the obvious, overlooked and obstacles for printing · 2017. 10. 6. · tips and traps for tax...
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Tips and TrapsFor Tax Time(d) Donation Planning
Kathy Hawkesworth, Edmonton Community Foundation
RRSPSharesMutual Funds
Opco
Holdco
George Lois
Old Life Insurance
PersonalInvesting
PersonalInvesting
} Whether George and Lois realize it or not:◦ they support charitable activities� Donation?
� or perhaps donating time (volunteer)� Charity?
� do they even identify the organization as a “charity”?� arts organizations/libraries/schools and many other
entities are often not comprehended as being “charities”� Tax Savings?
� if the donations are each small, clients may overlook or undervalue claiming them
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} Where a plan must result in tax at some level} Can a charitable gift be planned ◦ in time◦ by the right taxpayer◦ with the right asset
to relieve that tax?
} Cannot carry the gift back to a prior year unless death◦ Now even death has a few additional obstacles
2017If Gift 2019 2020 20212018 2022
} A useful conversation about tax savings of gifts needs to be part of planning checklists◦ early on and throughout
} If George sold his business LAST year….◦ and he is finding out about his tax saving
possibilities THIS year…..
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}91% � of advisors report they are having
“giving conversations” with many of their clients.
}only 13% � of clients report having meaningful
conversations with their advisors.
} Canadian Association of Gift Planners, BMO Harris Private Banking, GIV3, and Philanthropic Foundations of Canada 2014
} Common donor profile} Age} Stage of Life} Reflection} Ability} New tax issues
} Imagine Canada – September 2017 – Regarding Advisors
“While most demonstrated a general understanding of basic tax implications, there was also a relatively wide knowledge gap on matters dealing with the purpose and benefits of private foundations, the use of donor-advised funds, services offered by community foundations and the role of specialist consultants.”
“That said, all participants expressed a keen interest in usable information in these areas including success stories that they could integrate into conversations with their clients”.
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} Additional client-building assets for your practice
} Most examples here based on actual gifts received by Edmonton Community Foundation
} Personal in Alberta◦ A credit - after giving $200 in aggregate
each additional amount� 50%� 54% - to the extent the gift is out of income
over $200,000.} Corporate◦ A deduction - so dependent on corporate
tax rate
} Claimable donations limited to a maximum of:◦ Usually � 75% of income in a year◦ Year of death and immediately preceding year� 100% of individual’s income
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} Tax Savings Sometimes Asset Sensitive◦ Cash◦ Publicly traded securities � (generally shares and mutual funds) – special incentive◦ Private company shares – special restrictions◦ Life Insurance � owned by individual� owned by company ◦ Registered fund assets – create taxable event◦ Real estate – incentive for eco gifts
} Often assumed that personal donations are bestBUT } Requires consideration of:◦ income sources/liabilities/tax rates◦ donation asset source◦ tax liabilities triggered in order to access the funds to
make the gift◦ how a gift could assist in providing tax effective access
to corporate funds (e.g. CDA account, RDTOH planning etc.)
� how proposed section 246.1 ITA might impact availability of capital dividends?
} Popularity has exploded over the past few years
} Given “in kind” directly to a registered Canadian charity◦ (foundation or organization)
} No tax on the capital gain Plus } Donation credit/deduction based on value
of asset transferred
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EXAMPLE: Shares ACBCDN ValueCDN Gain
112,204$ 320,541$ 208,337$
IfHeldinHoldcoTaxableIncome Donation DeductionAvailableto CDA*
OffsetOtherIncomeIfSold 104,169$ 0 0 104,169$IfSoldandDonated 104,169$ 320,541$ 216,372$ 104,169$IfDonatedinKind 0 320,541$ 320,541$ 320,541$
Income Difference 104,169$
IfHeldPersonally TaxableIncome Donation CreditAvailabletooffset AssumptionOtherIncome(50%or54%)
IfSold 104,169$ -$ 0 Tax@48%IfSoldandDonated 104,169$ 320,541$ 123,091$IfDonatedinKind 0 320,541$ 173,092$ Credit@54%
Tax Difference 50,001$
* Is proposed 246.1 ITA now an obstacle?
