No better time for in-kind donations

Surging markets and charities in need create a planning opportunity

By: Rudy Mezzetta | Source : Investment Executive

This article will appear in the December issue of Investment Executive.

High-net-worth clients holding appreciated securities in their portfolios are increasingly choosing to make charitable donations “in kind” rather than giving cash. This strategy enables those clients to avoid realizing large capital gains after a banner year for equities markets.

“With record markets and record prices on most securities, now is probably the best time that there has ever been to donate a portion of those [appreciated securities] to registered charities,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.

As of Nov. 30, the S&P 500 composite index was up by 25% over the previous 12 months, while the S&P/TSX composite index was up by 19%.

With an in-kind donation, a client receives a charitable tax receipt equal to the fair market value (FMV) of the appreciated security while also eliminating the potentially large capital gains taxes associated with selling that investment.

“[Clients are] saying: ‘I pay a lot of tax, I think tax rates are going to increase, and I really need to start managing and coming up with solutions for this because I’m worried about my tax bill,’” said Mark Skeggs, vice-president of wealth planning with Gluskin Sheff + Associates Inc. in Toronto. Charities’ needs have increased during the pandemic, he added, and clients want to support those organizations.

Individuals who donate publicly traded shares, mutual funds, ETFs or segregated funds in kind can achieve significant tax savings relative to selling the same investment and then donating the cash proceeds. For example, a client donating publicly traded shares worth $5,000, with an adjusted cost base of $2,000, would eliminate the taxes on the $3,000 capital gain, half of which would be included in income. For a client in Nova Scotia in the top marginal tax bracket, for example, an in-kind donation would save the client $810 compared with selling the same asset held in a non-registered account.

That client also would be eligible to claim federal and provincial non-refundable donation tax credits, just as they would for a gift of cash. If a gift is made to a charity before the end of the calendar year, the tax credit can be applied against taxes in the current year or carried forward for up to five years. Donation tax credits claimed can’t exceed 75% of a person’s net income in a taxation year, or exceed 100% on their terminal return or on the return for the taxation year preceding their death.

Malcolm Burrows, head of philanthropic advisory services with Scotia Wealth Management, said he’s worked with many older clients who have held stocks for decades and are “gobsmacked by the cumulative gains” and “terrified of the tax implications from selling.” These clients, Burrows said, often are open to donating these shares as part of their broader charitable giving and estate planning, which “enables, sometimes, quite significant donations.”

Financial advisors can raise the topic of charitable giving in general, and in-kind donations in particular, as part of year-end discussions with clients about rebalancing portfolios. One common strategy is for clients to donate a portion of an appreciated security in kind — enough so the tax credit associated with the donation will offset the capital gains taxes realized from selling the remainder of the position — and then to use the proceeds of the sale to rebalance.

“People are saying: ‘I’ve given the government enough money. I really want to look at other opportunities for charitable giving and estate planning,’” said William Petruck, president and CEO of Funding Matters Inc. in Toronto, a charity consultancy firm that offers an online calculator for determining the most tax-effective way to make a donation.

Clients who wish to make a charitable donation but still want to hold onto a particular security can donate the security in-kind and then immediately buy it back with the cash they would otherwise have used to make the donation. This strategy allows for tax savings while maintaining the position in the client’s portfolio.

“There are superficial loss rules, but there are no superficial gain rules,” Skeggs said. “If it is a situation where it’s a stock that [a client] likes, that is a strategy we look at.”

Business owners can consider making in-kind donations from their private corporations rather than doing so personally, said Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto.

In-kind donations from a corporation generate a triple tax benefit: they eliminate the accumulated capital gain on the donated security; generate a charitable receipt for the FMV of the security, which results in a tax deduction for the corporation (as opposed to a tax credit for a donation made personally); and increase the corporation’s notional corporate dividend account (CDA) by an amount equivalent to the non-taxable portion of the capital gain. Amounts in the CDA can be paid out as tax-free dividends to Canadian-resident shareholders.

Bezaire said there has been “a big pickup” in business owners choosing to make donations from their corporation’s retained earnings to mitigate the effect of recent tax changes.

As of 2019, a corporation’s access to the small-business deduction is gradually reduced once the corporation’s passive investment income for the year is above $50,000 — and the deduction is eliminated entirely once passive income reaches $150,000. Many advisors, therefore, counsel their business-owner clients to make in-kind corporate donations to receive the deduction against income and “clear out [their] corporations so [they’re] below that $50,000 in passive investment income,” Bezaire said.

