Charitable Giving Through Private & Public Foundations
Certainly the booming economy of the past decades has created tremendous wealth in Canada. Unfortunately, this wealth has not been evenly spread over the population, as indeed it seems that the rich are getting richer, and the poor poorer. Governments in Canada certainly do a lot to fill the gap - but generally, it doesn’t appear to be enough to bridge this widening gap.
Canadians are, however, generous people. And fortunately, there are plenty of wealthy people with philanthropic intent who are determined to make very significant gifts to the charity or charities of their choice - and the income tax rules have been adjusted in recent years so as, basically, not to get “in the way”. Tax credits for charitable donations are now set at the maximum income tax bracket, regardless of the donor’s income level. Further, the limit is 75% of the donor’s net income for tax purposes. This gives tremendous scope for donors to donate, for example, a very large portion of their annual income to charity - with the added benefit that the donation amount can, practically, be the pre-tax, and not the after-tax portion of that income.
For example, a person earning $300,000 per year might choose to make a one-time $100,000 gift. The income tax credits that such a gift would generate would ensure that the $100,000 would not, effectively, suffer any tax, so the charity of choice receives, in essence, the donor’s pre-tax income. The donor might consider this a sort of “self-directed” way to have funds that would otherwise have gone into the general tax revenue fund of the Government to instead be directed to the charitable destination of their choosing.
It is, however, rare for persons to have such large annual income that substantial gifts can come from that. In most cases, gifts of substance come from capital, and that capital is realized only rarely (for example, when real estate or a business or stock portfolio is sold). Years of hard work often turn into substantial values inherent in these assets - often many times higher than the retirement needs of their owners.
It is these occasional realization events which create philanthropic opportunities. However, a donor may not have made a final decision as to where the funds should go - but how to deal with the fact that a current tax liability will need to be dealt with now?
Consider an example: a taxable capital gain of $1 million is generated on the sale of a business (a modest sum, in today’s context). If we presume the donor is a person with already high income, the tax which such a gain might generate could be $222,000 (B.C. rates, 2005). Further assume that the owner wishes to donate a sum of $500,000, but is uncertain about the ultimate beneficiary.
A solution in this case might be to make a gift to a private foundation. With such a vehicle, a $500,000 gift would generate immediate donation credits of $218,500 (43.7% maximum B.C. tax rate x amount of the gift), which is approximately enough to cover the entire tax on the full $1 million gain.
The private foundation would invest the capital sum for a period of 10 years, at least (that is one of the requirements for the establishment of a private foundation). However, gifts can be made from the annual income generated by the fund, and of course at the end of the period or some later time, the entire capital sum can be expended on the charity or charities selected.
Private Foundations have generally been the private privilege of the wealthy, partly because of the relatively high set-up cost. However, we are now aware of at least one financial institution (TD Bank) which has set up a structure which is able to accept these type of gifts, without up-front fees (of course, the bank will earn fees from the management of the invested funds over the term of the arrangement). Such funds have become a significant feature of the U.S. estate planning landscape, so it is a safe bet that more financial institutions are likely to follow suit.
Potential donors do need to realize that all donations made become the property of the Private Giving Foundation and cannot be returned under any circumstances. The Foundation is governed by an independent Board of directors who have sole discretion with regard to all decisions pertaining to the use of the funds, including grants distributed to charities. However, you can recommend which charities are to receive grants upon setting up of such an account, and we are assured that any charity properly registered with the Canada Revenue Agency ought to be acceptable to the Board, and so the would honor the wish. You can, of course, also change your wish as to ultimate beneficiary.
The basic message is this: private foundation funding of charitable gifts is not necessarily out of reach, and thus forms one more tool to assist wealthy retirees with their estate planning.