Tag: charitable giving
It is the start of a new year and a new decade. Many of us recently enjoyed some holidays and had much to eat and drink. Many of us are also feeling the lingering effects of this merriment. I figured that an uplifting, feel good read would be a nice way to start 2020. I was thus delighted to learn about Eva Gordon, and her estate.
Ms. Gordon passed away at the age of 105. She grew up on an orchard in Oregon, never graduated from college, and worked as a trading assistant at an investment firm in Seattle. In 1964, she married her husband, who was a stockbroker. They did not have any children together. Neither Ms. Gordon or her husband came from money, and they lived a modest life. Ms. Gordon’s godson, who was the Estate Trustee, joked that if Ms. Gordon and her husband went out for lunch or dinner, then they would make sure to bring their Applebee’s coupon.
From the salary that Ms. Gordon received from her employer, she purchased partial shares in numerous stocks, including oil and utility companies, and was an early investor in Nordstrom, Microsoft, and Starbucks. Unlike many at that time, Ms. Gordon held onto these valuable stocks. As a result of this shrewd investing, Ms. Gordon’s wealth increased considerably over the latter years of her life.
Instead of wasting away her money, in her Will, Ms. Gordon decided to bequeath $10 million to various community colleges, with about 17 colleges each receiving cheques for $550,000. Interestingly, no stipulations were put into place as to how the money was to be spent by the colleges. The colleges could do with the money as they wished. For many of them, it was one of the largest donations they had ever received.
For an interesting perspective on the impact of donations to modest, as opposed to elite, institutions, you should listen to Malcolm Gladwell’s Revisionist History podcast (episode 6).
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With giving season upon us, the philanthropic impulse is stronger than ever. As prospective donors craft their charitable giving plan, they will endeavour to make their charitable contributions as impactful and rewarding as possible. Achieving this philanthropic goal requires careful consideration of the multitude of charitable giving options available to donors.
With more than 85,000 registered charities in Canada, there is no shortage of organizations to whom a prospective donor can donate. In addition, there are a variety of ways in which individuals can donate to their charity of choice, as discussed by Suzana Popovic-Montag in her blog, “Giving money to charity? Know your options to maximize your impact”.
An important consideration that can influence how and to whom a person chooses to donate is what restrictions, if any, they wish to place on their gift. Accordingly, as one evaluates the charitable giving options available to them, they should think about whether they want to make a restricted or unrestricted gift.
Unrestricted and restricted gifts
An “unrestricted” charitable gift refers to a gift made towards a charitable purpose that is free from any restrictions or limitations imposed by the donor. Unrestricted funds can be used by the donee charity in any way so long as the use of the funds supports the general charitable purposes of the organization.
On the other hand, donors may opt to restrict how their donations are used by the donee charity. These types of gifts are referred to as “restricted” or “donor-restricted” charitable gifts. As the name suggests, a donor places restrictions, conditions, directions or other limitations on their gift which constrains the use of the funds to a particular purpose, program, or project. In essence, a restricted gift can only be used for the specific charitable purpose to which it is devoted. Thus, restricted gifts have the effect of fettering the charity’s discretion in deciding where the donated funds will be allocated.
This article provides a more detailed comparison of unrestricted and restricted gifts: http://www.carters.ca/pub/article/charity/2006/tsc0421.pdf.
Charities have tended to prefer unrestricted gifts since their flexibility allows the charity to apply the funds wherever they are most needed. However, charitable organizations are increasingly recognizing that prospective donors may want a greater say in their charitable giving and might be inclined to give more if they have some certainty as to exactly how their gift will be spent. Restricted gifts can therefore be a useful tool to achieve one’s personal philanthropic goals, as well as to increase overall charitable giving.
Making a restricted gift
There are many ways in which a donor-restricted charitable gift can go awry, such as where:
- the precise restrictions imposed on the gift are ambiguous and the charity consequently administers the funds in a way the donor did not actually intend;
- the donor has given money to a very specific program or project within a charity which is not in need of funding or has been discontinued, and the surplus funds cannot be used for any other purpose; and
- the charity amalgamates with another organization, or dissolves altogether, and transfers its remaining assets (including the restricted funds) to another charity that has a sufficiently different charitable purpose such that the organization can no longer give effect to the gift’s designated purpose.
In light of the above, there are certain precautions that a prospective donor should consider taking to ensure optimum impact of their restricted charitable gift.
A donor should refer to a charity’s gift acceptance policy for guidance on what types of restricted gifts a donor can give to the charity. In particular, a gift acceptance policy will usually prescribe what purposes or uses a donor can restrict their funds to. Gift acceptance policies may also specify what language will be accepted to confirm the donor’s charitable intent and what procedure will be followed when the donor’s charitable intent is unclear or cannot be carried out. For larger gifts, it is also advisable to meet with a representative from the potential donee charity to determine whether the organization’s gift acceptance policy coincides with the donor’s specific philanthropic goals.
