Tax developments for philanthropists

Anne Brayley, vice president, professional advisory services at the Toronto Community Foundation, speaks with Heather Evans, managing partner, tax at Deloitte & Touche, about how the current tax environment influences trends in philanthropy.

Brayley: What trends are emerging around corporate philanthropy?

Evans: In the past, a corporation’s philanthropy typically took the form of financial commitments to causes that were aligned with their business objectives. Employee engagement was sometimes involved, but often it was volunteers participating in fundraising initiatives. Today corporations want to look beyond financial support only. There is a real desire to leverage the skills and business expertise of their employees to offer hands-on help that will benefit charities.

For example, I recently worked with a client who does infrastructure work. For a number of the unfortunate natural disasters that have struck in the past few years, the company has stepped in and offered the talent of the organization to contribute to rebuilding. This is work they had always done and they are now looking for ways to have that recognized as charitable activity, possibly by creating a not-for-profit entity.

Brayley: How does a company’s philanthropy impact employee satisfaction?

Evans: It’s a competitive environment for attracting top young talent to an organization. That generation is looking to a company’s corporate social responsibility platform to help them decide if it will be a good place to work. Younger employees expect the company to be involved in the community. There is also a great awareness about how companies view their environmental responsibilities. So if a company is both philanthropic and green, it’s a win-win choice for the employee.

Brayley: How has the current tax environment affected HNW clients’ philanthropy?

Evans: Some of the changes around anti-avoidance rules have made it more difficult for entrepreneurs to incorporate philanthropy into their plans for the business. For example, the non-qualifying securities rules that govern gifting of private company shares to a charity narrow the scope of charitable donation options. The proposed changes to the donation of flow-through shares will also remove one more vehicle for tax-efficient charitable gifts.

Brayley: What tax changes have positively impacted philanthropy?

Evans: There was a CRA requirement for charities to disburse 80% of their charitable donations within 24 months unless they were held in an endowment. With the elimination of this requirement last year, charities have more flexibility with the gifts they receive. This can make a big difference, especially for smaller charities. [Yet] those who are thinking about creating a lasting legacy will continue to do so.

Brayley: Has the current investment environment had a negative impact on endowment thinking?

Evans: Perhaps some of the publicity around large losses by some prominent foundations has clouded the picture for the short term. But most people who have built enough wealth to consider creating their own endowment understand the long-term horizon that will allow a foundation to weather the ups and downs of the market.

There seems to be a clear trend in estate planning for high-net-worth individuals with children. Instead of planning for charities to get a certain amount first, and children getting the rest, it’s become the opposite. Parents who have accumulated significant wealth sometimes worry about leaving too much to the children, so they are allocating a defined amount to the family first, and then distributing the rest to their charitable causes.

Brayley: Any other tips for advisors who are discussing philanthropy with their clients?

Evans: Encouraging clients to think about accelerating some of their giving in their lifetime can be beneficial from a tax planning perspective. Too often, leaving large bequests in an estate may create donation tax credits that will exceed the income they can offset on their final tax return.