Planned Giving, Part 3 — Update
By DEWAYNE OSBORN, CGA, CFP and IAN BARNES, CGA
This article is an updated version of the original third article in a three-part series by Mr.
Osborn on the subject of Planned Giving to be carried on PD Network. In this update, the
detailed discussion of the Disbursement Quota changes was provided by Mr. Barnes.
Introduction
Gifts using trusts
New legislation and planned
giving
Charitable activities and the
disbursement quota
Issues to consider
New sanctions and penalties
What if a sanction is imposed
Disturbing trends in legislative
efforts to monitor charities
Opportunities for CGAs
Conclusion
Introduction
The first part of this three-part article presented a broad perspective of planned giving in
Canada. Planned giving, while well established in the United States, is a relatively new
phenomenon in Canada. For example, the only national organization that represents
planned giving in Canada is the Canadian Association of Gift Planners (CAGP), and that
organization is celebrating its 10th anniversary this year.
The topics covered in Part 1 included the types of charities in Canada, the regulatory
environment in which they operate, how an individual claims a charitable contribution, and
a brief introduction to the more common planned gift strategies.
In Part 2, three gift strategies were discussed in more detail: gifts by will, outright gifts by
individuals, and gifts using insurance products. Each of the strategies was subdivided into
five sections: how the strategy works, tax implications for donors, regulatory and other
issues for the charity, issues for the advisor, and examples.
In Part 3, a fourth gift strategy — gifts using trusts — will be discussed using the same
categories as with the other strategies. Also, a summary of key legislation proposed from
December 2002 up to and including Budget 2004 will be presented. These legislative
provisions include a series of new sanctions and penalties that are now available to Canada
Revenue Agency (CRA) to apply against registered charities that breach the rules.
Finally, some disturbing trends in the proposed legislation will be presented. These trends
can negatively impact the charity receiving the gift and the advisor advising his or her
client.
Gifts using trusts
How the strategy works
Setting up the trust
At this time, charitable remainder trusts are not recognized under the Income Tax Act of
Canada (ITA) as a separate type of trust. Throughout this article, the term “charitable
remainder trust,” or CRT, will refer to the generic use of trusts in planned giving.
Lobbying efforts are underway to try and persuade the Department of Finance to define the
CRT in the ITA in a similar fashion to the U.S. government, which incorporated the CRT
into its Revenue Code in 1969. Many people believe that this formal acceptance of the CRT
south of the border has been a key factor in the explosive growth of this type of planned
gift.
In contrast, many things must happen in this country in order to form a CRT under existing
Canadian law. Here are some of the more important factors to consider:
•
•
•
•
•
An equitable interest in a trust must be created for the ultimate benefit of a charity.
The trust documents must clearly direct that the capital interest in the trust must pass to the
charity after some future event — typically the death of the settler/donor.
The trust documents must provide strong protection against any possible encroachment on
the capital.
Once property is settled into the trust, the value of the equitable interest must be
ascertainable. Hence, valuation is a key issue for this type of planned gift. More discussion
on this is provided in the Regulatory and other issues for the charity section.
The equitable interest must vest with the capital beneficiary at the time the property is
settled into the trust. Therefore, an immediate gift of that interest must occur.
Setting up the gift
Once all of the above requirements are met, the settlement of the property must also qualify
as a gift. According to IT 226R, the following are the minimum requirements to be classified
as a gift: 1
•
•
The settler must voluntarily transfer property to the trustees of the trust without
consideration and with no expectation of reward to the settler or any person designated by
the settler.
The gift must vest with the charity. In order to vest, Canada Revenue Agency has dictated
the following conditions:
The capital beneficiary must be in existence and ascertained.
The size of the capital beneficiary’s interest can be ascertained.
There are no unsatisfied conditions standing between the capital beneficiary and its
eventual entitlement to the property.
The transfer of the property to the trustees and the trust must be irrevocable.
The terms of the trusts must allow that the full ownership and possession of the property
transferred into the trust will ultimately pass to the capital beneficiary.