Clients unsure about which charities to support can consider giving to a donor-advised fund (DAF), a separate charitable account the client can establish as part of a larger charitable foundation, in order to receive a charitable tax credit for the donation, Golombek said. DAFs are required by law to disburse at least 3.5% of their assets each year to charity.

By making an in-kind donation to a DAF before year end, the client would eliminate the accumulated capital gains taxes on the security and receive a donation receipt that can be used on the current year’s tax return in order to claim the tax credit. “Then [the client] can decide, over the next 20 or 30 years, where the money [in the DAF] actually goes,” Golombek said.

Advisors who engage their clients regarding charitable giving during financial planning discussions may establish deeper connections with their clients as a result.

“When clients have [charities] that they want to support, there’s usually a story behind it, and usually it’s a very deep and personal [one],” Skeggs said. “Having these conversations just helps to enhance your relationship.”

In-kind acts for the holidays

Gifting stocks, other investments excellent way to support charities this season, while helping to significantly cut your tax bill come spring

By: Joel Schlesinger

Most people dig a little deeper in their wallets this holiday season to help those in need. But some can also look to their portfolio by donating stocks, bonds and other investments that can have big impact on charities while reducing their own tax bill come spring filing their return.

In-kind donations refer to directly transferring ownership of shares of Apple Inc, for example, from a non-registered investment account (i.e. not a RRSP or TFSA) to a charity, which can then sell those shares and use the proceeds to fund its operations.

“If your stocks are doing incredibly well, it’s a great way to increase the amount of money you can donate to an organization while also increasing” the tax benefit you receive, says Amanda Leuschen, vice-president of strategic partnerships and philanthropy at United Way Winnipeg.

Of course, donating in-kind is not for everyone simply because not a lot of people have non-registered investment accounts.

But those who do hold stocks, bonds, mutual funds, exchange-traded funds, real estate and even shares in certain private corporations in a non-registered account may want to consider in-kind gifts.

“It’s often a win-win,” says Ana Plotnicoff, director of philanthropy at United Way.

The charity receives a substantial gift; the donor gets a tax receipt worth up to 75 per cent net income in a given year, and by transferring — rather than selling the shares first and giving the charity cash — capital gains tax does not apply.

“Instead of selling the securities and donating the cash, you’re much better off to donate the stocks directly because there is more of a beneficial tax impact to you,” says Lydia Potocnik, head of estate planning and philanthropic advisory services at BMO Private Wealth.

Already the non-refundable tax credits (provincial and federal combined) are generous for givers. Donors receive 25.8 per cent of their donation back in tax savings on their first $200 ($51.60) and then a combined credit for as much as 50.4 per cent for amounts exceeding $200 for the province’s highest income earners.

Founder and chief executive officer of Benefaction Canada Nicola Elkins says the federal government made in-kind donations attractive to givers when it changed the tax rules in 2008. The change eliminated taxes on gains in value on assets when directly transferred (in-kind) to a charity, or any other Canada Revenue Agency (CRA) certified donees. (Those include, by the way, journalism organizations, Canadian amateur athletic associations, arts service organizations and even the United Nations.)

“It has driven a lot of additional donations into the charitable sector,” Elkins says. “It’s increasingly popular for gifts of publicly traded securities and happens all the time, but this time of year is the busiest.”

For wealthier Manitobans and their advisors, none of this is news.

Toward the end of the year, they often pore over their portfolios to make in-kind gifts, fine-tuning the amount to maximize the benefit for the cause they want to support, and their taxes.

While not overly complicated, illustrations — or more aptly online calculators — help demonstrate the impact of a gift in both respects.

Those online calculators include the ‘GIFTABULATOR,’ mostly for advisors and charities to show their donors or clients the benefits of giving assets or cash.

“People are visual learners, and that’s why we created GIFTABULATOR — a learning tool where they can see the benefits,” says William Petruck, president and CEO of Funding Matters Inc. the organization behind the calculator.

Online calculators aside, here’s an example to demonstrate the difference between in-kind gifting of $50,000 in shares, and selling the investment and then donating the cash.

If the gain in value on the investment is $40,000 (the adjusted cost base $10,000) in a non-registered account, half ($20,000) of that increase in value would be taxable if selling the shares and donating the proceeds.

