Transcript Opportunities in the Business Market

Charitable Gifting Issues and
Strategies
Presentation to the Edmonton Estate Planning Council
Chris Ireland
November 18, 2009
Agenda
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Overview of charitable gifting rules
Split receipting rules
Excess corporate holdings regime
Planning opportunities
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
 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
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
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
 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
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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
 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
Examples of Actions Required
by a Foundation
Safe Harbour
Monitoring
Phase
Divestment
Phase
Private
Foundation
(Holdings of
Share Class)
Non-Arm’s
Length Person
(Holdings of
Share Class)
Action Required by
A Foundation
2% or Less
Any Percentage
None
5%
10%
Reporting required
10%
10%
20%
0%
Reduce holdings to 20%
25%
0%
Reduce holdings to 20%
8%
14%
Reduce holdings to 6%
10%
17%
Reduce holdings to 3%
Above 25%
Above 18%
Reduce holdings to 2%
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
 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
 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)
 Corporation must have cash flow; shareholder
wants/needs funds
 GAAR?
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 - 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
 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
Mr. W
$3 Million
FMV
+Capital
Gain
RDTOH $1
Million
W Co.
Example #2
 Potential donation on death - $500,000
 No post mortem capital loss planning
Mr. X
$3 Million
FMV +
Capital Gain
RDTOH and
CDA - Nil
X Co.
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)
 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
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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
ABC Co.
Private Co.
RDTOH - $1 Million
Alter Ego/Joint Partner Trusts
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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
 Funding?
 Non-qualifying security rules
Freeze
Preferred Shares
Mr. X
Participating
Shares
Will -20%
X Co.
X Family
Trust
Donation of Private Company Shares
 Post-mortem planning
 Deemed dividend-paid to charity
 Donation receipt/credit in Mr. X’s final return
Freeze
Preferred Shares
Mr. X
Will -20% of
shares
Participating
Shares
X Co.
X Family
Trust
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
– 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
 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
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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 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
 Personally owned
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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 Beneficiary
Mr. X
Common Shares
Voting/Participating
X Co.
2 Million
$1 Million
Charity A
Charity As Designated Beneficiary
Corporate owned
– Donor? – individual vs. company
– Capital dividend account
– Terms of the will
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
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Donation of Private Company Shares
Revisited
 Life insurance to provide liquidity to repurchase
the shares
 Post mortem planning advantages
Donation of Private Company Shares
Revisited
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Funding the gift with life insurance
CDA credit for X Co.
Funding the repurchase of shares
Gifting shareholder loans
Freeze
Preferred Shares
Mr. X
Will -20% or
equivalent substituted value
Participating
Shares
X Co.
X Family
Trust
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 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 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
Questions?