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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.

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charitable gifting issues and strategies

Charitable Gifting Issues and Strategies

Presentation to the Edmonton Estate Planning Council

Chris Ireland

November 18, 2009

agenda
Agenda
  • Overview of charitable gifting rules
  • Split receipting rules
  • Excess corporate holdings regime
  • Planning opportunities
overview of charitable gifting rules
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
overview
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
overview5
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
overview6
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
split receipting rules
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
anti avoidance rules
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
excess corporate holdings regime
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
planning opportunities
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
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)
gifting publicly traded securities through a corporation
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
gifting publicly traded securities through a corporation continued
Gifting Publicly Traded Securities Through a Corporation (continued)
  • Corporation must have cash flow; shareholder wants/needs funds
  • GAAR?
donating flow through shares
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
gifts by will and via trusts
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?
example 1

Mr. W

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

$3 Million FMV +Capital Gain

RDTOH $1 Million

W Co.

example 2

Mr. X

Example #2
  • Potential donation on death - $500,000
  • No post mortem capital loss planning

$3 Million FMV + Capital Gain

RDTOH and CDA - Nil

X Co.

spousal trusts
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 continued
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
example spousal trust
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

$3 Million FMV + Capital Gain

Private Co.

RDTOH - $1 Million

ABC Co.

alter ego joint partner trusts
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?
donation of private company shares

Mr. X

Donation of Private Company Shares
  • Funding?
  • Non-qualifying security rules

FreezePreferred Shares

ParticipatingShares

Will -20%

X Family Trust

X Co.

donation of private company shares24

Mr. X

Donation of Private Company Shares
  • Post-mortem planning
  • Deemed dividend-paid to charity
  • Donation receipt/credit in Mr. X’s final return

FreezePreferred Shares

Will -20% of shares

ParticipatingShares

X Family Trust

X Co.

donation of life insurance existing policy
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
gift of in force policy
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 example
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)
shared ownership
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
shared ownership29
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
charity as designated beneficiary
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
charity as designated beneficiary31

Mr. X

Charity As Designated Beneficiary

Charity A

$1 Million

Common SharesVoting/Participating

X Co.2 Million

charity as designated beneficiary32
Charity As Designated Beneficiary

Corporate owned

  • Donor? – individual vs. company
  • Capital dividend account
  • Terms of the will
corporate donation of securities revisited
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
donation of private company shares revisited
Donation of Private Company Shares Revisited
  • Life insurance to provide liquidity to repurchase the shares
  • Post mortem planning advantages
donation of private company shares revisited35

Mr. X

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

FreezePreferred Shares

Will -20% or equivalent substituted value

ParticipatingShares

X Family Trust

X Co.

charitable insured annuities
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 insured annuities37
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 annuities38
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