The benefits of giving

By Sandy Cardy
Illustration: Genevieve Cote

As more Canadians yearn to make a difference, a trusted adviser can help direct them to leaving a legacy

Julia Montaine’s mother, Gwen, died last year from breast cancer. Montaine inherited a sizeable amount from her mother’s estate and wanted to create an everlasting tribute to Gwen’s memory.

A marketing executive, Montaine is 49 years old, divorced and has two children. A review of her financial profile reveals that the market value of her house is $450,000, and she has no mortgage. She has an RRSP worth $375,000; her nonregistered investments total $750,000 (including the $500,000 inheritance), and her annual income is $150,000, including investment income.

As Montaine’s mother was active in her church, which she left $25,000 to in her will, Montaine wanted to keep up the support and do something to support breast cancer research. And together with her adviser, they came up with a plan to honour her mother’s legacy.

With a large upfront gift of $200,000, Montaine established the Gwen Montaine Memorial Fund, a donor-advised fund. Each year, she can make an additional donation of $10,000 to the fund to fulfill her philanthropic objectives. Montaine has also named the fund in her will as the beneficiary of 10% of the value of her estate. She hopes that through these contributions, the memorial fund one day will have about $1 million.

Each year, the Gwen Montaine Memorial Fund will distribute a portion of its income to Canadian registered charities. The total of those donations will grow as the value of the fund increases. Each year, Montaine will direct the money to a charity of her choosing. The first year, she recommended the grants be distributed to her church as well as the local teaching hospital to support breast cancer research. And she hopes her children will one day succeed her as donor advisers and be involved in the annual decision-making process.

While tax savings did not motivate Julia’s philanthropy, tax benefits cannot be overlooked. Julia’s initial gift to the memorial fund will generate a tax credit of $200,000, which in Ontario will generate tax savings of more than $90,000. (She will likely carry her tax credit forward for at least one year to maximize the tax savings, as the maximum creditable amount is 75% of her net income.) Furthermore, her additional gifts to the fund will continue to generate significant annual tax savings.

Over the past few years, the government has enriched the federal tax credits and other laws governing charitable giving to provide incentives for Canadians to give back to the community. Most notably, it has:

• Increased the amount of the individual donation tax credit against net in-come to 75% from 25% (100% for gifts of cultural property and donations of ecologically sensitive land). Individuals can also claim donations made through their wills equal to 100% of net income in the year of death and the immediately preceding year. This latter change allows for some powerful estate-planning opportunities.
• Reduced the capital gains inclusion rate on qualifying securities such as stocks, bonds, mutual fund shares and other public securities that are donated to charity from 50% to 0%.

The after-tax cost of a charitable gift is actually much less than the donation itself. For example, the after-tax cost of a $10,000 gift for a resident of Ontario is only $5,359. For BC residents, the cost is only slightly higher, $5,630.

There are many ways Canadians can make significant gifts to a favourite charitable organization, including:

Outright gifts — cash, cheque, credit card and donations of publicly listed securities;

Bequests — naming a charity as a beneficiary in your will;

Life insurance — naming a charity as the beneficiary of a life insurance policy;

Gift annuities — a combination of a charitable gift and a traditional life annuity;

Charitable remainder trusts — an inter vivos trust with upfront tax benefits and a charitable distribution upon the death of the settlor.

The method Montaine and her adviser chose, donor-advised funds, which are essentially funds within a charity, are gaining popularity in Canada mostly because they offer flexibility when it comes to philanthropic planning.

Essentially, in consultation with an adviser, an individual chooses to donate a sum of money into a donor-advised fund. The person can name the fund — e.g., The John Smith Charitable Fund — and even the charitable organization or cause the fund will support. The donor receives a tax receipt equal to the donation to the fund and relinquishes ownership of the funds to the charitable foundation (the legal charitable entity).

Each year, the foundation apprises the donor’s adviser of the amount the fund has available to grant to charities. The fund must grant a minimum of 3.5% each year (actually, the formula is more complicated). For example, with a $100,000 fund, the donor would be advised that his or her fund has $3,500 to grant.

The donor decides which charity gets the grant (it must be a registered Canadian charity). The donor can add to the fund at any time, can make a bequest gift to the fund in his or her will and can name successors (e.g., children) who take control upon the donor’s death or incapacity.

The benefit of such a fund is its flexibility in that it allows for the support of different charities each year. It also takes the administrative burden of charitable giving away from the donor, and is cost effective and typically less expensive than setting up a private foundation.

Leaving a legacy is a tradition that pervades every culture, and more and more Canadians are thinking about the legacy they can leave. Their advisers can, and should, help shape these dreams.

And for advisers, there are many reasons to incorporate philanthropy in their practice. As Canadians move beyond “chequebook philanthropy,” they are looking to advisers for direction.

Charitable gift planning is about giving money away in a thoughtful, meaningful and strategic manner and incorporating it into an overall financial plan. How an adviser incorporates such planning into a practice can have a dramatic impact on the adviser, his or her clients and the community. By discussing charitable giving, an adviser provides a wider spectrum of wealth-management solutions and a more comprehensive service.

A trusted adviser has the power to direct and influence a client’s thinking about important financial matters, including giving. The Canadian tax system ensures that a portion of each taxpayer’s wealth is used for the general welfare of the country. Thankfully, the system allows Canadians, in part, to decide whether their social capital is directed to Canada Revenue Agency or to charity. For many people, especially those sensitive about paying taxes, this is a powerful argument.

So what is the best way to bring up the topic with clients? When done in the context of an overall financial plan, it’s not that hard. Sometimes the question “tell me about your charitable giving” is enough. With this simple starter, an adviser will learn alot about the client’s passions, values and history. Knowing a client on a more personal level allows the adviser to provide better financial solutions, which leads to greater trust and retention.

Also an adviser should listen for clues. For example, the client may mention he or she is a board member at the local women’s shelter or has season tickets to the symphony orchestra. Such comments can speak to a client’s potential support of a charitable organization or the desire to pay less tax. Taking the conversation further may uncover new planning opportunities.

Most modern financial planning software has a module on charitable giving or philanthropy that can be used to introduce clients to new concepts and strategies. The software can help demonstrate that any good financial plan requires a discussion on charitable giving.

There is no best time to bring up the topic of philanthropy with clients but there are moments when the opportunity is ripe; for example, during year-end tax planning. Typically, most Canadians think about tax planning during the last quarter of the calendar year. This focus on year-end planning stems largely from a realization that they face the burden of a large bill if they do not take steps to reduce their taxes. Charitable giving is one of the most powerful (and simple) tax saving methods available.

There aren’t many events greater than the sale of a business that speak to the need for effective tax planning. The substantial capital gains that often result from the sale or transition of a private business may provide the necessary motivation for a large charitable gift. Another good time may be the sale of real estate. The disposition of real estate can often result in a substantial tax bill. Effective charitable gift planning can relieve a client of some of the tax burden resulting from the sale.

When a client inherits money, the first and most obvious question is what to do with it. An inheritance is an opportune time to talk to clients about their overall financial plan. Since their inheritance will likely generate new taxable income, part of the planning strategy should be how to reduce that taxable income. Charitable giving can help achieve that goal.

Sandy Cardy, CA, CFP, TEP, is senior vice-president, tax and estate planning, with Mackenzie Financial Corp.

Technical editor: Ian Davidson, MBA, CFP, CA, RFP, vice-president, Assante Capital Management