{
{
{
{
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Provided these requirements are met, a tax receipt can be issued to the donor at the time the
property is settled into the trust for the value of the residual interest that ultimately will pass
to the charity at some point in the future. 2
Determining the tax receipt
In Canada, the common practice is to take that fair market value of the residual interest and
discount it using an appropriate time period and interest rate. 3 Thus, the shorter the time until
the property is passed to the charity, the larger the tax receipt. Therefore, CRTs work best for
donors over the age of 75.
How these factors are selected is not standardized and is the subject of much debate. Thus far,
CRA has maintained that any reasonable effort is acceptable. Unfortunately, CRA has not
defined the term “reasonable.” This issue will be discussed in more detail under the
Regulatory and other issues for the charity section.
In the end, the donor makes an irrevocable contribution of property to a trust where he or she
will continue to enjoy the income from the trust for the rest of their lives. The income will be
taxed in the normal fashion, and upon their passing, the property will transfer to a charity.
Ideally, the tax receipt will be sufficient to negate any tax incurred when settling the trust.
1
2
3
http://www.cra-arc.gc.ca/E/pub/tp/it226r/it226r-e.html
The tax receipt is discounted.
While a formula and tabulated values exists in the IRS Revenue Code, no such help exists in the
ITA.
Planned Giving, Part 3 — Update • 2
Tax implications for the donor
Type of property
In order to settle the trust, the donor must place some type of property into the trust. For nonreal property, 4 CRA maintains that an equitable interest cannot be created for the charity until
after the property is settled into the trust. Hence, a full disposition for tax purposes occurs
when the trust is settled, and if the property is capital property, the donor may have a capital
gain or loss. To avoid such a gain or loss, it is quite common to use non-capital properties
such as GICs or cash.
If real property is used, ITA 43.1(1) permits the donor to “carve” off an interest for the
benefit of a charity without the use of a trust. Therefore, there is only a disposition of the
interest donated to the charity and any capital gain or loss is attributed to the interest that was
donated. When the settler uses real property for a prescribed period of time (e.g., life), and the
property ultimately passes on to a charity, such gifts are commonly referred to as gifts of
residual interest.
Trust taxation
All charitable remainder trusts are subject to the normal taxation of trusts in general. For
example, all CRTs are subject to the 21-year rule. Common strategies to deal with this rule
range from the use of non-capital investments inside the trust, to limiting the time line of the
trust to a period less than 21 years, to designating under ITA 104(21) that the capital
beneficiary 5 is to receive all capital gains realized by the trust.
As for the income from the trust, it is taxable in the normal fashion. It is possible for the trust
document to designate income to be paid to the income beneficiary. By doing so, the income
retains its properties when it is paid to the beneficiary, thus enabling him or her to use
existing tax credits to reduce the tax payable. 6
A charitable remainder trust can be created via testamentary means, that is, the donor’s will.
From a tax perspective, the important thing to remember is that testamentary trusts are taxed
at their own marginal tax rates, while intervivos trusts are taxed at the highest rates in Canada.
Another important tax feature of using charitable remainder trusts is that any property that is
settled into them does not form part of the donor’s estate. Therefore, the property is not
subject to probate or legal challenge.
Regulatory and other issues for the charity
Given the flexibility of trusts, it is understandable that there is a wide variety of regulatory
and other issues when using them for charitable giving. The key issues are:
•
In order for a gift to have been made, the size of interest must be ascertainable. Therefore,
there are valuation issues that must be dealt with at the time the trust is settled. For
securities, a common practice is to use the yield from a Canada Bond that matures at or
near the date the residual will pass on to the charity. For example, Bill is 75 with a life
expectancy of 13 years. If today were October 10, 2004, then the yield from a Canada
Bond maturing in December 2017 would be used in the determination of the tax receipt. If
the charity wants to be absolutely sure it has been reasonable in its approach to valuation,
then it should employ the services of an Actuary. The expected lifetime of the donor can be
4
Defined as property that is moveable.
Remember that in a CRT, the capital beneficiary is the charity and it pays no tax. The amount
can be made payable so as to remain in the trust to earn income for the donor. Care must be
taken to ensure that the trust documents clearly indicate that the charity is to receive all capital
gains before designation under 104(21) is used.
T3 Trust Guide.