• Flowthrough shares � Careful about deemed ACB � Once the “darling” of gifts of securities � Now gift may also trigger a liability for tax
} Publicly traded securities acquired through employee stock option (i.e. ITA 7(1) applies)
◦ Special tax incentive ITA 110(1)(d.01) reduces the benefit by ½ of the lesser of:� Value of benefit� Value of security at time of disposition◦ Time limit for making gift� Within the same year� Within 30 days of the donor acquiring the share◦ Conditional upon the taxpayer also being entitled to
deduction under ITA 110(1)(d)
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} The gift is not “made” until the charity receives the asset into its account� May not be immediate� Mutual funds take notoriously longer to settle� Important consideration at year ends and for insiders
} Timely transfer requires the cooperation of the donor’s investment advisor� losing an asset under management� cannot “pull” from donor’s account – must be “pushed”
} Not all charities are set up to receive securities� ECF can refer you to some alternatives based on type
of gift being made
} Charities heavily regulated by CRA in how donation receipts are issued◦ Must be to the owner of the asset (e.g. securities
account holder)◦ Date must be upon receipt in charity’s accounts◦ Value must be based on consistent practice
� E.g. end of day/middle of day/ average – but consistent
} Punitive penalties can be imposed on charity◦ Deregistration as a charity (and loss of all assets)◦ Up to 125% of the “eligible amount” (i.e. gift amount)
Inter vivos giftsSpouses/Common-law
Estate/Insurance/Plan Designation Gifts on Death
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} Share Sale?/Asset Sale?◦ Capital gains?◦ Income?◦ Tax rate?◦ Credit/Deduction for gift?◦ Year end? (time limit for the gift)
} Gift private company shares ◦ Valuation an issue and expense� May be resolved by gift of fixed value redeemable
retractable preferred shares� Followed by an immediate redemption for full value
◦ No special tax incentive for private company shares� Indeed some additional obstacles
} Many additional ITA rules/obstacles for ◦ gifts to a non-arms-length charity
(e.g. private foundations) ◦ assets that continue to be used by donor or non-
arm’s length parties
◦ such as, but not limited to:� 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
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} Private Foundations◦ divestment obligation percentages and penalties
for excess corporate holdings� ITA 188(3.1) and (3.2)
} Public foundations ◦ not allowed to acquire control – ITA 149.1(3) ◦ BUT � “control” defined differently only for 149.1(3) if
shares have been gifted – ITA 149.1(12)◦ BUT� dividends from a controlled corporation
� subject to a financial penalty - ITA 188(3)
} Beware ITA 248(35) ◦ deems certain gifts of property to be made at
ACB or adjusted cost basis of insurance if acquired in certain circumstances such as:� 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◦ ITA 248(37) provides some exceptions
} No special incentives unless ecological land} Gift triggers a taxable event
BUT} Opportunity
� election available for lower proceeds on gifts of capital property� corporate ITA 110.1(2.1) and (3)� personal ITA 118.1(6)
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} Donation of remainder interest in real property
◦ ITA 43.1(1) deems the life estate to also be disposed of◦ exception exists where remainder interest given to a
“qualified donee” (e.g. a charity)
} Value an issue
} Making gift directly from RRSP/RRIF triggers tax
} Publicly traded securities tax incentive does not apply to securities coming from RRSP/RRIF
BUT} Opportunity◦ Consider making the gift from other assets
} If must pull from RRIF ◦ i.e. donor does not need these resources
} Do consider a charitable gift ◦ The charity does not have to receive assets or
cash FROM the RRIF� I.e. could give from any asset source and offset the tax
arising on the RRIF withdrawal
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RRSP/RRIF
Lois
PersonalInvesting
Withdrawal is taxableIs it required?
