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A charitable donation is defined as the gift of property without any expectation of benefit accruing to the transferor. The transferee has to be a registered charity, a public foundation or private foundation in order for a charitable donation receipt to be issued.
Where is the Best Spot to Make a Donation?
Should a charitable donation be made by the corporation or by the individual? Invariably the answer is that in the majority of cases it is more tax effective to donate the funds as an individual than it is to make a donation through a corporation – even this involves taking the charitable funds out of the corporation. Donations by individuals in excess of $200.00 in a year generate a tax credit by multiplying the donated amount by rates which approximate the top marginal tax rate in that province, even if the individual is not subject to tax at this high rate. Since 2013, first time donors who are individuals are also entitled to a supplemental first time donor credit on donations of up to $1,000. Even without the supplemental first time credit, the tax credits given to individual donors for charitable donations over $200 provide significant tax relief in the year of a gift.
In contrast, donations at the corporate level are deductible from taxable income rather than generating a tax credit. Corporate donations therefore generate tax savings at the marginal tax rate for the corporation. By comparing the tax credit treatment for individuals versus the tax deduction treatment for corporations, the tax credit is more tax effective particularly for individuals who are not already subject to tax at the top marginal rates, (taxable income above $200,000 in most provinces)
It’s also important to note that when it comes to an individual making a significant donation, there is an annual limit as to how much one can donate and still avail themselves of tax relief. Under the
Income Tax Act a donor, whether they be corporate or individual can only donate up to 75 per cent of their net income in a year. It is also worth noting that charitable donation tax credit generated is not a refundable tax credit, this means the credit only has benefit if tax is otherwise payable. If an individual does not have enough “tax payable” to be offset by the donation credit in the year of donation, no refund of the excess credit is allowed. All is not lost and the donation is not wasted in this situation, unused donation tax credits arising from donations in a year can be carried forward for up to five years and applied against taxes in those future years.
A high degree of planning is necessary for what would be considered legacy donations (anything over the amount of $100,000) in regards to the donors income in the years in which the donation is made and what strategies are implemented to provide some assurance that the donation credit generated will be utilized.
To encourage gifts to the charitable sector, the government has instituted several rules to encourage the donation of publicly listed securities, a donor can make a donation of publically traded securities (ie: Stocks, Bonds, Mutual Fund Units, Government Bonds) to a registered charity, public or private foundation. Special rules apply to donations of publicly traded securities, one if which is that any accrued capital gains realized on the deemed disposition of those securities as a result of the donation are not included in income. More importantly, the donor is still entitled to a donation credit for the fair market value of the shares being donated. From a tax perspective, it is significantly more advantageous to donate “in kind” publicly traded shares with large accrued capital gains which you were planning to sell in any event, than it is to donate the equivalent in cash which you had sitting in the bank.
While donation, “in kind” of public corporation shares includes tax relief on the capital gain realized on the disposition, similar treatment does not exist to mitigate the capital gains tax where the shares donated are shares of a family corporation (private company). A proposed tax exemption for capital gains realized on the disposition of private corporation shares if cash proceeds were donated within 30 days was cancelled in the 2016 Federal Budget. While there is no capital gains relief available on the donation of private corporation’s shares there are still numerous opportunities for private corporation shares to be donated and for charitable donation tax credits to be generated. It is worth considering some of these planning options if charitable objectives are a key a component in business succession planning.
A donation of shares of a family owned enterprise can either be considered donations of “non-qualified securities” or “excepted gifts.” Transfer of family corporation shares to a private foundation would in most cases be considered a gift of a “non-qualified” security. Normally for gifts to a private foundation related to the donor, no donation receipt would be issued unless the foundation sold the gifted shares within five years of receipt. A private foundation is typically a corporation established where all funds received are designed specifically to be used for charitable donations. To qualify for charitable status, it’s crucial to ensure none of the income from the foundation is used for the personal benefit of the donor, proprietor, shareholder, trustees or directors. There are several ways to mitigate the tax which would arise on the disposition of the family corporation shares gifted to a private foundation, one of which is a special election which allows the donor to elect at any value between the tax cost and fair market value of the private corporation shares. The elected amount for the shares would then be treated as the proceeds of disposition of the property and the amount of the charitable donation receipt received. Using this provision and electing at the tax cost of the shares in making the donation would eliminate tax on the disposition of the shares which could achieve a key component of the estate plan. The potential downside to this specific election is that there would be no charitable donation tax credit arising from the gift of the family corporation shares.
It’s important to note that one of the overarching rules associated with a private foundation is that any funds or property donated can never be returned to the family and only be used to make donations or make investments to generate income which will then be used for future charitable giving.
Alternatively, the donation of family corporation shares to a public foundation or charitable organization can be considered to be an “excepted gift”, in which case the donation will be recognized when the shares are transferred. As an example of an excepted gift, if shares of a family corporation are gifted to a public foundation, the shares will be considered disposed of as of the date of the gift. This will require valuation to determine the capital gain realized on the gift and the amount of the charitable donation which arises from the gift.
The above is only a brief summary of some of the options which are available in combining philanthropic objectives with family business succession and estate planning. The key message for planning in this area is for the planners to be clear on what is to be achieved. Planning can be done which maximizes the charitable donation tax credit from making a large donation. Similarly planning can be done where no charitable donation tax credit is received but the result of the plan mitigates significant capital gains tax which would otherwise be payable on the disposition of private corporation shares. Regardless of the donor’s goals, there are numerous options available within the
Income Tax Act to creating a lasting legacy investment pool from which charitable donations can be made currently and into the future.
Business is multi-dimensional and so is an effective succession plan. To serve you best, your succession plan needs lay the foundation for maximizing the value of your business and personal wealth in both the short- and long-term, you with a clear path for the future. MNP’s Tax and Succession Services teams will work collaboratively with you to develop a customized plan that is best for you, your business and your family.
For more information, contact Graham Heron, FCPA, FCA at 403.346.8878 or
The nuances of philanthropic giving, tax efficiency and positioning your business, family and legacy can be quite complex. But with complexity – comes opportunity. In our second article on the topic, MNP’s Graham Heron discusses how to approach charitable giving in relation to testamentary wishes.
Related Topics:Succession Series; ExitSMART™
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