5
6
Planned Giving, Part 3 — Update • 3
obtained through numerous sources such as life insurance company tables and actuarial
reports.
•
Trusts often require regulatory filings every year. Someone must ensure that these
documents are filed in a timely manner, or else face sanctions and penalties.
•
To properly create a trust, a lawyer is required. Therefore, there will be fees to use this type
of gift.
•
Given the lack of legislation governing CRTs, and the presence of Third Party Civil
Penalties legislation, 7 accountants and other financial advisors may be reluctant to help the
charity set up such gifts.
•
Similar to insurance gifts, a CRT is a deferred gift vehicle. Therefore, charities often
institute a minimum gift size (e.g., $100,000) for all CRT gifts to ensure that a meaningful
gift is received when the trust is dissolved and the property passed on to the charity in the
future. Such minimums may discourage donors from using the CRT in situations where it
is the ideal strategy for them.
•
If the property placed into the trust is moveable, such as paintings or other artworks, then
the trust document must ensure that proper measures are in place to safeguard the assets to
ensure that they will pass to the charity. Failure to do so may jeopardize the gift.
•
The CRT works best for older donors.
Issues for the advisor
When considering a CRT for a client, the advisor should address the following issues:
•
•
•
•
Ensure that a properly constructed trust is created that achieves the objectives of the donor,
including the charitable gift.
Understand the rules governing charitable gifts in order to help the donor choose the
appropriate property to place into the trust. For example, the trust is not a registered charity
nor is it an institution designated to receive cultural property. Therefore, the tax advantages
of using those types of property would be negated in the CRT.
Ensure that a system is in place to make sure that all required regulatory filings are done on
a timely basis.
Attain a level of comfort with the risks 8 associated with the CRT and be prepared to
counsel the client accordingly.
Examples of charitable remainder trusts
Steven, an 82-year-old widower, wants to help his church and his spendthrift younger brother
who just turned 77. Steven has GIC investments of $100,000 that he does not need today. He
decides to settle a CRT with the GIC and designates his brother as the income beneficiary.
The trust will dissolve upon Steven’s death and the trust capital will pass to the church.
Assuming the residual is calculated correctly, Steven is eligible for a $74,489 tax receipt
today, 9 his brother gets the income for the rest of Steven’s life, and the church will receive a
meaningful gift in the future.
New legislation and planned giving
This section will review some of the more significant legislative steps that have occurred
since December 2002 up to and including Budget 2004. For ease of reference, this
information is presented in tabular form and the significant new and/or proposed sections are
identified.
7
8
9
http://www.cra-arc.gc.ca/E/pub/tp/ic01-1/ic01-1-e.pdf
Civil penalties legislation and proposed new sanctions presented in Budget 2004.
Assume an 8-year life expectancy and a yield of 3.75% rounded. $100,000/(1.03758)
Planned Giving, Part 3 — Update • 4
Pre-December 2002 rules
Post-December 20, 2002 rules
New section
Charity issues a tax receipt for the eligible amount.
248 (30)
Eligible amount must be at least 20% of the total
amount contributed or satisfy the Minister that
clear intent to give was evident.
248 (32)
Unless the gift was made as a consequence of
death of the donor, the fair market value is reduced
to cost if any of the following is true:
248 (35)
Tax receipting
For all gifts, the charity issued a tax
receipt for the fair market value.
NA
•
The property was gifted within three (3) years of
being acquired by the donor,
•
The property was acquired with the expectation
of making the gift, 10 or
•
The donor acquired the property through a
gifting arrangement as defined in 237.1. 11
Property excluded from 248(35) include inventory,
real estate in Canada, cultural property, publicly
traded securities, and ecological property.
248 (36)
Eligible amount defined
Advantage defined
248 (30)
248 (31)
Transactions attempting to bypass the new
legislation will be ignored
248(33), (37), (38)
Charitable activities
Revised section
Foundations required to spend a
percentage of their endowment funds
All charities required to spend a percentage of their
endowment funds. 12
Required to spend 4.5% of
endowment funds
Foundations include gifts from other
charities in their disbursement quota
Now 3.5 % and may be adjusted again at anytime.
All charities include at least 80% of gifts received
from other charities. Private foundations continue
to report 100% of such gifts.