For the highest income earner in Manitoba, the taxes would be a little more than $10,000, and the gift a little less than $40,000.

But if donated in-kind, no capital gains tax applies, and total gift would be $50,000.

Plus, donors get a non-refundable tax receipt worth about $23,000 to more than $25,0000 in tax savings, depending on their taxable income.

While more common among Canadians with significant wealth, folks of more modest means may have assets to give too, including ecologically sensitive land for a nature conservation group to protect. Others may have stocks in a non-registered account through workplace purchase plans or whatever the reason, not needed for retirement, to gift in-kind.

Plotnicoff notes the United Way receives in-kind gifts from all kinds of donors, ranging from a few hundred to tens of thousands of dollars.

Individual can choose to give from registered accounts too — though there is no benefit to doing so in-kind. All those accounts are tax sheltered, and when withdrawn from an RRSP, for example, the sum is fully taxable with applicable withholding tax (though you can make an election with CRA to not have that withheld). Assets inside TFSAs grow tax-free, so no taxes would apply anyway. 

Still, you do get the tax credit for the amount donated for either account.

If you’re considering a donation, particularly an in-kind one, it’s best get on it as soon as possible because the assets must be in the charity’s account by Dec. 31 to be claimed for the 2021 tax year — and it can take a few days to complete, Plotnicoff says.

“If you’re planning to donate shares, don’t decide to do that on Dec. 30 because you won’t get it done in time.”

Fortunately, most charities, United Way included, are happy to guide givers through the process, Leuschen says.

“It’s just a neat way for people to be more empowered,” she adds. “People want to support the community and this is just another option that may suit them best.”

The time to prepare for year-end charitable giving is now

When fundraisers ask for “cash” donations, they’re not only selling their organizations short, they’re also selling their donors short. A credit card or cheque donation may be easy, but it comes from an account the donor has already paid tax on. The donation actually costs more than the donor is giving.

Meanwhile, the stock market has nearly doubled over the past year and assets have grown in value. Charities, donors, and advisors should be exploring tax-efficient giving strategies.

There’s no question about it: discussing donations can be intimidating. With complex terminology and even more complex calculations, it’s no wonder many fundraisers and donors choose to stay on the path they’re familiar with: cash donations. Unfortunately, this becomes an expensive loss of opportunity for charities, donors, and their advisors.

Discussing tax-efficient giving from stocks, mutual funds, and registered accounts like RRIFs can create significant donations where taxable capital gains come into play. When fundraisers and advisors understand the core capabilities of tax-efficient giving, they provide dramatically increased value to their donors and their organization.

A tax-efficient donation is a win for all involved, lowering taxes for the donor while contributing to a greater good and helping a charity get closer to its funding goals. Bigger gifts become possible and more affordable.

Lowering taxes can be complicated, largely because of national and provincial tax laws. Determining the best way to lower taxes depends on which taxes the donor hopes to lower. Knowing the appropriate techniques can lower capital gains taxes, income taxes, and estate capital gains taxes.

Tax-efficient planned giving and major gifts have significant impact on charities. They are the secret weapon of fundraisers and savvy donors alike. When fundraisers ask for cash, they’re asking from the small bucket. The big bucket is filled with the highly taxable assets that have not yet been taxed.

A donor’s most valuable assets, such as real estate or tangible goods, can be inaccessible for the purpose of generating cash for donations. There may be legal or tax consequences associated with the untimely sale of these assets. Empowering charities to engage with their donors on a win-win path will achieve larger donations and satisfied donors.

Fundraisers, donors, and financial advisors deserve the tools they need to understand the complex benefits associated with making tax-efficient donations to charities.

At FUNDING matters Inc., we developed Giftabulator® with the donor in mind, to increase individual giving and lower taxes. The online tool for facilitating discussions about tax-efficient giving strategies – for today or in the future – is now at the fingertips of donors, charities, and advisors.

 

Why Planned Giving is a good place to start for Major Gifts

Through Covid-19 we’ve all been made aware that the number of deaths is increasing, but guess what? Planned giving is not.

Remember, charities play two primary roles; one, provide services, programs, care that fill a large gap that governments can’t or won’t support in communities; and two, raise funds for these programs and services.

The provision of support for the needy, investments in science, and cultural education have made a tremendous difference for many during the pandemic. Overall, charities perform very well in providing these programs and services with limited resources, day-to-day and year-to-year.

