Charitable Gifting Issues and Strategies

1. Charitable Gifting Issues and Strategies Presentation to the Edmonton Estate Planning Council Chris Ireland November 18, 2009

2. Agenda • Overview of charitable gifting rules • Split receipting rules • Excess corporate holdings regime • Planning opportunities

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Examples of Actions Required by a Foundation

11. 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

12. 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)

13. 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

14. Gifting Publicly Traded Securities Through a Corporation (continued) • Corporation must have cash flow; shareholder wants/needs funds • GAAR?

15. 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

16. 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?

17. 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.

18. 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.

19. 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?

20. 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

21. 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.

22. 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?

23. Mr. X Donation of Private Company Shares • Funding? • Non-qualifying security rules FreezePreferred Shares ParticipatingShares Will -20% X Family Trust X Co.

24. 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.

25. 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

26. 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

27. 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)

28. 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

29. 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

30. 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

31. Mr. X Charity As Designated Beneficiary Charity A $1 Million Common SharesVoting/Participating X Co.2 Million

32. Charity As Designated Beneficiary Corporate owned • Donor? – individual vs. company • Capital dividend account • Terms of the will

33. 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

34. Donation of Private Company Shares Revisited • Life insurance to provide liquidity to repurchase the shares • Post mortem planning advantages

35. 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.

36. 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

37. 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

38. 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

39. Questions?