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You Can Donate That?! Non-Traditional Gifts That Can Make a Big

Difference

Natasha Smith

Nicole D’Aoust November 21, 2017

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Natasha Smith • Associate,

Social Impact Group (Toronto)

• Provide advice to charities and non-profits on corporate governance and tax compliance

• Assist in transactional proceedings and re-structurings

• Expertise in social enterprise and social finance

• Co-editor, Social Impact Newsletter

• nsmith@millerthomson.com

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Nicole D’Aoust • Associate,

Social Impact Group (Toronto)

• Advises charities, not-for-profits, and social enterprises on a broad range of topics

• CPA-Canada In-Depth Tax

• Co-editor, Social Impact Newsletter

• Chair, Toronto Symphony Orchestra Impresarios Club

• ndaoust@millerthomson.com

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What are “traditional gifts”?

• Cash

• Single donations

• Monthly donations

• Specific monetary bequests

• Bequests of residue

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• Gifts-in-kind • RRSPs, RRIFs and TFSAs

• Life Insurance

• Cultural Property

• Ecological Property

• Public Company Shares

• Private Company Shares

• Flow-Through Shares

• Stock Options

• Services*

*Services can not be gifted directly

What are “non-traditional gifts”?

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• Assist you in generating revenue or other assets of value for your organization

• Help you to tailor your ask to individual donors and their circumstances

• Help you to assist individual donors in making a donation that is right for them

Why is this Important?

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Overview of Charitable Receipting Rules

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• A “gift” is a voluntary transfer of property to a charity without consideration

• Receipts must be issued for the “eligible amount” of the gift

• The “eligible amount” is the fair market value of the gift less any “advantage” provided by the charity to the donor

Charitable Receipting Rules

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• Inter-vivos gifts:

• Receipts can be used by individual and corporate donors on up to 75% of their income in a given year (100% in some cases, depending on the type of gift)

• Receipts can be carried forward for 5 years or 10 years, depending on the type of property gifted

• Gifts by estate:

• Receipt can be used on up to 100% of the deceased’s income (in the year of death or the prior year)

• Possible to carry forward receipt for up to 60 months IF estate qualifies as a “graduated rate estate”

Charitable Receipting Rules cont’d…

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RRSPs, RRIFs, and TFSAs

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• RRSPs, RRIFs and TFSAs = Estate (post-mortem) gifts

• Mechanics:

• Donor has investments housed in RRSP, RRIF or

TFSA • Donor designates charity as beneficiary (on plan or in

Will) • On death – donor’s estate receives receipt for full or

partial FMV of the assets of the plan

RRSPs, RRIFs and TFSAs

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• Advantage to the donor: • Donation receipts received are used to minimize tax in the estate • Donor has full access to funds during lifetime

• Advantage to the charity (if designation made in plan):

• Proceeds are paid directly to the charity

• No delay on account of estate litigation • Not subject to probate fees • Not available to most creditors of the estate

RRSPs, RRIFs and TFSAs cont’d...

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Life Insurance

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• 4 Ways to Structure a Gift of Life Insurance:

1. Gift of Paid-up Policy

2. Gift of Death Benefit

3. Donation of Premiums

4. Bequest of Proceeds

Life Insurance

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• Mechanics:

• Donor purchases a life insurance policy and pays the premiums in full

• Donor donates the paid-up policy to the charity outright

• Receipt is provided to the donor for FMV when policy is transferred

• On death – no receipt is issued on the payout of the policy

Gift of Paid-up Policy

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• Advantage to the donor:

• Donor receives an immediate tax benefit during his/her life time

• Advantage to the charity

• No continued administration required (as is the case for other types of gifts of life insurance)

• On death – proceeds flow directly to the charity

Gift of Paid-up Policy cont’d…

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• Key Considerations:

• Need to determine the FMV of the policy in order to issue a proper receipt

• Actuarial valuation will consider:

• cash surrender value

• loan value

• face value

• health of the insured and life expectancy

• other terms of the policy

• replacement value

• Who is going to pay for the valuation?

Gift of Paid-up Policy cont’d…

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Gift of Death Benefit

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• Mechanics:

• Donor designates charity as the beneficiary in the policy and pays the premiums

• On death – donation receipt is issued to the estate when the death benefit is paid to the charity

• Receipt is issued for the FMV of the death benefit, which is deemed to be the value of the death benefit immediately before death

• No receipt(s) are available on the premiums because the individual is the owner of the policy (not the charity)

Gift of Death Benefit

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• Conditions to making a valid gift:

• Donor must be the life insured

• Proceeds must be transferred to the charity as a consequence of death and must be pursuant to the obligation under the policy

• Charity cannot be a policyholder nor an assignee of the policy

Gift of Death Benefit cont’d…

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• Advantage to the donor:

• Donor retains control of the policy during their lifetime and can re-designate if needs/desires change