March 23, 2004
Ten-year gifts and bequests are
excluded from disbursement quota
“Enduring gift” defined to include:
Ten-year gifts, gifts received through RRSP/RRIF
and insurance beneficiary elections, and gifts
received from a transferee charity. 13
March 23, 2004
10
11
12
13
149.1
Effective 2009 for
charities existing
before March 23,
2004. Effective March
23, 2004 for all others.
March 23, 2004
No time limit.
No time limit.
The rule reads: property not used for charitable activities or administration. Such property is
commonly referred to as endowment funds.
Transferee charity is the original charity that accepted the gift that subsequently transferred the
gift to another charity. Any donor direction on the original gift is also transferred to the new
charity as if the gift had been made to it originally.
Planned Giving, Part 3 — Update • 5
Charitable activities and the disbursement quota
The federal Budget of March 23, 2004 proposed seven changes to the disbursement quota
(DQ) for charities. Subsequently on May 12, 2005 Bill C33, which encompasses the
amendments envisioned in the March 23, 2004 budget, was passed into law.
The rationale for these DQ changes was mainly twofold. The first was in response to the input
of the charitable sector through the Voluntary Sector Initiative and other interested
constituents. The second was to “harmonize” the DQ calculation among charitable
organizations and foundations (both public and private), which previously had distinctly
different methods of DQ calculation. As the reader shall soon conclude, the concept of
“equity among DQ calculation methods” results in some unexpected DQ legislation — some
of which is not advantageous to charitable organizations compared to the previous calculation
methods.
1. The DQ is now reduced from 4.5% to 3.5% per year on capital assets held by registered
charities for taxation years commencing after March 23, 2004. (Capital assets not used
directly on charitable activities). A charity that holds less than $25,000 in capital assets
not used for charitable activities is exempt from the 3.5% DQ inclusion.
This change is absolutely delightful for public and private foundations. The 4.5% threshold
was set many years ago when double-digit returns were being earned by foundations. In
recent years, however, it has been a struggle to earn a 4.5% return in the market. In many
cases, foundations have been forced to disburse in excess of their annual income; thus eroding
their capital base.
EXAMPLE 3.1
The fair market value (FMV) of the capital assets (not used directly on charitable activities)
for Foundation A at December 31, 2004 is $1,000,000. No other contributions or transfers
were received. The DQ for Foundation A for 2004 is $45,000 (4.5% x $1,000,000). Given the
same scenario at December 31, 2005, the DQ is $35,000 (3.5% x $1,000,000).
EXAMPLE 3.2
The FMV of the capital assets (not used directly on charitable activities) for Foundation B, a
very small foundation, is $25,000 at December 31, 2005. No other contributions or transfers
were received. The DQ is nil.
The DQ legislation exempts the FMV of capital assets up to $25,000. However if the FMV
exceeds $25,000, the initial $25,000 is not exempt.
2. The DQ (currently applicable to foundations) shall be extended to include charitable
organizations, so that all registered charities shall be subject to the same disbursement
obligations to fund charitable activities.
The change is applicable to tax years that begin after 2008 for charitable organizations
registered before March 23, 2004. For charitable organizations registered after March 23,
2004, the change is applicable for taxation years commencing after March 23, 2004.
This is an example of Finance harmonizing the DQ calculation among foundations and
charitable organizations. Foundations currently are subject to both the “80% rule” and the
“4.5% rule” (now 3.5%). As you can see in Example 3.3 this change is not advantageous to
charitable organizations.
Planned Giving, Part 3 — Update • 6
EXAMPLE 3.3
Charitable organization A (registered in 1964) received tax-receipted gifts (no enduring
property) of $500,000 in 2004. It also holds an endowment with a FMV of $50,000 at
December 31, 2005. The DQ for 2005 is $400,000 (80% of the tax-receipted gifts from the
previous year – $500,000). Given the same scenario for 2008 and 2009 the DQ for 2009
would be $401,750 [(80% × $500,000) + (3.5% × $50,000)]. In this case, the change
incrementally increases the DQ by $1,750.
