts
Spousal trusts and charitable gifts: If spousal trust established in will, with intention
to have charitable gift after death of spouse:– No right of encroachment - net present value of
the future donation is claimed on terminal return– If spousal rollover - sufficient income on date of
death return? Subsection 70(6.2) election? Other post-mortem planning Consider providing a right to encroach on capital
in spousal trust - gift will be spousal trust’s?
Spousal trusts and charitable gifts: If spousal trust established in will, with intention
to have charitable gift after death of spouse:– No right of encroachment - net present value of
the future donation is claimed on terminal return– If spousal rollover - sufficient income on date of
death return? Subsection 70(6.2) election? Other post-mortem planning Consider providing a right to encroach on capital
in spousal trust - gift will be spousal trust’s?
Spousal Trusts (continued)
If charity is a capital beneficiary under the spousal trust:– No donation (technical interpretations 991821,
2000-0056625 and 2001-0076753)– May qualify as a charitable remainder trust?
If spousal trust gives executor discretion to make gift:– Subsection 118.1(5) – N/A – no deeming provision for the gift– No carry-back of donation– Must make gift in the same taxation year
as spouse beneficiary’s death
If charity is a capital beneficiary under the spousal trust:– No donation (technical interpretations 991821,
2000-0056625 and 2001-0076753)– May qualify as a charitable remainder trust?
If spousal trust gives executor discretion to make gift:– Subsection 118.1(5) – N/A – no deeming provision for the gift– No carry-back of donation– Must make gift in the same taxation year
as spouse beneficiary’s death
Example – Spousal Trust
Death of spouse beneficiary Deemed capital gain Capital loss planning to utilize the RDTOH? Donation after death – gift vs. capital distribution Timing – eg. Aug. 15 DOD
and Nov. 30 year end
Death of spouse beneficiary Deemed capital gain Capital loss planning to utilize the RDTOH? Donation after death – gift vs. capital distribution Timing – eg. Aug. 15 DOD
and Nov. 30 year end
ABC Co.
$3 Million FMV +
Capital GainPrivate Co.
RDTOH - $1 Million
Alter Ego/Joint Partner Trusts
Also not subject to subsection 118.1(5) Donation vs. distribution to charity as beneficiary Terms of the trust Expected income of the trust - significant
deemed capital gains on death?
Also not subject to subsection 118.1(5) Donation vs. distribution to charity as beneficiary Terms of the trust Expected income of the trust - significant
deemed capital gains on death?
Donation of Private Company Shares
Funding? Non-qualifying security rules
Funding? Non-qualifying security rules
Mr. X
X Co.
FreezePreferred Shares
Will -20%
X Family Trust
ParticipatingShares
Donation of Private Company Shares
Post-mortem planning Deemed dividend-paid to charity Donation receipt/credit in Mr. X’s final return
Post-mortem planning Deemed dividend-paid to charity Donation receipt/credit in Mr. X’s final return
Mr. X
X Family Trust
FreezePreferred Shares
ParticipatingShares
Will -20% of shares
X Co.
Donation of Life Insurance- Existing Policy Absolutely assigned to charity Donee becomes the registered owner Donation receipt – now to be FMV – 2007 APFF
CRA Roundtable and 2008 CALU Conference Donation receipt – for payment of future premiums Donor – disposition of the life insurance policy Potential income inclusion Enduring property designation
Absolutely assigned to charity Donee becomes the registered owner Donation receipt – now to be FMV – 2007 APFF
CRA Roundtable and 2008 CALU Conference Donation receipt – for payment of future premiums Donor – disposition of the life insurance policy Potential income inclusion Enduring property designation
Gift of In-Force Policy
Gift of in-force policy– Disposition of policy for “value” (i.e. cash surrender value)– CRA’s changed position on amount of the gift – Charity will want to make arrangements for ongoing
premium payments– Enduring property designation– Not included in estate for probate purposes
Gift of in-force policy– Disposition of policy for “value” (i.e. cash surrender value)– CRA’s changed position on amount of the gift – Charity will want to make arrangements for ongoing
premium payments– Enduring property designation– Not included in estate for probate purposes
Gift of In-Force Policy - Example
Bob, now age 56, acquired a $2 million T100 policy for buy-sell funding 15 years ago
Six years ago he had a heart attack and is no longer insurable
Wants to reduce coverage (and premium cost) to $1 million Actuary has assessed FMV of the policy at $500,000 If he gifts 50% interest in policy to charity, Bob will receive
$250,000 charitable receipt with no gain as policy disposition deemed to take place for “value” (nil as no cash surrender value)
Bob, now age 56, acquired a $2 million T100 policy for buy-sell funding 15 years ago
