How philanthropy fits into your financial plan

28 August 2016 by National Bank

Charitable giving for high-net-worth individuals can be complex, but prudent strategies will ensure your gifts are enduring and tax-efficient.

Everyone knows you can’t take it with you, but for high-net-worth (HNW) individuals and families, it takes a considerable amount of thought and planning to give it away.

When wealthy donors support the causes they care about, their gifts can make a big impact. But while ordinary folks might simply donate to the charity of their choice, for HNW philanthropists, complexities can pile up. They need to consider how they structure their gifts, how funds get distributed and how their legacies will be taxed.

Finding the right structure is important for HNW philanthropy because donors often look to create a more enduring source of charitable funding with their wealth, says Sophie Ducharme, associate vice-president at National Bank’s Private Banking 1859.

“The list of reasons why people decide to contribute to charity is as varied as the people themselves,” says Ms. Ducharme. “Sometimes it’s a genuine desire to help others in need, or the donor want to contribute to a cure for a disease a family member has suffered.” Often, high-level donors know that their own direct heirs won’t need the full amount of their wealth, so they feel it can be better used to help others.

The first step a potential donor should consider is the timing of the gift – whether it will be made during the donor’s lifetime or upon his or her death, says Ms. Ducharme.

“This decision may impact the method of donating – it may be through a public or private foundation, a donor advised fund or through a straight gift. It may also help quantify the amount to be donated.”

A private foundation can be a good vehicle for planned giving, says Ms. Ducharme. Unlike public foundations, private foundations are set up by the individual or the family, who take charge of how the funds will be used.

“The donor and the donor’s family can participate as they are permitted to be trustees or directors of the foundation,” she explains. Cash gifts and gifts of property are eligible to get tax receipts at fair market value at the time of the gift, as long as the foundation has met Canada Revenue Agency (CRA) requirements. This can bring tax advantages for donors who make their gifts while they are still alive.

“A donor can claim a donation tax credit in the case of an individual, or a donation tax deduction in the case of a corporation, and apply that to reduce personal or corporate liabilities,” says Ms. Ducharme.

Public foundations also have benefits, says Jennifer Leve, lawyer at Toronto firm Morris Kepes and Winters LLP. For one, they can attract contributions from donors beyond the individual leaving his or her legacy.

“There may also be cost savings from not having to manage your own private foundation,” says Ms. Leve. A public foundation (or endowment funds) will often require less governance by the individual donor because this will be handled by the larger organization.

“It allows a person to establish a fund with a registered Canadian charity, to name the fund and make a donation,” says Ms. Ducharme. “The funds will be invested by the charity and earn income that will be used for [designated] charitable purposes.” Ms. Ducharme notes that even high-level donors should be aware of limits to their generosity.

“There is an annual net income limitation which some donors may prefer not to go above, as they will not receive the same advantageous tax treatment. It’s generally 75 per cent of your net income, but in the year of death and the year before death, the limit is 100 per cent of your net income,” she says. “Depending on the purpose for a donor’s giving, these limits may or may not be important considerations.”

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