Tea, Cookies, and Tax??

1. Tea, Cookies, and Tax?? Presented By: DeWayne Osborn CGA, CFP General Manager – Lawton Partners Financial National Chair – CAGP*ACPDP 944-3538 or toll free at 1-888-944-1144 ext 256 Dosborn@lawton.mb.ca

2. Tea, Cookies, and Tax?? Purpose 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!!!

3. Tea, Cookies, and Tax?? What do you need to know? • Terminology • Terminology • Terminology • Terminology • Basic Rules

4. Tea, Cookies, and Tax?? What 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!!

5. Tea, Cookies, and Tax?? Why do you need to know some tax? Donors Advisors Planned/Major Gifts Officer

6. Tea, Cookies, and Tax?? Some key terms to know – cold! • Net Tax Savings • Combined Tax Rates • Marginal Tax Rate • Capital Gain\Loss • Contribution Room • Tax Credit vs Deduction • Tax Receipt • Tax Payable (Owing) • Total Income • Taxable Income • Property (not assets) • FMV, ACB or Cost

7. Tea, Cookies, and Tax?? 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 companies.

8. Tea, Cookies, and Tax?? How to calculate the donation tax credit • 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.

9. Tea, Cookies, and Tax?? % $ For Illustrations, use a minimum donation of $5,000 and 44% for tax credit.

10. Tea, Cookies, and Tax?? Individual Tax Rates for Illustration Purposes Personal Tax Rates (Combined Prov. and Fed.) < $9,000 0% $9,000 - $36,000 27% $35,000 - $70,000 35% $70,000 – 113,000 39/41% $103,000+ 44% Marginal Rates To avoid confusion, it is helpful to sometimes use a rate lower than 44% in illustrations. I suggest 40%.

11. Tea, Cookies, and Tax?? Corporate Tax Rates for Illustration Purposes < $250,000 18.6% $250,000 - $300,000 27.6% $300,000+ 39.1% Effective Jan 1/2004, Above rates assume active business. Holding companies are not included. Holding companies are taxed at higher rates (52.8%) I suggest using 19% in illustrations

12. Tea, Cookies, and Tax?? Other definitions Total Income is all income from all sources reported on the tax return. Net Income is total income less some deductions. It is this amount that is used to determine your charitable contribution room (75% in a given year). Taxable Income is net income less other deductions. It is this amount that is used to determine your tax payable. Tax Payable is the amount you owe to CRA. It is reduced by credits like donations. Take from CRA and give it to Charity!!

13. Tea, Cookies, and Tax?? Your Estate Real Estate Kids Pension Investments Charity CRA

14. Tea, Cookies, and Tax?? Other definitions • Net Tax Savings is thetax 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 2002! When Illustrating the year of death, do not make contributions in the previous year.

15. Tea, Cookies, and Tax?? Gifts 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. • Life insurance contracts • Listed personal property (e.g. art, jewelry, antiques, etchings, etc).

16. Tea, Cookies, and Tax?? Gifts that create income and thus tax Capital property • FMV is a price two willing, independent, and knowledgeable people would pay for a property. • ACB is the total cost of the property (includes renovations, improvements, additions, not maintenance) • FMV – ACB = Capital Gain/(Loss) • 50% of gain or loss is taxable – except publicly traded securities For simplicity, always have FMV > ACB

17. Tea, Cookies, and Tax?? Example of gift of capital property Bob donates his cottage he purchased in 1995 for $50,000. The FMV is $100,000. His tax rate is 40%. Bob must report $25,000 of income from the gift (50% of the capital gain). The gift creates $10,000 in tax ($25,000 X 40%) Always do the math for the reader!

18. Tea, Cookies, and Tax?? Example of gift of capital property • Net tax savings = $34,000 ($100,000 X 44% - $10,000).

19. Tea, Cookies, and Tax?? Example of gift of Publicly Traded Securities • Same numbers as cottage example, only use IBM Shares • FMV = $100,000, ACB = $50,000 • Capital gain is still $50,000 • Only 25% is taxable = $12,500 • $5,000 in new tax ($12,500 X 40%) • Net Tax Savings is $39,000 ($44,000 - $5,000)

20. Tea, Cookies, and Tax?? Cash is King!!

21. Tea, Cookies, and Tax?? Life Insurance and Registered Plans – Example: • Bob and Mary owned a joint LTD policy with death benefit of $250,000 payable to their estate. Upon Bob’s passing in 2001, Mary changes the beneficiary to the Charity A in honour of Bob. • If un-changed, upon her death, Charity A will get the $250,000, she will get the tax receipt for her terminal return. Save $110,000 in taxes! • Alternatively, Mary could give the ownership of the policy to Charity A today for a tax receipt = CSV and any other premiums she pays.

22. Tax Benefits of Planned Giving More Rules and Considerations – Cont’d: Gift Annuity: Example: MTC $100,000 Tax Receipt = $25,000 Keeps $25,000 for its activities or the endowment fund Bob & Mary CRA $7,300/yr $420 $75,000 Insurance Company

23. Tea, Cookies, and Tax?? Back to Back Annuity Assumptions: Male Age 78 Non-smoker $100,000 Invested in Annuity & $100,000 Insurance with Charity A as Owner

24. Tea, Cookies, and Tax?? Any Questions??? Thank You Check out my planned gifts website at www.lawton.mb.ca click on Planned Gifts See me for details on how to subscribe!!!