• Donation receipt can be used to minimize taxes owed in the estate

• Donation can remain anonymous (if designation is made outside of donor’s Will)

Gift of Death Benefit cont’d…

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• Advantage to the charity:

• Insurance proceeds are paid directly to the charity so:

• no delay on account of estate litigation

• the proceeds of the insurance policy are not included in the donor’s estate for probate purposes (not subject to probate fees)

• proceeds are not available to most creditors of the estate (less risk of the gift being minimized)

Gift of Death Benefit cont’d…

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Donation of Premiums

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• Mechanics:

• Donor gifts a life insurance policy to charity

• Donor agrees to make premium payments and retains the investment portion of the policy

• Split donation receipt is issued to the donor for each premium payment(s) that is made (directly or on behalf of charity)

• donor may receive one cumulative receipt for the year or a receipt for each individual payment

• On death – no receipt is issued on the payout of the policy

Donation of Premiums

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• Advantage to the donor:

• Donor receives an immediate tax benefit

• Advantage to the charity:

• Charity gets immediate payout on death

Donation of Premiums cont’d…

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• Key consideration:

• Significant administration to ensure that the premiums are paid and receipts are issued

• What happens if the donor defaults?

Donation of Premiums cont’d…

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Bequest of Insurance Proceeds

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• Mechanics:

• Donor’s estate is named as the beneficiary of the insurance proceeds on death

• Insurance proceeds fall into the estate and the estate then makes a gift of those proceeds to the registered charity/charities listed in the donor’s Will

• Estate is issued a receipt (or receipts) once the estate makes the donation

Bequest of Insurance Proceeds

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• Advantage to the donor:

• Donation receipts are used to minimize tax in the estate

• Advantage to the charity:

• No administration; just wait to receive the gift

• Key consideration:

• Mechanism does NOT maximize the value of the gift

Bequest of Insurance Proceeds cont’d…

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Gifts of Cultural Property

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• What is Cultural Property?

• Objects that are considered be of outstanding significance and national importance to Canada’s cultural heritage

• What is the Tax Benefit in donating Cultural Property?

• Full capital gains exemption

• Receipt can be used to offset 100% of the donor’s taxable income for the year

• Carry forward is 5 years (standard)

Gifts of Cultural Property

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FACILITATING THE GIFT

• For a charity to accept the gift – need to be a designated institution

• charity (not the donor) must apply to the Minister of Canadian Heritage and demonstrate that it is capable of preserving the cultural property for a long time

• For the donor to receive the tax benefit – property needs to be certified

• Charity (not the donor) must apply for tax certification of the property as “cultural property”

• Need to make the case that the property is “cultural property”

• Need one (or two) appraisals

Gifts of Cultural Property cont’d…

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• Key considerations:

• Can you preserve the gift?

• Do you want that responsibility ($$)?

• Who is going to pay for all of this?

• Can you retain the appropriate experts?

Gifts of Cultural Property cont’d…

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• Why bother?

• Mission-related rationales:

• acquiring certain cultural property can help generate revenue by enticing people to visit your organization and pay to view the item(s)

• (museums, art galleries, archives, library)

• may be able to generate revenue by acquiring the property and thereby demonstrating to donors/potential donors your commitment to preserving Canadian artifacts

• (cultural organization)

Gifts of Cultural Property cont’d…

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Gifts of Ecological Property

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• What is Ecological Property?

• Includes ecologically sensitive land and a partial interest in ecologically sensitive land

• Ecologically sensitive land land that has been certified by the Minister of Environment and Climate Change Canada as land that is “ecologically sensitive” and therefore important to conserve and protect as part of Canada’s environmental heritage

• Partial Interest donor continues to own a piece of property, but they provide (via a donation) to the recipient charity, a conservation easement which is registered on title to the land and restricts the potential uses of the land in favour of conservation

Gifts of Ecological Property

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• What is the Tax Benefit in donating Ecological Property?

• Full capital gains exemption

• Receipt can be used to offset 100% of the donor’s taxable income for the year

• 10-year carry forward

Gifts of Ecological Property cont’d…

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• Ways to make an eco-gift:

• Donor gifts the land outright • Donor gifts a partial interest in the land • Donor gifts the land and receives part of the FMV of

the land in the form of a tax receipt and part of FMV as a cash payment (split receipt)

• Donor gifts the land and structures the donation as a

life estate

Gifts of Ecological Property cont’d…

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FACILITATING THE GIFT

• For a charity to accept the gift – need to be an approved recipient organization

• If charity eligible environmental charity, that has as its primary mandate the conservation and protection of Canada’s environmental heritage

• For the donor to receive the tax benefit – property needs to be certified

• Submit an application

• Obtain an ecological assessment

• Obtain an appraisal of FMV

Gifts of Ecological Property cont’d…

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• Key considerations:

• What is your mandate?

• Who will bear the costs of getting the land certified and appraised?

• Can you retain the appropriate experts?

• What are the costs associated with stewardship of the property?