Charity
Creates barrier to spousaltax rollover• withdrawal creates taxplus• no “special” tax incentiveother than personal taxcredit
Special tax incentivefor publicly traded securities• personal tax creditplus• relief from tax on capital gain
} Tax-wise◦ often better to state “an amount equal to the
value” of my RRSP/RRIF rather than giving the RRSP/RRIF itself◦ avoids spoiling a rollover◦ beneficiary designation can simplify estate
administration
} Philosophically ◦ how much support does the donor actually wish
to provide?� provide for this value, rather than relying on a
moving value target
} Overlooked opportunities◦ Finding a new and meaningful purpose for an old
asset
} Gifting ◦ proceeds (i.e. beneficiary designation): or ◦ ownership of the “redundant” insurance policy
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} Gift of ownership - irrevocable◦ FMV of policy and premiums after ownership
is transferred are claimable donations◦ Relieves tax now
} Designate charity only as beneficiary –revocable◦ Proceeds when received by charity are claimable
donations◦ Relieves tax later
} Does the gift trigger tax?◦ Need to assess adjusted cost basis
} Costs of obtaining valuation for gift of ownership
} Applies Not Only to Wills◦ Life Insurance◦ Plan Designations
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} Donation tax changes:◦ Gift receipted only as it is received by charity� No longer deemed “as of date of death”
◦ May be claimed in year received by charity◦ If received from GRE (or former GRE) within 60
months of death� May also be claimed in last two years of individual’s
life (terminal T1 and immediately prior T1)� And in prior years of the estate
� (caution re ITA 118.1 wording)
Immediately
Prior Year T1
Year of Death
T1
GRE Year 1
GRE Year 2
GREYear 3
36 months fromdate of death
maximum
Post GRE Year 2
Post GREYear 1
Lifetime• 100% Income• limit 60 months from
date of deathmaximum
Deemed dispositions
but notdeemed
Gifts
} Resolves some tax issues for percentage gifts to charity◦ (overcomes circular calculations)
} Time limits problematic especially:◦ selling operating business after death may take time◦ disputed estates ◦ under-active personal representatives (PR’s)
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} Satisfy charitable gifts with publicly traded securities where possible◦ don’t exclude potential transfers “in kind” in will
wording• Encourage PR’s to work promptly for charitable gifts
to be most tax effective• Raise 60 month limit as an issue and deadline in all
cases � but especially in disputed estates
} Recall Imagine Canada Research◦ Private Foundation◦ Community Foundation◦ Commercial Gift Funds
} Control◦ Investments◦ Decision making◦ Charitable work to be
accomplished◦ Qualified Donees to
benefit} Permanence◦ Immediate support◦ Semi permanent support◦ Permanent support
} Who speaks for the Founder?
} Who maintains the vision/legacy?
} Who assesses the recipients?
That is:} Where is the
philanthropist in this picture?
LOSS OF CAPACITYOF FOUNDER
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Private Foundation
} Separate entity} Reporting} Investing } May have own CRA
approved charitable activities
} Granting - only to registered charities
“Donor Advised” Funds
} Within a public foundation◦ Commercial gift fund◦ Community foundation
} Foundation handles reporting
} Generally grants ◦ i.e. limited activities
} Granting – only to registered charities
Commercial Gift Funds(often through banks)
} Registered as a charity
} Primarily (not exclusively) non endowed
} Donors investment advisor may retain investing ability and receive remuneration
} Any Canadian registered charity
Community Foundations
} Registered as a charity
} Primarily (not exclusively) endowed
} Generally invested by community foundation through its asset management plan
} Any Canadian registered charity
} Deep community knowledge
} A resource for philanthropic information/ideas
} Opportunities◦ Offer fuller control - initially
� and can unwittingly facilitate full loss of founder’s purpose later◦ Can undertake its own charitable activities
} Issues:◦ ITA issues restricting treatment of some gifts◦ Initial and ongoing costs of maintaining the structure◦ Succession planning can be difficult but is essential
◦ Note:� please avoid use of words “charitable organization” in wind-up
clauses � too limiting� more likely a “charitable foundation” successor will be suitable� reference the word “charity” to cover both foundations and organizations
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} Essential to contemplate and provide for succession
� May have a “gift over” clause for lump sum contributions after the donor no longer is able to give advice
� If no gift over clause – who is to make granting decisions?
} Most commonly grants } May also have some of their own charitable
activities� Scholarships
} Agreements � Tailored to donor wishes
} Advocate for the founder’s philanthropic vision� agreements determine how successive generations
have input� agreements establish the succession plan and
contemplate the inevitable changes that occur over long periods of time
} Avoid the “name that charity” game◦ people do not know what they do not know◦ assumptions do not lead to the best gifts
} Do discuss client interests, issues and values◦ addresses who your client is as a person◦ enhances client relationships
} Especially as part of retirement planning◦ likely a time for reflection◦ thoughts of legacy and meaning
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} Lack of comfort about who does what well in the charitable sector◦ Know where to turn for assistance
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} Or more informationKathy Hawkesworth [email protected] Mandrusiak [email protected] Xavier [email protected]
Edmonton Community Foundationwww.ecfoundation.org9910 – 103 Street, Edmonton T5K 2V7780-426-0015