Six years ago he had a heart attack and is no longer insurable
Wants to reduce coverage (and premium cost) to $1 million Actuary has assessed FMV of the policy at $500,000 If he gifts 50% interest in policy to charity, Bob will receive
$250,000 charitable receipt with no gain as policy disposition deemed to take place for “value” (nil as no cash surrender value)
Shared Ownership
Donor is owner of the cash or fund values Charity is owner of the death benefit Amount of the gift for the donor Disbursement quota issues
Donor is owner of the cash or fund values Charity is owner of the death benefit Amount of the gift for the donor Disbursement quota issues
Shared Ownership
Proposed split receipting rules now permit donor to retain an advantage from a gift to a charity and permits “charitable shared ownership”
Donor obtains charitable credit for premium payment and can take advantage of the exempt status of the policy
Proposed split receipting rules now permit donor to retain an advantage from a gift to a charity and permits “charitable shared ownership”
Donor obtains charitable credit for premium payment and can take advantage of the exempt status of the policy
Charity As Designated Beneficiary
Personally owned– Subsections 118.1(5.1) and (5.2)– Large gift on death – 100% credit; one year carry back– Could be used to offset deemed capital gain– No donation receipt for premiums
Alternative– gifting life insurance proceeds through will
Personally owned– Subsections 118.1(5.1) and (5.2)– Large gift on death – 100% credit; one year carry back– Could be used to offset deemed capital gain– No donation receipt for premiums
Alternative– gifting life insurance proceeds through will
Charity As Designated Beneficiary
Mr. X
X Co.2 Million
$1 Million Charity ACommon Shares
Voting/Participating
Charity As Designated Beneficiary
Corporate owned– Donor? – individual vs. company– Capital dividend account– Terms of the will
Corporate owned– Donor? – individual vs. company– Capital dividend account– Terms of the will
Corporate Donation of Securities Revisited Replacement of capital Corporate deduction for charitable gift No tax on capital gains from gifted property Credit to CDA to extent of non-taxable capital
gain arising from gifted property Life insurance replaces value of gifted property
and creates additional CDA credit
Replacement of capital Corporate deduction for charitable gift No tax on capital gains from gifted property Credit to CDA to extent of non-taxable capital
gain arising from gifted property Life insurance replaces value of gifted property
and creates additional CDA credit
Donation of Private Company Shares Revisited Life insurance to provide liquidity to repurchase
the shares Post mortem planning advantages
Life insurance to provide liquidity to repurchase the shares
Post mortem planning advantages
Donation of Private Company Shares Revisited Funding the gift with life insurance CDA credit for X Co. Funding the repurchase of shares Gifting shareholder loans
Funding the gift with life insurance CDA credit for X Co. Funding the repurchase of shares Gifting shareholder loans
Mr. X
X Co. X Family Trust
FreezePreferred Shares
ParticipatingShares
Will -20% or equivalent substituted value
Charitable Insured Annuities
Charitable annuity - irrevocable contribution made by donor In return, receive annuity payments
– Fixed term– Life expectancy
Donation = FMV of contribution less amount paid to acquire the annuity
Charitable annuity - irrevocable contribution made by donor In return, receive annuity payments
– Fixed term– Life expectancy
Donation = FMV of contribution less amount paid to acquire the annuity
Charitable Insured Annuities
Charitable insured annuity – fixed income alternative– Prescribed annuity if personally owned– Registered charity – owner of the life insurance policy– Donation receipt – payment of life insurance premiums
Charitable insured annuity – fixed income alternative– Prescribed annuity if personally owned– Registered charity – owner of the life insurance policy– Donation receipt – payment of life insurance premiums
Charitable Insured Annuities
Designed for a donor in fixed income investments that wants to make charitable gifts while not significantly impacting after-tax cash flow
Donor uses fixed income investments to acquire a prescribed annuity
Donates the income portion of the annuity and purchases a T100 policy to replace capital on death
After-tax cash flow is often greater than the fixed income strategy
Designed for a donor in fixed income investments that wants to make charitable gifts while not significantly impacting after-tax cash flow
Donor uses fixed income investments to acquire a prescribed annuity
Donates the income portion of the annuity and purchases a T100 policy to replace capital on death
After-tax cash flow is often greater than the fixed income strategy
Questions?