Gifts of Ecological Property cont’d…

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• Why bother?

• If conservation charity one of the ways to demonstrate to donors/potential donors that you are dedicated to conserving the environment in Canada

• If you are able to facilitate the gift and assist the donor may be able to encourage that donor to contribute more by way of an additional monetary contribution

Gifts of Ecological Property cont’d…

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Gifts of Shares and Stock Options

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• A “public company” is a company/corporation the shares of which are listed and traded on a public stock exchange (TSX, VSE, NASDAQ Canada, Canadian Securities Exchange, etc.)

• Donor’s inclusion rate on capital gains is zero

• Charitable donation tax receipt issued for the fair market value of the shares on the closing price on the date of transfer

• Electronic or physical transfer of shares possible

Gifts of Public Company Shares

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• The rules for gifts of public company shares also apply to the following types of capital property: • shares of the capital stock of mutual fund corporations;

• units of mutual fund trusts;

• interests in related segregated fund trusts;

• prescribed debt obligations (for example, government savings bonds); and

• shares, debt obligations, or rights (for example, security (stock) options) listed on a designated stock exchange

Gifts of Public Company Shares

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• A “private company” is a company/corporation that does not list its stock on a public stock exchange

• A privately-owned company, typically by related individuals or groups of individuals

• Donor’s capital gains inclusion rate is 50%

• Determination of fair market value for receipting purposes is not straightforward and will depend on the particular circumstances

Gifts of Private Company Shares

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• Corporations in the mining, oil and gas, renewable energy, and energy conservation sectors issue flow-through shares to help finance their exploration and project development activities

• Resource expenses are transferred to the investors

• Majority of shares are publicly-listed; few privately-held

• Capital gains exemption for publicly-listed shares

• Charitable donation tax receipt issued for the fair market value of the shares on the closing price on the date of transfer

Gifts of Flow-Through Shares

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• A “stock option” is a type of benefit given by a company to an employee to buy stock in the company at a discount or a pre-determined fixed price

• On exercising the stock option, the employee becomes a shareholder in the company (i.e., an owner of the company)

• If the employee decides to gift his or her stock option to charity, a receipt can only be issued once the charity exercises the stock option

• A receipt can be issued for the fair market value of the shares at the time of the exercise of the option by the charity

Gifts of Stock Options

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• The individual is not the donor, the corporation is the donor

• A private company gifts either: (1) private company shares; or (2) public company shares (common)

• A public company gifts public company shares (rare)

• High net worth individuals have sophisticated tax plans

• Opportunity for tax planning around capital gains rules

• Department of Finance consultation paper on tax planning using private corporations (released summer 2017) proposes changes

• Paper has received significant backlash

Shares Gifted by a Corporation

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General Rules for Gifts of Property

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• Art that is not “Certified Cultural Property”, other types of property such as supplies, materials, equipment, etc.

• Generally speaking, the “eligible amount” of the gift for receipting purposes is the fair market value of the property transferred less the value of any advantage that the donor receives in exchange for the gift

• However, there are several “anti-avoidance” rules in the Income Tax Act (Canada) for gifts of property that have increased in value since acquisition by the donor

• Result of these rules is that “buy-low/donate-high” planning is not straightforward

General Rules for Gifts of Property

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• Summary of anti-avoidance rules: • If donated property purchased within 3 years, the “eligible

amount” of the gift is the purchase price of the property

• If the fair market value (“FMV”) of the property at that time is less than the purchase price, then the receipt is issued for the lower amount

• If the donation is made within 3 years of purchase and the donor never intended to donate the property to charity, then a receipt can be issued for FMV

• If, when looking at the facts, the property was bought within the previous 10 years and it is reasonable to conclude that the donor purchased the property with the intention of gifting it to charity, then the receipt is issued for the lesser of the purchase price and FMV

General Rules for Gifts of Property

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Providing Services to a Charity

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• Contributions of services (time, skills, or efforts) are not property, and therefore do not qualify as gifts for purposes of issuing official donation receipts

• A charity cannot issue an official donation receipt for services rendered free of charge

• It may be possible to issue a receipt when a right to reimbursement for any actual expense incurred on behalf of a registered charity has been established

• A charity may issue an official donation receipt if a person provides a service to the charity, the charity pays for the service, and the person then returns the payment to the charity as a gift

Providing Services to a Charity

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Key Takeaways and Recommendations

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• Most common gift is cash

• There are lots of other types of property that can be gifted to charity

• These other types of property have significant value

• High net worth individuals have diverse assets, sophisticated tax plans, and corporate structures

• Donors look to charities for guidance on how to make gifts

• Charities should be a resource for donors

Key Takeaways

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• Review and update your charity’s Gift Acceptance Policy

• Create a condensed version of the Policy that can be shared with donors

• Familiarize yourself with the existing rules

• Stay current

• “Tailor the ask”

• Gifts should be structured with care

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