It may be prudent for a charitable organizations registered prior to March 23, 2004 to use the
“DQ holiday” on endowments up to 2008 as an opportunity to focus on endowment building;
as such, strategies will be relatively more difficult when the 3.5% DQ is applied.
3. All transfers between registered charities (other than specified gifts and enduring
properties) are now subject to a disbursement requirement. From the perspective of
charitable organizations DQ requirement is 80%.
Public Foundations are currently subject to such transfers at a rate of 80% (private
foundations 100%) This is more bad news for charitable organizations in the name of DQ
harmonization. Previously, transfers from other charities to charitable organizations were not
subject to the DQ.
EXAMPLE 3.4
Charitable organization B received tax-receipted gifts (no enduring property) of $750,000 in
2003. It also received a $100,000 grant from a local community foundation during 2003. The
DQ for 2004 is $600,000 (80% of the tax-receipted gifts from the previous year - $750,000).
Given the same scenario for 2004 and 2005, the DQ for 2005 would be $680,000 [80% ×
($750,000 + $100,000)]. In this case the change incrementally increases the DQ by $80,000.
4. An endowment received by a registered charity from another registered charity shall
result in the same treatment as if the endowment had been received directly from the
original donor.
Previously, if a charity transferred an endowment (by way of bequest or a gift subject to a 10year restriction) to a foundation, the foundation must include the amount for the purposes of
calculating its 80% disbursement quota. Recipient charitable organizations did not include
such transfers in their respective disbursement quotas.
The legislation facilitates these transfers by subjecting such endowment transfers to the same
DQ calculation. The endowment shall be subject to the 80% rule only at the time the
endowment is expended. Therefore, whether the recipient charity received the endowment
directly, or received the endowment indirectly from a transferor charity, the source of transfer
are irrelevant for DQ purposes.
5. Gifts made by direct designation through an RRSP, RRIF, or life insurance policy are
treated as endowments for the purposes of the DQ rules.
A few years ago the Income Tax Act was amended to allow a donation credit to the final
return of a deceased taxpayer — where the taxpayer designated a charity as the beneficiary of
an RRSP, RRIF, or life insurance policy. However, these gifts did not appear to receive
similar treatment for DQ purposes (i.e., they were not treated as bequests). This legislation
has the effect of treating such gifts in the same manner as bequests; subject to the 3.5% rule
while they are held as endowments and the 80% rule in the year they are expended.
Planned Giving, Part 3 — Update • 7
6. Expended endowments are subject to the 80% disbursement requirement in the year of
expenditure.
Previously, expended endowments were subject to the 80% rule by the year following the
year in which the gift was expended. This rule closes that “loophole” by applying the 80%
rule to expended endowments in the same year they are expended.
7. Charities are allowed to access capital gains realized on endowments to reduce their
disbursement quota.
Endowment funds are generally invested in income producing vehicles that may eventually
realize capital gains. It appears that this pool was created to “compensate” for the fact that
previously, the realization of capital gains per se, was not included in meeting an
organization’s disbursement quota requirement in any given year.
Effective for taxation years beginning after March 22, 2004, the 80% DQ requirement shall
be reduced by the lesser of:
a) The capital gains pool for the charity
b) 3.5% of the value of all property not directly used in charitable activity
The capital gains pool is a cumulative calculation:
The aggregate of capital gains realized from the disposition of endowments after March 22,
2004 and before the end of the taxation year minus the amount determined and utilized for the
DQ calculation for a preceding taxation year.
Accessing the capital gains pool for the calculation of the disbursement quota is at the
discretion of the charity. Therefore, it is prudent for the charity to aggregate and track the
capital gains pool on the Charity Return each year even if it does not access the pool in a
given year.
EXAMPLE 3.5
For the year 2010 Charitable organization C has calculated a disbursement quota of $400,000
prior to considering the use of its capital gains pool. For the past five years the organization
has tracked an aggregate of $300,000 in capital gains. During 2008, $100,000 of the capital
gains pool (CGP) was accessed and applied to reduce the DQ of that year. The FMV of the
organization’s capital not directly used in charitable activity is $1,000,000 at December 31,
2010.