The second area that charities focus is much more difficult, fundraising. The ability of fundraisers to engage in meaningful discussions with their donors is often a challenge. Possessing the ability to educate, illustrate and activate meaningful charitable discussion that shows the donor why their funding is important and illustrating how they can afford a tax efficient donation from taxable appreciated assets, this isn’t magic.

I was recently speaking with a colleague who advises philanthropists. She stated that in many instances, if the donor stopped their giving to the charity, they would be forced to end the program. In our discussion, the solution for the charity and the donor should be to develop a plan to sustain the program with an endowment with the donor from their estate, current assets or both.

Planned giving is an effective fundraising method, but it has its challenges. In future blogs, I’ll peel back the onion on charitable giving and give you an inside look as to why it’s such a good place to start when thinking about major gifts.

Giftabulator provides new tools for those in the charitable sector; helping them to explore and understand major gifts, planned giving and endowments with an easy to use client interface.

For more information visit Giftabulator.com

Click here! To see tax efficient ways to give

The concept of the ‘value curve’ was introduced in 1997 by academics, W. Chan Kim and Renée Mauborgne. They believe that an effective strategy needs to have three main factors:

1. A clear focus.
2. Divergence from the competition.
3. A compelling tag line.

The Value Curve model aims to fulfil all of these factors. It provides a useful framework for comparing your strategy against that of your competitors, by using a simple chart. This helps you focus sharply on the things that differentiate you from your competitors, and develop a clear and easily explained value proposition.
The chart below, shows an example of how value curves can be used to compare strategies. In this example, the value curves represent the strategies used by charities to illustrate major and planned giving fundraising: a pencil and paper, excel spreadsheet & Giftabulator.

The amount of training, education and knowledge required by a charity to have their staff calculate the ideal donation either by pencil and paper or in populating an excel spreadsheet is a barrier for most charities in discussing the benefits of donating appreciated assets or incorporating a bequest within one’s estate plan.

The factors on the x axis show the key criteria or “competitive factors” that charities and those that advise or raise money in this sector think are important. The vertical axis shows the degree to which the budget and traditional tools invest in, or “value,” each of these criteria.

Giftabulator is pre-programed with charitable giving scenarios based on region, household income tax brackets and tax on appreciated assets such as stock, mutual funds, registered investments, secondary property and private company shares. Giftabulator generates outcomes within a split second to illustrate the benefits of a charitable donation.

Let me demonstrate how this can be illustrated:

See the impact of your donation with GIFTABULATOR.

My good friend David Tsubouchi, posts inspirational quotes that are spot on and remind us that we are human and that we don’t always get it right the first time.

I have worked with David on many initiatives over the years and he brings positivity, zeal and intelligence to every encounter.  He’s a people person who cares about others.

This week’s quote by Maya Angelou is in the sweet spot for charities, fundraisers and those helping donors make the right decisions. Realizing that asking for donations is one of the most difficult things that anyone can do, since it’s intimidating, non-linear, it depends on the prospective donor and those around them and it involves knowledge, skill, support and tools that help you achieve you and your donors goals.

This holds true in asking for donations. Whether you’re a fundraiser, a volunteer assisting in the raising of funds for your organization or an advisor in the area of investments, tax or law. The opportunity to learn, build skills, knowledge, techniques in presenting and asking the right questions and creating a comfort level isn’t something that comes naturally – but is learned by trial, error, failure and success.

Imagine illustrating the impact of a donation to a particular donor, you should see the benefit that it will give the organization along with its mission. Also, the benefit that the donor will receive from a tax efficient donation from appreciated assets or their estate.

Let’s look at the beauty of a program aimed at increasing art programs for underprivileged kids and the need to fund the space and some of the materials. Your donor has recently told you how she benefited from such a program when she was younger, that is why she has been a regular annual donor. She then follows up with “I wish I could do more, but…”

Educating charities and those individuals involved with them by suggesting, “what if there was a way you could do more, would you like to hear about that?” Getting the opportunity to inform the donor about their giving options can be easily learned and transmitted. This approach may actually identify when the donor might actually and truly be interested in learning. This also is a gentle approach that does not make the fundraiser come across as aggressive but simply serving in the role of an informed industry staff or volunteer.

Your donor is thinking about donating $100,000 to your arts fund. She is looking to write a cheque to your organization. She will receive the tax credit for her donation. Suggesting to your donor a donation of appreciated assets such as stock, your donor will not only receive the tax credit or tax deduction but additionally avoid the capital gains tax on their investment.

