Tax breaks a boon for charitable funds

December has historically been a peak month for charitable donations. But new laws that allow investors to donate securities without paying any tax on the capital gains have led to an unprecedented spirit of giving in the industry, as well as one of the biggest opportunities in years for advisors to bring a new dynamic to their client relationships.

This growing trend of giving and the amount of money it generates has not been lost on the investment community, which has been responding in kind with charitable gift products for some time. With the federal government’s announcement in May that the capital gains on donated securities will no longer be taxed, the demand for clients seeking advisors who can maximize their charitable donations is unprecedented, particularly now that the season of giving is in full swing.

“The government’s changes are arguably one of the most positive tax incentives in the history of Canadian philanthropy. Canadians have embraced this new tax rule and charities are the winners,” said Brad Offman, assistant vice-president, strategic philanthropy for Mackenzie Investments. “There is a really profound understanding by advisors that they need to be incorporating charitable giving for their clients.”

In July, shortly after the government’s announcement, Mackenzie responded to this demand by establishing the Mackenzie Charitable Giving Fund. RBC Dominion Securities had already established a similar fund in May; Investors Group has followed suit with its own fund established in September; and just last week, Scotia Private Client Group launched its own public charity.

While the donation of securities in general is on the rise, donor-advised charitable funds are a unique and increasingly popular option for ethically minded investors looking to give a substantial donation without having to go through the expensive process of establishing their own private charity.

For example, with the Mackenzie fund, donors may donate any publicly listed security to start up their own funds. That security is then liquidated and the proceeds are invested in eligible mutual funds that are then managed by the Strategic Charitable Gift Foundation (SCGA), a CRA-approved charity. The SCGA grows the investment and grants money to other CRA-approved charities of the donor’s choice.

Tony Maiorino, vice-president of RBC Dominion Securities, said that interest in its fund has been “explosive.” Maiorino points out that legacy building is a big selling point because these funds allow donors to name the fund and pass it on to successors so it is multi-generational.

“We’re already seeing dramatic increases in charitable donations. As the population ages and looks at their expendable income and what will be their legacy, this type of program will become more important to them — to support causes they care deeply about,” Maiorino said.

Offman has seen similar results with Mackenzie’s fund. “From coast to coast the response has been overwhelming,” he said. “There has been a firm pent-up demand for this type of program. We won’t have official figures until the end of the year, but we’re well into the millions of dollars in terms of the size of our program.”

The growth in security donations doesn’t surprise Frank DiPietro, senior tax specialist at AIC’s tax and estate planning group. DiPietro outlines that it’s not the tax benefits for investors that is driving growth, since the financial rewards to donating securities is essentially limited to a 46% tax credit on the initial donation. Rather, it’s that investors are no longer penalized for donating. In his experience, most investors donate out of a sense of self-fulfillment.

The interest in helping others has always been there, but the appeal of giving has increased now that clients can donate their capital gains without incurring any tax consequences.

DiPietro expects growing interest in the donor-advised funds, such as charitable giving funds, because investors have a variety of investment options and get more say in how their donations are used. “A donor-advised fund gives you more flexibility in how the investor can donate,” he said. He also adds that these funds can be attractive to advisors who get to keep the money donated on their books of assets.

According to Offman, allowing advisors to keep the investments on their books is a small incentive. He believes that helping the client build a legacy will ultimately be the big payoff for advisors, as it adds a new dynamic that will ultimately strengthen the advisor/client relationship. “It’s fair to say that by having a conversation with your clients about passions and life goals, you’re getting to know them better, and I think that’s ultimately the advisor’s life goal.”

Maiorino stresses that whatever the benefits for the client or his or her advisor, charities across Canada are going to come out on top. “This is just going to become a bigger space for investment as people get older and want to leave that lasting legacy,” he said. “I very much believe that philanthropy will be the big winner from all these solutions coming online. The money donated has to find its way to a charity.”

Advisors helping their clients donate securities should remember that in order to include the donation for a 2006 tax rebate, the donation has to be received by December 31.

Mark Noble is a Toronto-based freelance writer

(12/06/06)