Donation agreements and testamentary documents can also be drafted to contemplate scenarios in which the designated purpose of a restricted gift cannot be brought to fruition. Specifically, donors may want to consider adding to these documents a contingency that permits their gift to be used for alternate charitable purposes, or permits the donee charity to vary the restriction to a use that most closely corresponds with the donor’s original charitable intent.
Thanks for reading and happy holidays!
This week on Hull on Estates, Natalia Angelini and Umair Abdul Qadir discuss life insurance in the context of two articles, namely, “That’s Life Insurance” by Michael Grob, published in the June 2016 edition of Step Journal (http://bit.ly/29Yoc3Z) and “Charitable Donations: A Summary of Tax Considerations” by James M. Parks, published in the Canadian Donors Guide 2016/17 (http://bit.ly/29SAkAF).
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
A couple of months ago, I blogged about a letter from the Department of Finance in which it addressed concerns regarding amendments to the Income Tax Act (the “ITA”) that have come into force as of January 1, 2016. The stated purpose of the letter was to confirm the Department of Finance’s understanding of the issues raised and to describe an option for responding to these issues. There was no promise that the option would be pursued or that any action would be taken.
However, on January 15, 2016, the Department of Finance released draft legislative proposals that would modify the income tax treatment of certain trusts and their beneficiaries. The legislative proposals, along with explanatory notes, can be found here.
Currently paragraph 104(13.4)(a) of the ITA provides that upon the death of a beneficiary of a spousal trust, the trust’s taxation year will be deemed to come to an end on the date of the individual’s death. Subsequently, according to paragraph 104(13.4)(b), all of the trust’s income for the year is deemed to have become payable to the lifetime beneficiary during the year, and thus must be included in computing the beneficiary’s income for their final taxation year. This has been raised as an issue due to paragraph 160(1.4) which makes the trust and the beneficiary jointly and severally liable for the portion of the beneficiary’s income tax payable as a result of including the income from the trust. As such, it is possible that the beneficiary could be responsible for the full income tax liability, to the benefit of the trust and the trust’s beneficiaries.
According to the draft legislation, paragraph 104(13.4)(b) is to be amended and 104(13.4)(b.1) is to be added, such that (b) does not apply to a trust unless all the requirements are met and the trust and the beneficiary’s graduated rate estate jointly elect that (b) apply. It would, therefore, be up to the trust and to the estate of the beneficiary to determine whether they wish the trust’s income to be included in the income of the beneficiary for their final taxation year.
There was also an issue raised with respect to the stranding of charitable tax credits. This situation could arise if a trust were to make a charitable donation after the beneficiary’s death. As the trust’s income for the year has to be included in the beneficiary’s income, consequently, the trust would have no income against which to deduct tax credits. Based on the draft legislation, as long as the beneficiary and the trust do not jointly elect for 104(13.4)(b) to apply, the trust’s income will be included in the trust’s tax return, and any charitable donation tax credits should be able to be deducted from that income.
The press release issued with the draft legislation stated that the Department of Finance had released the draft legislative proposals for consultation and welcomed interested parties to provide comments by February 15, 2016.
Thanks for reading.
I recently tweeted this article from the Financial Post, which discusses different methods of charitable giving and the tax benefits associated with each method.
With respect to inter vivos charitable gifts, the methods include:
- A one-time gift using cash, cheque or credit card;
- Gifting publicly traded securities;
- A one-time gift using flow-through shares; and
- Gifting real estate or private shares.
One-time gifts using cash, cheque or credit card, which are familiar to most individuals, are the most common type of gift and are often gifts of smaller amounts. The other type of one-time gift, which makes more sense for larger gifts, is a gift of “flow-through shares”. These are a particular type of stock involved in materials or energy exploration that qualify for significant government credits. This option is better for individuals comfortable with advanced tax strategies and high taxable incomes. The two remaining inter vivos methods of gifting publicly traded securities, private shares, or real estate, are best for large gifts and result in tax benefits with respect to capital gains.
With respect to testamentary giving, the article discusses leaving money in a will, leaving money through an insurance policy, and donating RRSPs and RRIFs. Gifting money to charities via a bequest in a will is familiar to many individuals. However, there are often more tax-efficient ways to give, since money in your estate has been fully taxed and probated along the way.
The other methods of testamentary giving discussed are less common. Leaving money through an insurance policy involves paying premiums on a policy for which a charity is the beneficiary, and receiving a tax receipt on the payment of that premium. This method is said to often deliver a higher rate of return than investing and leaving money to a charity in your will. It also has the benefit of providing certainty with respect to the amount you will be donating to the charity. Donating your RRSPs or RRIFs has a benefit in that, often, the taxes on an RRSP or RRIF may be the largest tax liability on an estate. By donating the balance of the RRSPs or RRIFs, you can effectively use a charitable gift to cancel out the tax.
If charitable giving is something that you consider important, consider gifting in a tax-efficient way so as to gain a benefit yourself, and to provide even more of a benefit to your chosen charity.
Thanks for reading.