Let me demonstrate how this can be illustrated:

See the impact of your donation with GIFTABULATOR.

#1 Secret To Asset Based Giving

When fundraisers ask for “cash” they are selling their organization short.

Sure talking to donors can be intimidating. Fundraising, financial advisors and donors deserve the tools to help understand complex the benefits associated with making a tax efficient donation to their charities.

With the complex terms, complex calculations no wonder many (fundraisers) turn away from the field to go down the easier path that they are familiar with asking for cash.

This aversion to discussing planned and major giving results in an enormous loss of opportunities for the donor, the fundraiser and the advisors.

When fundraisers and advisors are able to understand the core capabilities of planned giving, they are able to provide dramatically increased value to their donors and organization. That starts with mastering the vast complexity possible in major and planned giving.

A major gift donation is a win for all those involved, lowering taxes for the donor while contributing to a greater good helps a charity get closer to their funding goals. Major planned giving makes these bigger gifts more doable and affordable.

Lowering taxes can be somewhat complicated. Most of the complexity comes from the tax laws, nationally and provincially. Determining the best way to lower taxes depends on which the donor is planning on lowering. Planning can lower capital gains taxes, income taxes and estate taxable capital gains, where the techniques differ depending on which asset is in play.

Planned giving and major gifts has a significant impact on charities. Getting the donor to write a cheque is clean and quick when you have the donor in mind as well as the charity and cause. Beyond sending a gift receipt, it requires no knowledge of taxes, investments, finance or law. Major and planned gifts will be your number one secret and your “easy” button for fundraisers and donors. When fundraisers ask for cash they are asking from the small bucket, look at the big bucket.

The largest assets such as real estate or tangible assets are not easy to write and cheque from, they are less accessible.  These may come from the fact that there is difficulty in selling all or part of the asset from legal or tax consequences associated with the asset. If you follow this path, you may achieve a larger donation and a happier donor.   

Giftabulator was developed with the donor in mind.  Increase individual giving and lower taxes.  The stock market over the past year has nearly doubled, assets have grown in value and the opportunity for charities to discuss tax efficient giving strategies now or in the future is at the fingertips of donors, charities and advisors.

See the impact of your donation with GIFTABULATOR

Over the years I have had the privilege of being interviewed by and presented with Patricia Lovett-Reid discussing the importance of estate and philanthropic planning to her audience and to many organizations, their supporters and members. It was a platform where we heard many interesting and challenging questions regarding estate and incorporating charitable giving. These sessions provided many answers to a myriad of issues, concerns around the importance of financial planning, how lawyers, accountants, and financial advisors needs to be engaged with their clients.

This past week, Patricia commented on LinkedIn a topic that we had not discussed in any of our encounters, that being, winning the lottery! What a great topic for new found wealth, that these lucky winners find themselves in and this especially relates to another lottery style windfall, inheritance. Just as if, your six or seven numbers were to come up, sometimes the same is true for an inheritance.

How much might one want to give to charity from the windfall? There are several options in looking at how one might become a philanthropist and have fun doing it. The $70M LottoMax is tax free but with the right investment strategy, however the growth after the first year is taxable. With your advisors, look at how much you can give away from your taxable capital gain to not only benefit a charity but yourself too.

The role that professional advisors play in helping these newly minted millionaires is invaluable. Let me show you a way we illustrate the tax calculation on a $70M lottery windfall. Assume that your $70M is invested and generates 6% ROI. The growth in year one will be a taxable capital gain of $4.2M. The tax on that $4.2M would be approximately $722,655. Now with a donation of $1.5M almost all of the tax is eliminated.

Now, assume your $70M windfall is invested at 6% you can have an impact of $2.45M in the second year. Every year afterwards your $70M will continue to grow even after you disburse 3.5% of your principal amount of $70M. 

The illustration on GIFTABULATOR will not only show your $70M principal growth over time but will also illustrate the impact you can have with your philanthropy now and into the future. 

We have developed GIFTABULATOR to calculate how much one can give to reduce their taxable capital gains. Don’t sell your taxable capital gain shares but work with your investment advisor and accountant and calculate how many shares your should gift to charity not to trigger the tax. This would be a real win-win-win for the donor, the charity and the advisor who helped make this a reality.

See the impact of your donation with GIFTABULATOR