Step 1 — Calculate the capital gains pool available to apply to the 2010 DQ
Aggregated CGP
Less: CGP accessed in previous years
CGP available to apply to 2010 DQ
$ 300,000
100,000
$ 200,000
Step 2 — Apply to 2010 DQ
DQ prior to CGP consideration
Less:
Lesser of :
available CGP
3.5% FMV of capital
2010 DQ
$ 400,000
$ 200,000
$ 350,000
200,000
$ 200,000
Planned Giving, Part 3 — Update • 8
Issues to consider
There are some administrative issues with the calculation of the capital gains pool that remain
to be resolved. An April 2005 conversation with the Charities Directorate acknowledges these
administrative issues and offers no resolution at this time. It appears the capital gains
aggregated on an annual basis must be traceable to the specific endowment from which it was
generated. This is because a capital gain from a disposition of a bequest or inheritance
received by the charity prior to 1994 is excluded from the capital gains pool. Also, the Canada
Revenue Agency requires an audit trail to the original investment to document that the capital
gain is correctly calculated.
A charitable organization perhaps may be in a relatively better position than a public
foundation in its ability to trace capital gains back to the original investment because it
generally maintains fewer endowments. The public foundation may have hundreds, or even
thousands, of individual endowments of invested capital. The original capital from these
endowments may have generated past capital gains, which have been re-invested several
times. It seems an onerous task to trace a pool of capital gains back to their original
investments.
New sanctions and penalties
For years, the only sanction CRA could impose on a charity was revocation of charitable
status. In Budget 2004, ITA Sections 188.1 (1) to (11) and 188.2 (1) to (5), and 189 (6.1) to
(6.3) and 189 (7) and (8), Finance proposed sweeping new penalties with which to better
enable CRA in its enforcement duties. Note that revocation of charitable status can still be
used for any of these infractions.
In the Spring of 2005, the Budget Implementation Act, 2004 brought the new sanctions and
penalties, as well as the disbursement quota changes into law in Spring 2005.
The following table summarizes the new penalties including first offense and subsequent
offenses:
Planned Giving, Part 3 — Update • 9
Tax or Penalty
(Unless registration of the charity is revoked)
Repeat infraction
Infraction
Late filing of annual information return
(Repeated acts or omissions will
increase the probability of revocation)
First infraction
14
$500 penalty
$500 penalty
Issuing of receipts with incomplete information
5% penalty on the eligible
amount stated on the receipt
10% penalty on the eligible
amount stated on the receipt
Failure to comply with certain verification and
enforcement sections of the Income Tax Act (230 to
231.5), e.g., keeping proper books and records
Suspension of taxreceipting privileges
Suspension of tax-receipting
privileges
Charitable organization or public foundation
carrying on an unrelated business
5% tax on gross unrelated
business revenue earned in
a taxation year
100% tax on gross unrelated
business revenue earned in a
taxation year and suspension
of tax-receipting privileges
Private foundation carrying on any business
5% tax on gross business
revenue earned in a taxation
year
100% tax on gross business
revenue earned in a taxation
year, and suspension of taxreceipting privileges
Foundation acquires control of a corporation
5% tax on dividends paid to
the charity by the
corporation
100% tax on dividends paid to
the charity by the corporation
Undue personal benefit provided by a charity to any
person. For example, a transfer to a person who
does not deal at arm’s length with the charity or
who is the beneficiary of a transfer because of a
special relationship with a donor or a charity
105% tax on the amount of
undue benefit
110% tax on the amount of
undue benefit and suspension
of tax-receipting privileges
A gift that is restricted under Subsections 149.1(2),
(3), or (4) of the Act
105% tax on the amount of
the gift
110% tax on the amount of the
gift
Issuing receipts in a taxation year for eligible
amounts that in total do not exceed $20,000 if there
is no gift or if the receipt contains false information
125% tax on the eligible
amount stated on the receipt
125% tax on the eligible
amount stated on the receipt
Issuing receipts in a taxation year for eligible
amounts that in total exceed $20,000, if there is no
gift or if the receipt contains false information
Suspension of taxreceipting privileges and
125% tax on the eligible
amount stated on the receipt
Suspension of tax-receipting
privileges and 125% tax on the
eligible amount stated on the
receipt
Delaying expenditure of amounts on charitable
activities through the transfer of funds to another
registered charity
The charities involved are
jointly and severally, or
solidarily, liable for the
amounts so transferred plus
a 10% tax on
The charities involved are
jointly and severally, or
solidarily, liable for the
amounts so transferred plus a
10% tax on
14
The number one cause of revocation in Canada.
