The holiday season is a time when Canadians turn their attention to giving back. That’s particularly the case this year as the COVID-19 pandemic has left many in need of financial support.
In fact, financial advisors say they’ve been having more discussions with clients about charitable giving in recent weeks, and that the topic is becoming a larger part of financial and estate planning, in general.
“Philanthropy is becoming more and more important as an overall goal when you talk about planning, especially for high-net-worth Canadians,” says Glen Brown, managing director and head of Manulife Private Wealth in Toronto. “And this time of year is when people give a lot of thought to giving. I think we are going to see more of a focus on this issue because of COVID-19.”
Tannis Dawson, vice-president of high-net-worth and business succession planning at TD Wealth Advisory Services in Winnipeg, says she’s hearing from more clients who are either looking to give more or to give back in different ways this year.
“With many stores not open [due to the pandemic] and people not getting together, more people are giving donations in a person’s name in lieu of gifts,” she says.
Regardless of how or how much you give, there are ways to give back that not only make you feel good but can also be tax efficient. Here are some of the options for investors to consider:
Many investors choose to donate investments such as stocks or investment funds directly to charities as a way to give back and avoid paying capital gains taxes.
“Capital gains aren’t taxable if the securities are donated to a charity in-kind,” Ms. Dawson says.
She uses the example of an investor who buys shares of a company for $8,000 and donates them when the value reaches $10,000. The investor will receive a donation tax credit for $10,000 and will not pay taxes on the capital gain of $2,000. Also, if the charity sells the stock, it will receive the $10,000 tax-free.
Business owners can make the same transaction through their corporations, Ms. Dawson says. The difference is that the $10,000 donation will be a straight deduction from the business’s expenses. Similar to the personal donation, the $2,000 gain on the investment isn’t taxed.
She adds that the corporation can only deduct a donation of up to 75 per cent of its income for the year during which it’s made. Any amount above that can be carried forward for use in future years.
Employees can also donate stock options to a charity, which are taxed and can be substantial depending on the size of the options. The key point is that they have to make the donation within 30 days of the date at which they exercise the options and in the same calendar year, Ms. Dawson says.
“If you were going to make a charitable donation, anyway, it makes sense to do it that way to reduce the taxes,” she says.
Create a foundation or donor-advised fund
Many high-net-worth families choose to set up a foundation to distribute their wealth to charities. The two main types are a private foundation and a donor-advised fund. With a private foundation, the donor can distribute grants to charities and is responsible for all of the administration. Meanwhile, with a donor-advised fund, a public foundation handles the administration and distributes the funds based on the donor’s wishes.
The advantage of both options is that the donor receives the tax deduction immediately while distributing the funds over a longer period of time, says Kevin Burkett, portfolio manager at Burkett Asset Management Ltd. in Victoria.
Mr. Burkett, who also operates the accounting firm Burkett & Co. Chartered Professional Accountants through which he advises clients on options to create a long-term legacy with their funds, often collaborates with the Victoria Foundation, a community foundation in British Columbia that can serve this purpose.
He says more investors are choosing donor-advised funds, leaving the administration to someone else while keeping the more fulfilling job of choosing which charities to support.
“Donor-advised funds can be a very efficient means of establishing an ongoing funding stream [for charities] without placing yourself under the administrative burden of registering and maintaining charitable status,” Mr. Burkett says. “It’s a great way to avoid becoming mired in complexity.”
Donate through insurance
A growing number of investors are also using life insurance policies as a way to donate to charities, which usually enables them to make a larger gift.
Ms. Dawson says the most common ways to donate include assigning a charity as a beneficiary in a will, which means the estate gets the tax credit, or changing the policy beneficiary to a charity and receiving the tax credit while alive.
In the latter example, the donor would receive a tax credit for the fair market value of the policy at the time of transfer, as well as any annual premiums paid.
“When you pass away, the policy goes to the charity, which ends up with more money,” Ms. Dawson says.
It’s also possible for charities to take on the premiums, but Ms. Dawson says the organization should be contacted first to ensure it’s on board with this option.
How advisors can help
People interested in making larger financial donations should speak with their advisor to ensure both they and the charity are getting the most out of the gift, Mr. Burkett says.
“Co-ordinating with different advisors can also bring a lot of benefits,” he says.
For example, Mr. Burkett says advisors at his firm work with accounting professionals to set up donations using securities or to establish a donor-advised fund.
Philanthropy is a growing area for advisors and a part of the wealth management process that Mr. Burkett says his team – and many of his clients – enjoy the most.
“We love these sorts of questions. They give us an opportunity to lean into both sides of the business, bring them together and sync up the advice to the end client,” he says.
“Clients are also expecting more from their investments … and many are driven by a wider purpose other than investment returns.”
Mr. Brown says advisors should be including philanthropy in their wealth planning strategies with clients.
“If you’re providing holistic planning, this is one of the areas you need to focus on,” he says. “Philanthropy is an excellent way to ensure you’re on the pulse of the family as an advisor.”