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

Agenda  Overview of charitable gifting rules  Split receipting rules  Excess corporate holdings regime  Planning opportunities  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  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  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  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  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  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  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  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  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 Private Foundation (Holdings of Share Class) Non-Arm’s Length Person (Holdings of Share Class) Action Required by A Foundation Safe Harbour2% or LessAny PercentageNone 5%10%Reporting required Monitoring Phase 10% 20%0%Reduce holdings to 20% Divestment Phase 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  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)  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  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?  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  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? 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  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 W Co. $3 Million FMV +Capital Gain RDTOH $1 Million

Example #2  Potential donation on death - $500,000  No post mortem capital loss planning  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 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 , and ) – 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  If charity is a capital beneficiary under the spousal trust: – No donation (technical interpretations , and ) – 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  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  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 ABC Co. $3 Million FMV + Capital Gain Private Co. RDTOH - $1 Million

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?  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  Funding?  Non-qualifying security rules Mr. X X Co. Freeze Preferred Shares Will -20% X Family Trust Participating Shares

Donation of Private Company Shares  Post-mortem planning  Deemed dividend-paid to charity  Donation receipt/credit in Mr. X’s final return  Post-mortem planning  Deemed dividend-paid to charity  Donation receipt/credit in Mr. X’s final return Mr. X X Family Trust Freeze Preferred Shares Participating Shares Will -20% of shares X Co.

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  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 – 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)  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  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  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  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 – 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  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

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

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

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

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  Funding the gift with life insurance  CDA credit for X Co.  Funding the repurchase of shares  Gifting shareholder loans Mr. X X Co. X Family Trust Freeze Preferred Shares Participating Shares Will -20% or equivalent substituted value

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 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 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  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?