Planned Giving, Part 3 — Update • 10
What if a sanction is imposed
Canada Revenue Agency has instituted a new procedure to deal with appeals and objections
to the aforementioned sanctions. Now, like other taxpayers, if a charity is sanctioned, it can
file an appeal directly to CRA. The appeal will be reviewed and a decision rendered. If the
charity does not agree with the re-assessment, it can file directly to the Tax Court of Canada.
Comments
If a charity is fined an amount that exceeds $1,000, the penalty will be reduced by all
contributions the charity makes to an “eligible donee.” An eligible donee is defined in new
ITA section 188(1.3) as: 15
•
•
•
•
a registered charity
not subject to suspension under new section 188.2(1)
has no unpaid liability
is not a private foundation
The proposed legislation held that a period of 10 years must elapse before a second infraction
of the same type would not be subject to increased fines or penalties. On March 7, 2005, the
timeframe was reduced for all second infractions to five years from the date of the first
infraction.
If there is a problem with planned giving, it will most likely involve one of the following
factors:
•
With over 80,000 registered charities, it is quite likely that smaller, volunteer driven
organizations, such as soup kitchens, churches, and daycares will be either unaware of
these changes, or unable to effectively deal with them.
•
Failure to maintain adequate books and records pursuant to ITA 230(2). Similarly, failure
to hold such records for a period of six years from the date of the last fiscal year end. The
penalty is a one-year suspension of receipt-issuing privileges. Once again, the smaller
organizations are most likely to offend under the new sanctions.
•
Issuing receipts with false or incorrect information. Given that some planned gifts either
are not clearly articulated in the ITA, or have not been vetted through the courts, the
possibility of issuing a receipt with incorrect information is highly probable. The real issue
is whether or not the incorrect or false information was the result of culpable conduct
pursuant to ITA 163.2, which is more commonly known as the Civil Penalties Legislation.
The resulting fine of 125% of the eligible amount can be applied to the advisor or the
charity depending on if the person making the false statement was an officer, employee,
official, or agent of the charity. It is important to note that the eligible amount may be
extremely large, in which case the fine would be significant.
•
Given the reluctance of public charities to use the court system to remedy problems, the
new system that mandates appeals of sanctions and/or penalties to go ultimately to the Tax
Court of Canada may be problematic and/or cause hardships to the charity beyond the
imposed sanction. Legal costs and marketing efforts to calm skittish donors are but two
examples of such hardship.
•
Finance introduced a new concept called Annulment. If a charity is registered in error, or
its activities are no longer considered charitable at law, CRA can annul the charity’s
registration. Annulment removes the organization’s ability to issue tax receipts on a go
forward basis. 16 However, unlike revocation, the organization is allowed to keep its assets,
15
Payments of fines to other charities is consistent with past policies where revoked charities can
eliminate the revocation tax by paying out their assets to other charities.
Tax receipts issued prior to the date of annulment are still valid.
16
Planned Giving, Part 3 — Update • 11
and basically becomes a not-for-profit organization. An annulled charity may appeal the
annulment decision in the manner explained above.
Disturbing trends in legislative efforts to monitor
charities
When one considers all the legislative changes that have taken place over the past two years,
several disturbing trends are apparent:
•
The burden of proof has been shifted to the charity, especially with regard to the
implications of the gifting arrangement legislation. For example, how is a charity to know
that a donor acquired the property they wish to donate to the charity from a gifting
arrangement five years ago? Failure to receipt accordingly could result in the charity being
suspended or having to pay a fine. Advisors can be implicated as well.
•
Finance seems content to use timelines that are impossible to monitor. For example, if at
anytime the taxpayer acquires a property under a gifting arrangement, and then at some
time in the future donates the property to a charity, the fair market value is reduced to the
cost to the donor.
