Philanthropy rounds out planning

Philanthropic activity in Canada was in top gear in December 2010.

As the season for charitable giving was drawing to an end, Canadians looked for ways to keep the tax man’s hand out of their pocket. And charitable giving was, and remains to be, an effective tax-reduction strategy.

Giving is prevalent when Canadians feel confident about the economy. During these times, they’re wiling to open their wallets and share the wealth, says Jo-Anne Ryan, vice-president, philanthropic advisory services, TD Waterhouse.

“We are seeing gifts of appreciated securities, which certainly provide a lot of benefits when it comes to charitable giving,” says Ryan. She advises investors to give securities with appreciated gains rather than selling the stock and donating cash so as to avoid half of their capital gains being taxed as income.

Those reluctant to donate securities that are expected to continue to grow in value can still have it both ways. “They can donate it, get the tax receipt for the market value, eliminate capital gains and then buy it back immediately to still participate in any upside potential.”

Planning plays a key role in philanthropic giving. However, there seems to be a considerable lack of strategic planning around philanthropy in Canada. Ryan wants to change that. She encourages people to develop a philanthropic plan much the same way they create an estate plan or a financial investment plan.

“A philanthropic plan is done to donate in a way that reflects your values as opposed to just ending up with a pile of tax receipts at the end of the year that represent a mishmash of different causes, but not necessarily values that are important to you.”

One of the biggest trends in charitable giving nowadays is donor advised funds, a simple alternative to establishing a private foundation. The time consuming process of establishing a private foundation also requires the donor to have $1 million or more. By contrast, opening a mini sub-foundation account in a public foundation structure takes minimal paperwork and only requires $10,000 to open.

“When you donate to it, you are building a legacy of giving where the earnings would be paid out to a charity of your choice and you have the flexibility to change those charities from one year to the next.”

This flexibility is particularly beneficial to donors who want to donate now and decide on a recipient later. Ryan says even those who may still be undecided on the charity they want to support can enjoy tax advantages of charitable giving. Donor advised funds provide the flexibility to give now and get the tax savings now, while appointing charitable beneficiaries later. “You can put the amount of your choice into the donor advised fund before the end of the year, but you don’t have to decide until later which charities you want to allocate the fund to.”

Done with the right spirit, right intent and right approach charitable giving is a great investment strategy that is a win-win for donors and charities. Unfortunately, there are “donors” who are abusing this otherwise legitimate avenue to earn tax credit.

The Canada Revenue Agency (CRA) is going after questionable tax shelter programmes that allow people to claim spurious charitable donations. Such schemes typically give the donor a tax receipt far in excess of the cash value of their donation, which allows them to claim a tax refund larger than the actual donation.

Ryan cautions legitimate, well-intentioned donors to be suspicious of programmes that offer tax savings disproportionate to donations. “If you are presented with something where you’re actually going to end up with more money in your pocket as a result of making a charitable donation (and) if it sounds too good to be true, it is.

“There are terrific tax benefits to charitable giving and it’s a great way to reallocate tax savings money to causes you care about, but at the end of the day you will still be out of pocket a little bit.”

As for financial advisors, Ryan said they should make the effort to increase their knowledge in the area of charitable giving as an investment strategy because it is important to their clients. They can make a real contribution by helping their clients help charities and save more tax dollars at the same time.