With fewer farmers facing an insatiable number of organizations needing time and money, the decision of how much to give to whom is getting tougher.
What do you want your money to do? How much should you give and when? What are the tax benefits?
For many farmers, there’s also the question of how best to give to charities through your estate and succession planning. Additionally, in the last few years some new ways to save taxes while giving have been added to the playbook.
Society’s thinking about giving has also changed. As fewer families attend church, the younger generations aren’t being taught to put something on the plate Sunday after Sunday. Instead, they are moving toward more spontaneous, secular giving. For example, there’s the phenomenon of crowdfunding where someone asks for money online and it goes viral. In the last few years this has reaped millions of dollars that would have historically been directed to registered charities.
It’s not for lack of tax receipts. Donations to registered Canadian charities are eligible for a charitable donation tax credit for individual donors or for deduction if the donor is a corporation.
Over 85,000 charities are registered in Canada, so individuals can give to these charities directly for specific causes and get a receipt to claim against income taxes. To qualify to provide tax receipts, these charities must follow certain rules, like having a board of directors and separate annual CRA filing.
Within this CRA list are charitable foundations, like the Mennonite Foundation of Canada. Although anyone can set up a foundation, they must follow the CRA rules, including separate annual filings and a board of directors.
Foundations pool the donations, take care of all the paperwork and administrative responsibilities, and invest the funds on the donor’s behalf for a small fee. For example, the Mennonite Foundation of Canada charges about one per cent, says Sherri Grosz, MFC’s stewardship consultant in Kitchener, Ont.
Another way is to set up your own family trust and hire a foundation like Gifts Canada to administer it for you. You control the investment and how it’s donated. It’s called donor-advised, and you can change it over the years.
Many foundations have sunset clauses, and you can set where your money is to go in stone at the very beginning.
With pooled foundations, you can get the receipt right away. Currently, you can donate shares of a company, equities, ecologically sensitive lands and cultural property and, if they have increased in value, any capital gains would be tax exempt. However, if you sell those assets and want to give cash, you have to pay the tax on the increases in value.
So not only do you get the tax deduction, you don’t have to pay the income tax on any increase in values.
New budget rule
Proposed during this spring’s federal budget is an exemption for capital gains tax for charitable gifts of cash proceeds from disposition of private company shares and real estate. Previously this exemption was only available for when you sold and donated publicly listed securities, ecologically sensitive land, and certified cultural property.
Beginning in 2017, this exemption would include the capital gains when you sell private assets, like shares and real estate.
In theory you could donate some of the amount you might owe for capital gains when you sell a company. Instead of paying more to the government, you are able to give more to your favourite charity.
Accountant and partner at Collins Barrow in Elora, Ont., Tom Blonde uses the following example to explain: You sell your family farm corporation for $3 million to someone outside of the family. You’ve already used up your available capital gain exemption and the marginal tax rate is 50 per cent. (If there’s no donation, you’ll only get $2.25 million net, after the capital gains tax.)
However, if you donate $1 million of the proceeds within 30 days of selling your farm, you’ll get a charitable credit of $500,000. You’ll also be taxed on only $2 million of capital gain, and $500,000 tax on gain is eliminated by charitable credit. The final result is that you donate $1 million and receive $2 million net of capital gains tax.
Make sure you talk to your accountant about how this might work for you, and please note that final legislation and assessing practice has not yet been determined.
Before you do anything, MFC’s Grosz says it’s really important to take some time to think about what you want your money to do instead of randomly giving to whatever group comes asking. “What are your hopes and goals for your donations?” asks Grosz.
Although donors into the Mennonite Foundation of Canada are of all ages and socio-economic classes, the majority are older than 50. This group tends to have more disposable income, understands the fragility of life as part of the sandwich generation, and is doing estate and retirement planning, says Grosz. Plus they’ve been raised within the church and are comfortable giving through their church.
MFC gets Great West Life to invest the pooled funds for them in one of two ways — one is higher risk, with 50 per cent equities, and the other is a more conservative investment based on bonds and mortgages. In keeping with their faith’s principles, the MFC screens out of GWL’s portfolio companies that sell alcohol, tobacco or gambling. “If you are preaching against it on Sunday, you shouldn’t invest in it on Monday,” says Grosz.
Estate planning and giving
Although there’s no inheritance tax in Canada, when someone dies, their estate has to pay their income tax and everything is deemed disposed on the date of their death. This means everything, even tax-sheltered investments like RRSPs, are sold in the year of death and the estate has to pay income taxes.
Living poor and dying rich does have its tax implications. Using predetermined charitable giving to counter this tax bite is one strategy some farmers are employing to decrease their taxes on their relatively large estates.
Grosz suggests getting the help of an accountant to figure out if it would be better to have the tax receipt during life or after to decrease the tax bill on the estate. Sometimes it means keeping the donation until after passing away so the tax credits can be used against estate taxes. Other times it’s better to give while earning more. Maybe a combination, or phased-in strategy is best for you.
In the past, MFC has been willed land but it tends to be more complicated, and usually property is liquidated with the estate, says Grosz.
Grosz says some people make their favourite foundations or registered charities the beneficiaries of life insurance policies. They pay the premiums and get a tax receipt for those premiums paid in their lifetime and when they die, the charity gets the insurance proceeds.
Sometimes a donor will even transfer the ownership of a life insurance policy to the charity while alive and pay the premiums, and, if they get a receipt can use these premiums as a tax deduction.
Keep in mind that if you transfer a policy while you’re alive but no longer insurable, it may have significant fair market value so the donation credit might be larger. However, you’ll get a much larger deduction if you buy life insurance through your farm corporation at lower tax rates.
On death, the life insurance proceeds are paid out tax free to the estate through the capital dividend account, and then the estate makes the donation and gets the larger credit.
For smaller donations, a few years ago the government added the First-time Donor’s Super Credit (FDSC) to entice people to give to charitable organizations. It supplements the value of the charitable donations tax credit (CDTC) by 25 per cent on donations made after March 20, 2013, by a first-time donor.
If neither you nor your spouse (or common-law partner) have claimed and been allowed a charitable donations tax credit for any year after 2007, you are considered a first-time donor.
This super credit applies to a gift of money made after March 20, 2013, up to a maximum of $1,000, in one taxation year from 2013 to 2017. The claim for the FDSC can be shared with a spouse or common-law partner, but the total combined donations claimed must be under that $1,000 cap.