As another tax year comes to a close, has your client indicated he or she is ready to make a big donation to charity? If so that could be a signal to you the advisor, that there may be a lot more wealth tied up in private shares and real estate that can be accessed.
“If the donor can afford to cut a cheque for $10,000, they’ve probably got a significant portfolio of stocks and other assets that have capital gains in them,” says Doug Puffer, director of planned giving for Simon Fraser University. “And when you ask them, they almost always say, ‘yeah, I do!’”
Despite looming changes, currently there is no capital gains exemption for gifts of real estate or private company shares. But these donations are eligible for tax credits. As a charitable gift planner, Puffer knows the various advantages of gifting public shares, private shares or other property, and how to transact those. And he says, many affluent donors are very open to the discussion.
“I would then say, ‘Instead of paying with a cheque, you should think about donating appreciated assets. The cost of donating is much less that way.’ The response is often, ‘Really? How do I do that?’ It’s a conversation starter.”
When tax problems are on the horizon, the gifting of real estate can be a financially sound solution.
“If your client has been hanging on to commercial real estate in Vancouver or Toronto for 15 years, there’s a tax bill that is just waiting to explode. But I don’t think its common thinking yet among most financial advisors, to advise their clients to look at real estate as a donation and tax strategy,” says Puffer.
“Property can be a really valuable gift,” agrees Malcolm Berry, vice president of major gifts for the SickKids Foundation and past chair of the Canadian Association of Gift Planners. “It might be the best way to dispose of a big holding to reduce the tax implications. This is a non-traditional asset that some charitable organizations may have trouble receiving. We have a fairly sophisticated team here at SickKids, so we don’t have any trouble organizing that.”
70% of family businesses don’t transition past the first generation
The conversation surrounding business succession planning is a perfect time to discuss charitable giving, and the tax savings that can be realized. Janice Loomer Margolis, a philanthropy advisor at JLM Philanthropy, points out that 70% of family businesses fail to make a successful transition to the next generation.
“Without the next generation to take over, lots of private businesses are being sold outside the family. This will trigger big capital gains taxes and also open up opportunities for a conversation about philanthropy and ways to share family values beyond the business. A portion of the shares can be donated to charity to help offset the taxes, but it takes top-notch accountants and other advisors to help realize the savings as well as make a plan to convert the assets into cash that will benefit the charity. Most business owners will only look at this option for large gifts - $50,000 and up - because the transaction needs to be meticulously planned and managed. Additionally, without the business structure holding the family together, philanthropy is a wonderful way for the family to engage in a rewarding experience together."
New CRA measures in 2017
Regarding possible changes to tax law, the 2015 federal budget extends the existing capital gains tax exemption for donations of securities to include donations from the sale of private shares or real estate. This change, scheduled to begin in 2017, may or may not happen under the new Liberal government.
“The new measures will eliminate the capital gain if you donate the cash proceeds of the sales within 30 days,” says Margaret Mason, Bull, Housser and Tupper. “But there are many unanswered questions, particularly after the October Liberal victory. Will this new exemption proceed? If it does, what are the technical considerations and how will it work exactly?”
Who better to keep clients informed than their financial advisors?