presented by: dewayne osborn cga, cfp general manager – lawton partners financial 944-3538 or toll...

Presented By:

DeWayne Osborn CGA, CFP

General Manager – Lawton Partners Financial

944-3538 or toll free at 1-888-944-1144 ext 256

[email protected]

Planned Gifts Taxation Boot Camp

Planned Gifts Taxation Boot CampPurpose of the presentation?

•Help non-tax oriented planned gifts officers understand the basics of taxation.

•Offer a review of planned gifts taxation for anyone interested.

•Help you clearly and correctly illustrate common planned gift strategies

ANSWER YOUR QUESTIONS!!!

What do you need to know?

•Terminology

•Terminology

•Terminology

•Terminology

•Basic Rules


Planned Gifts Taxation Boot CampWhat do you need to know??

•How to confidently illustrate the gifts your organization uses.

•Know How and When to hand off a case to others!!

•Everything you need in one hour!!

Planned Gifts Taxation Boot CampWhy do you need know know some tax?

DonorsAdvisorsPlanned Gifts Officer

YOU!!

Planned Gifts Officer

Planned Gifts Taxation Boot CampSome key terms to know – cold!

•Tax Credit vs Deduction

•Marginal Tax Rate

•Deemed

•Tax Payable (Owing)

•Total Income

•Taxable Income

•Net Income

•FMV, ACB or Cost

•Net Tax Savings

•Combined Tax Rates

•Earned Income

•Capital Gain\Loss

•Contribution Room


Tax Credit vs Deduction

•Both are good things for tax payers•Any tax credit reduces an individual’s tax payable or owing.

•A deduction reduces taxable income for either companies or individuals.

•Donations are credits for individuals, deductions for non-individuals (e.g. companies.)

Planned Gifts Taxation Boot CampHow to calculate the donation tax credit

Total Donation

$

ON Prov. Rate

%

Fed Rate%

Combined (%)

< 200 5.5 15 20.5

>200 17.4 29 46.4•Many donors understand the federal credit, but forget the combined!!

•Actual tax rate is irrelevant. The best results comes from low income earners making large donations.

•Can carry forward for 5 years from date of gift.


Quiz Time:What is the tax savings for a $200 cash donation in Ontario assuming no other donations in the year?

Answer: $41 ($200 X 20.5%)

Question 2: What about a $500 gift?

Answer: $41 + $300 X 46% = $179. OR 35.8%

Question 3: what about $5,000 donation?

Answer: $41 + $2,208 = $2,249.0 OR 45%


0

5000

10000

15000

20000

25000

30000

35000

40000

200 2000 20000 40000 60000 80000

Prov Credit

Fed Credit

Combined

$

$For Planned Gift illustrations, use a minimum gift

of $10,000 and 46% for tax credit.

Planned Gifts Taxation Boot CampIndividual Tax Rates for Illustration PurposesOntario Personal Tax Rates (Prov. and Fed. + surtaxes)

< 37,106 20%

$37,107- 40,970 24.15%

$40,971- 65,345 31.15%

$65,346 – 74,214 32.98%

$74,215 – 76,986 35.39%

$76,987 – 81,941 39.41%

$81,942 – 127,021 43.41%

>$127,022 46.41%

Marginal Rates

Personal Income

Planned Gifts Taxation Boot CampIf you need to use a tax rate, use a high oneExample, Bob’s marginal tax rate is 40%

Why would you post a tax rate: because you have to determine net tax savings. In other words, the gift triggered income (capital gain)

Planned Gifts Taxation Boot CampQuiz Time:Bob’s taxable income from all sources is $75,000. Bob consults for a $5,000 contract (assume no deductions). How much income tax will he pay on the $5,000 contract?

Answer:

$1,769.5 ($5,000 X 35.39%)

What was his total tax payable?

Planned Gifts Taxation Boot CampAnswer: Income Tax rate Tax

37,106 20.05% 7,440

3,864 24.15% 933

24,374 31.15% 7,592

2,772 35.39% 981

11,884 39.41% 4,683

80,000 21,269

Tax rate = 27% (21,269/80,000)

Planned Gifts Taxation Boot CampCorporate Tax Rates for Illustration Purposes

<= $500,000 15.5%

>$500,000 28%

Above rates assume active business.

Holding companies are taxed at higher rates (46.41%)

Gifts more likely from Holding Companies – use 46% west, 48% east! $10,000 gift = $4,800 tax saved.

Planned Gifts Taxation Boot CampOther definitions to know

Deemed: Not withstanding anything else!

E.g. I deemed my son to clean up his room!

Deemed disposition at death, yet nothing actually was sold


Net Tax Savings is the tax savings from the donation less any tax from the gift itself.

Donation limit (Contribution Room) is the amount of charitable donations you can claim against net income in any one year.

• 75% of net income in a given year with 5 year carry forward. 100% in the year of death and the previous year. Do not go back too far, say beyond 2006!

