Charitable giving can be an important pillar of a financial plan

By Rosemary McCracken | April 17 2012 08:40PM

Increased public awareness of the need for charitable giving has deepened the conviction held by many people that they have a responsibility to contribute to the society in which they live.
“Public foundations are developing higher profiles,” noted Christine Van Cauwenberghe, Winnipeg-based director, tax and estate planning, at Investors Group. “More businesses are supporting charities instead of advertising as a form of branding, and schools are getting students into the habit of supporting charitable causes and community projects.”

But unless their clients make their philanthropic intentions known, many advisors are reluctant to bring up the subject. In 2010, Mackenzie Financial conducted a Canadian survey to see how charitable giving fit into financial advisors’ practices. It found that most advisors who were polled were not raising the issue with their clients.

“The primary reason for this is that many advisors don’t have a strong comfort level with the technical issues – the tax considerations, the most appropriate gifting vehicles or the time of life that’s best for giving,” said Brad Offman, vice-president, strategic philanthropy at Mackenzie Financial in Toronto.

Canadians, he added, have an obligation to support the well-being of our society. “We can choose to do this in the form of paying taxes to the Canada Revenue Agency. Or we can do it through charitable giving and, in return, receive a tax break.”

Planned giving can be an important pillar of an effective financial plan, and advisors should find out how important supporting charities and social and environmental causes, is to clients. “What causes do they want to support?” Ms. Van Cauwenberghe said. “How much control do they want to exercise over their gifting. Do they want to support a lot of causes or take a more focused approach?”

Advisors will find that most donors don’t identify tax savings as the major drive behind their giving, Mr. Offman added. “Conversations with clients will be more about the client’s values than money. Leaving a legacy is an important part of charitable giving.”

Many details need to be considered to ensure that clients get the most from their charitable gifts. Advisors may require extra training in the tax implications of charitable donations, or they may need to build a network of professionals, such as accountants and lawyers, to whom they can refer clients. They should also make themselves knowledgeable about different gifting options such as donor-advised funds, which offer investors many of the advantages of private charitable foundations – tax benefits and control over their giving – at considerably less cost than establishing and maintaining a typical private foundation.

Mr. Offman noted some tax issues around charitable giving with which advisors and their clients should be familiar.
- For clients who want to make annual donations, many need to be reminded that they can donate up to 75% of their incomes for the year in order to receive a tax credit. “If donations have exceeded this amount, they can carry them forward for up to five years,” he said.
- “And in the year of death, donations of up to 100% of the deceased’s net income can be claimed on the terminal tax return. If donations exceed this amount, the estate can carry the donations back to the tax return of the year before the client’s death, and it would again be deductible up to 100% of net income for that year.”
- In 2006, the federal government eliminated capital gains tax on publicly traded securities that were donated to registered Canadian charities. “They must be donated in kind – by transferring the actual shares to the charity,” Mr. Offman said. “The client pays no tax on the capital gains and receives a receipt for the full fair market value of the securities.”

Life insurance is a gifting vehicle that is often overlooked. “With changing family structures, clients may have a lot of people – spouses, children, step-children, common-law partners and their children – who will want a piece of their estates,” Ms. Van Cauwenberghe said. “These clients may be concerned that bequests to charitable organizations in their wills will be subject to challenges from these people. Or clients may be concerned about being pressured to change their wills when they grow frailer. An insurance policy, with a charity as the designated beneficiary, may be the answer in these situations.”

“And if the client donates a life insurance policy to a registered charity,” Mr. Offman added, “he can choose whether to take the tax benefit during his lifetime or after his death. If he chooses to take it during his lifetime, he will have to transfer ownership of the policy to the charity and will immediately receive a receipt for the policy’s fair market value. If, instead, he names the charity as the beneficiary of the policy, the tax benefit can be claimed by his estate upon his death, thereby reducing the tax hit on the estate for his heirs.”

Shelter capital gains
A charitable donation can also be used to shelter the capital gains realized from the sale of a business. “This will have to be carefully planned out in advance of the sale,” Ms. Van Cauwenberghe noted, “because the donation should be made in the year the business is sold. The client can claim up to 75% of his net income that year, and any unused amounts over the 75% limit may be carried forward for five years. However, he may not realize significant gains in income in the years subsequent to the sale, especially if he is retired.”

Charitable gifts don’t have to be large ones, and small but well-placed sums of money can make a considerable impact on charitable causes. There are a few tax issues relating to small donations that clients should be aware of.

There is a federal tax credit available for gifts to registered Canadian charities of 15% for the first $200 donated and 29% on amounts of more than $200, Ms. Van Cauwenberghe said. “So the client should consider accumulating tax receipts of small gifts over five years – the longest they can be carried forward – in order to get the higher tax credit.”

Married and common-law couples also have the option of having the couple’s total donations claimed on the tax return of the spouse with the highest taxable income, she added. “This is particularly beneficial when each person’s donations are under $200, but combined exceed $200.”