Introduction to planned giving

EXPERTISE | Flash update: Introduction to planned giving

Background

Many taxpayers support philanthropic projects either personally or through their business.

 Below you’ll find an overview of some tax planning strategies that can minimize the financial consequences associated with giving to a charitable organization.

·         Take out a life insurance policy in the name of a charitable organization. The annual premiums paid will be eligible for a charitable tax credit. Furthermore, upon death of the insured, the charitable organization will receive a death benefit (the value of the life insurance policy) that exceeds the total present value of the premiums paid on the policy.

·         Include a gift in your will corresponding to the value of your life insurance benefit, to be paid by the estate upon death. This sum may be eligible for a charitable tax credit, which can lower the deceased’s tax liability, among other benefits.

          Donate a publicly listed investment with significant unrealized capital gains instead of cash. Donating the security will result in a “deemed disposition” for tax purposes, but the realized capital gains will not be taxable and a charitable tax credit equal to the investment’s market value will be available. This can then be used to lessen the donor’s tax burden.

·         Donate a publicly listed investment with significant unrealized capital gains through a business. Donating the security will result in a “deemed disposition” for tax purposes, but the realized capital gains will not be taxable and a tax deduction equal to the investment’s market value will be available to the business. The company can then allocate a tax-free dividend to its shareholder.

          Donate shares in a private company to a charitable organization and arrange for the shares to be bought back immediately thereafter. The donation will result in a “deemed disposition” for tax purposes as well as a capital gain, but the tax on this gain may be offset by the capital gains deduction. When the company repurchases the shares, it will be assumed that the charitable organization received a dividend on which it will not pay taxes. However, this dividend may trigger a dividend refund for the company. A charitable tax credit equal to the market value of the private company’s shares will be available and can be used to lessen the donor’s tax burden.

 t is important to keep in mind that a donation always implies a financial loss for the donor. If this isn’t the case, it's not considered a donation!

In a judgement handed down by the Tax Court of Canada in Mariano v. The Queen, Justice Pizzitelli noted:

“In the end, I cannot see how any person participating in such a scheme, regardless of whether such person had an honest belief in the value of the Licences he expected to receive or not, can argue, based on the manner in which the scheme was marketed and in the makeup and integration of the Transactional Documents that deliver it, that he or she expected none other than to profit from, be enriched or not be impoverished by, such participation, and thus not have the requisite donative intent.” 

Taxpayers should therefore be very careful when agreeing to transactions suggested to them by institutions that promote the use of products such as flow-through shares to minimize the financial impact of donations. While these planning strategies are authorized by the tax authorities, there’s a risk of falling afoul of regulations governing non-arm's length transactions (transactions between persons who are related to each other).

In such strategies, a promoter acts as an intermediary between the donor, the charitable organization receiving the gift and the future buyer of the flow-through shares. Because this person acts on behalf of three other parties, there is a risk of a non-arm’s length relationship being created between the various participants involved in the strategy.

Before agreeing to participate in a transaction of this nature, donors should consult with a tax specialist to ensure that the strategy will work for them.