Net Income is the amount of income from al sources less RRSP, and other deductions and expenses.

Planned Gifts Taxation Boot CampQuiz Time:Mary’s 2008 net income is $100,000. What is her 2008 contribution room?Answer: $75,000

Question 2: Mary dies in 2008 (no mention of when), her net income in 2007 was $150,000 and her net income in 2008 was $750,000. How much can she donate via her will to wipe out all tax assuming no donations in or before 2007?

Answer: $830,000 ($36,000/.46 + $750k) Generally speaking, high tax bracket income earners, donations are a wash!!

When Illustrating the year of death, do not make charitable donations in the previous year.

Planned Gifts Taxation Boot CampTypes of Income

• Earned Income (basis for RRSP etc)

Earned Income is:Net income from an office or employment Net income from self-employment Employee profit-sharing plan allocations Disability benefits received from the Canada or Quebec Pension Plan Supplementary unemployment benefits – not regular EI benefits Royalties from any work or invention you created Research grants, net of certain related expenses Net rental income from real property Canadian-source business or employment income earned while non-resident Alimony and maintenance payments received


Planned Gifts Taxation Boot CampTypes of Income

• Earned Income (basis for RRSP etc)

• Dividends (Eligible vs Non-eligible)

• Investment Income (AKA Passive Income) capital gains

• Retirement Income (RRIF, RRSP)

For simplicity, just use the words “Net Income” when referring to income

Planned Gifts Taxation Boot CampExample: Gift of RRSP, RRIF

• Generally required to take a minimum amount out each year (fmv RRIF/90-age of annuitant).

• Taken into income, reflected in Net Income.• Minimum withdrawal rates increase from 5.26% age

71 to a flat 20% after age 94.• Lump sums other than the minimum subject to

withholding tax (10 to 30%). E.g. Take out $100,000, you will get $70,000 cash.

• No need to donate the actual RRIF payment. Simply calculate the amount to be withdrawn, then gift a similar amount.

Planned Gifts Taxation Boot CampGift of RRIF

• Mary, a recent widow, has to withdraw $45,000 from her RRIF. She now has her husband’s RRIF.

• She does not need the money

• She can donate listed securities, cash, or any other property now to wipe out the tax from the RRIF.

May be possible to appeal to Minister of revenue to have the withholding waived for a lump sum gift to charity.

Planned Gifts Taxation Boot CampGifts that create income and thus tax

•Capital property is property that if sold results in a capital gain or loss. Usually acquired for investment purposes or to earn income (e.g. machines).

•Life insurance contracts

•Listed personal property (e.g. art, jewelry, antiques, etchings, etc). Important for art auctions

Advisors do this all the time!!

Planned Gifts Taxation Boot CampGifts that create income and thus tax

Capital property

• FMV is a price two willing, independent, and knowledgeable people would pay for a property.

• POD is proceeds of disposition (what you got for the property). Should = FMV in theory!

• ACB is the total cost of the property (includes renovations, improvements, additions, not maintenance)

• POD – ACB = Capital Gain or (Loss)

• 50% of gain or loss is taxable – except publicly listed securities, mutual funds, etc.

For simplicity, avoid capital losses

Planned Gifts Taxation Boot CampExample of gift of capital property

Bob donates his cottage he purchased in 1995 for $50,000. The FMV is $100,000. His marginal tax rate is 36%. (note, no mention of income)

Assuming no other deductions, Bob must report $25,000 of income from the gift (50% of the capital gain).

The gift creates $9,000 in new tax ($25,000 X 36%)

Use highest marginal tax rates if capital gain > $250,000

•Net tax savings = $37,000 ($100,000 X 46% - $9,000 in new tax).

Planned Gifts Taxation Boot CampExample of gift of capital property

Question 2: What if Bob donated $750,000 of land, ACB = $250,000, what is his net income if no other deductions?

Answer: $100,000 + $250,000 (50% of $750k-$250k) = $350,000

Question 3: What is her 2008 contribution room?

Answer: ($100,000 + $250,000) X 75% = $262,500 + (25% X 250,000) = $325,000.


•Same numbers as cottage example, only use IBM Shares

•FMV = $100,000, ACB = $50,000

•Capital gain is still $50,000

•0% is included in income

•$0.00 in new tax

•Net Tax Savings is $46,000 ($46,000)

Example of gift of Publicly Traded Securities

Easy Tax and Other Resources:• CGA Personal Tax Planning handbook•KPMG Tax Facts 2009-2010•Charities Section on PD Network (under Taxation)•http://www.cra-arc.gc.ca

•http://www.irs.ustreas.gov/•http://www.charitylaw.ca/index.html•www.cagp-acpdp.org•http://www.givingandvolunteering.ca/•[email protected] •1-888-944-1144 ext 256



Any Questions???

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presented by: dewayne osborn cga, cfp general manager – lawton partners financial 944-3538 or toll...

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