Image courtesy of Robert Couse-Baker Flickr
When I was a kid, the arrival of fall was always a big deal. I used to look forward to the return to school and, most importantly, the return of the fall TV schedule. Growing up in the late 70s and early 1980s, I looked forward to back-to-back syndicated episodes of Gilligan’s Island and I love Lucy that started right at 4 pm as I got home.
Today, I continue to look forward to the return of fall and the start of school for a different reason – my three kids, and my wife Bridget (who is a kindergarten teacher) are all getting ready to return to school, so I will get the house to myself, which will make for a much quieter work-from-home scenario. Depending on who you ask, I’ve come to resemble either the Skipper or the Professor trying to work while my much-loved family is all on vacation mode!
Speaking of work, as we move into fall, many of our clients begin their year-end charitable planning, and it’s our job to help them ensure that the outcome looks like neither a zany sitcom nor tense drama. I’m pleased to say, after the large run-up in the investment markets, I’m seeing a record number of inquiries into my favourite type of charitable gift — a gift of publicly listed securities with capital gains. This is one of, if not the most, tax-effective charitable gifts you can make in Canada The best time to do it is over the next few months, as this type of donation takes much longer than a “regular” cash donation. If you want a tax receipt for this year, you want to get the ball rolling well in advance of December.
I’d like to share with you the story of three such gifts I’ve seen in the last few weeks. I’ve changed their names (please pardon my sitcom theme!) and some scenario details to protect confidentiality, but each story is based on real-life gifts currently in process. We’ve been proud to have been a helping hand in each of these great stories.
Lucy, who wants to rebalance her investment portfolio
Lucy’s non-registered portfolio has done very well in the last year and over the summer, when reviewing her holdings, she’s found herself with some very significant capital gains. Because the equity portion of her portfolio has done so well, she should be rebalancing her portfolio and diversifying those gains into some of her other holdings. Unfortunately, in order to do so, she’ll trigger some taxable capital gains. The timing isn’t good for her as her income is already quite high this year.
Fortunately, Lucy regularly donates to a number of charities close to her heart. We’ve worked out that instead of donating cash this year, Lucy can donate some of her investments in-kind to the charities instead. Lucy will get a tax receipt for the fair market value of her investments on the date of transfer and also gets 100% of the capital gains tax on the amount she donates waived as well.
The combination of tax credits will allow her to sell enough of her other investments to properly rebalance her portfolio. In her words, it’s like “donating her gains for free” and she was delighted to know she can support her favourite charity (trust me, they love Lucy!) and enjoy a double tax savings by using her investments instead of cash.
Rickesh, who’s winding up his company
Our friend Rickesh is a retired business owner and has been working with us for a few months. After a lot of back-and-forth doing planning work with his accountant, we are all in agreement that the time is right for him to wind up his holding company. Rickesh holds many of his investments within his holding company, but tax-wise, it now makes sense for him to hold them personally and not inside the corporation.
Like Lucy, Rickesh’s corporation will benefit from the donation (in the case of a company, a donation reduces corporate income for the year) and capital gains waiver if he donates some of those investments in-kind. However, Rickesh will benefit from one extra step – if you donate securities in-kind from a private Canadian-controlled corporation, 100% of the capital gain on the donated securities can then be taken out tax-free to the shareholders through what is known as the capital dividend account or CDA. His accountant will work with him to declare a special tax-free capital dividend, which will help remove funds from the corporation into his own personal holdings.
In Rickesh’s case, a donation from his company is a win for the company, and a win for him personally through the tax-free dividend that results. Finally, the third winner is the charity – who benefits from his gift. Win-win-win scenarios are really hard to come by!
Ethel, who’s paying for her existing life insurance gift.
Finally, meet the incredibly generous Ethel, who has previously donated the ownership of a life insurance policy to her favourite nature charity. Premiums are due each year on the policy, and in the past, Ethel simply paid the premiums to the insurance company and the charity then issued her a donation receipt at the end of the year.
Ethel’s husband Fred, however, has a number of non-registered securities that, like Lucy’s, have gained in value. So, going forward, I’ve advised Ethel that the best planning option for her is to have Fred donate enough securities each year in-kind from his non-registered investment account to cover the annual premium. Ethel and Fred then get the benefit of the tax receipt – which she would have gotten anyway, but now Fred also benefits from the extra tax waiver on the capital gains. In return, the charity pays for the insurance directly. (This all works, since spouses can use each other’s tax charitable tax receipts in whichever way makes the most sense each year when completing their tax returns.)
In-kind gifts aren’t a three-hour tour
One of the reasons fall is so important for in-kind gifts is that it can take several weeks for this type of gift to get processed. If you think you want to make a gift of publicly listed securities, you need to make sure you get the ball rolling with your investment advisor and the charity well before December hits. Ever since the virus-which-shall-not-be-named came along, I’ve noticed that most financial institution appear to be slower at this kind of transfer than in the past. If you wait too long and don’t start the process of an in-kind transfer until December, there’s a good chance your gift might get stuck on a remote island waiting to be processed.
Have a generous and tax-advantaged fall
As we’ve seen from Lucy, Rickesh and Ethel, almost everyone with non-registered investments can benefit from some creative thinking around using publicly listed securities as gifts. The types of investments that can be given is fairly broad. You can find a full list at the Government of Canada website. Be sure to get qualified advice for your situation, however, as some types of gifts may be trickier than others – segregated funds, an insurance investment product, for example, often require the donation of the entire account as a whole, rather than just donating some of the units. As always experienced tax and investment advisors are worth their weight in gold.
After all, you’d hate to get caught in a funny situation that would land you on TV, right?
The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.