•
Enduring properties often have donor directions associated with them. If enduring property
is transferred from one charity to another, the original donor direction must be maintained
as if the gift has been made to the second charity directly. If the first charity did not
maintain proper books and records, how does the second charity know of the donorimposed directions or restrictions?
A common example where this could happen is where Charity A receives an enduring
gift 17 with direction to split it among several charities and that those charities are to endow
the gift and use only the income. Somehow, Charity A fails to tell some or all of the other
charities and they use the gift for current needs. Who is responsible for what? What
recourse does the donor have for this blatant violation of the direction he gave to the
charities? Will lawyers be required to sort out the mess?
•
The term “reasonable” needs to be defined. For years Finance has used this term as a
benchmark by which all charities need to comply. The proposed legislation is riddled with
the use of the term, yet there still is no clear indication of what it means.
•
In a similar fashion to the non-qualifying securities provisions in the past, proposed
legislation to curb abusive practices have caught perfectly sound planned gift strategies.
The best example is where the donor converts voting common shares into non-voting
preferred shares to give to a charity. The company that issued the shares is liquid and steps
have been taken to ensure that the charity will receive the full value when the shares are
redeemed. The problem is that the preferred share maintains the cost base of the common,
which is likely nil. Therefore, under the proposed rules, the tax receipt will be nil.
•
Prior to 2002, when Finance announced legislation affecting charities, the legislation was
subsequently passed into law in very short order. Now, legislation is being passed into law
on a piecemeal basis over a number of years. Charities often do not understand that the
effective date of the legislation is legally enforceable, not just the date the legislation
becomes law. Therefore, many charities will simply carry on as normal oblivious to the
problems they may be incurring and not realize that ignorance of the law is not an excuse
in the eyes of the regulators.
17
Often a substantial current gift with a 10-year direction to not encroach upon the capital.
Planned Giving, Part 3 — Update • 12
Opportunities for CGAs
People that work in the charitable sector have repeatedly indicated that these are the most
significant legislative provisions affecting charitable operations in several decades. There are
significant business opportunities for knowledgeable CGAs, and in particular, CGAs working
in the audit and not-for-profit sector
What are some of the opportunities for auditors? There are two broad areas where CGA
auditors can provide help to registered charities. The first is in providing value to existing
client relationships. The second is in securing new clients.
Earlier in this article, Ian Barnes mentioned that charities should track their aggregate capital
gains pool in order to benefit from the relief it provides in their disbursement quota (DQ).
Furthermore, CRA requires proof that the calculation was done correctly — proof in the form
of an audit trail to the original investment. Who better to show such a trail than a CGA! The
charities most likely to have difficulties tracing historical capital gains back to their original
investment are foundations with hundreds or even thousands of individual accounts within
their endowment funds. Charities that can afford to hire professional help, would appreciate
an auditor that can uncover the DQ reduction value from their past capital gains — gains that
would have already been disbursed.
In my discussions of these issues with many charities of all sizes, the consistent message is
that our auditors will advise us as to how to deal with these provisions. One could interpret
such a comment as a challenge to the audit community to understand and be able to explain
the implications of this new legislation on the operations of their existing charitable clients.
An extension of this thought is for the auditor to be able to show his or her charitable clients
the impact the new rules will have on their operations. Methodology could include: enhanced
scrutiny of internal controls, systems and process reviews, and other value added services to
ensure clients are ready.
What about CGAs working in the charitable sector? Your role in the organization is more
critical than ever. Without a doubt, you will be expected to know these rules, the magnitude
of the implications they will have on your organization, and to be able to ensure that your
charity is ready for them. If appropriate, you will be expected to work with the auditors to
ensure that all reasonable steps have been taken to protect your charity from running afoul of
CRA guidelines.
As for new clients, one of the issues will be the ability of the charity to pay for the service. As
mentioned before, the most vulnerable will be the smaller charities that are run primarily by
volunteers. Typically, these charities are operating “hand to mouth” and do not have the
resources (or are unwilling to prioritise them) to pay for extensive reviews of their systems
and processes. Finding a way to help them and being compensated for the effort will be a
challenge.
One way would be to host seminars and invite these charities to come and learn of the new
regulations. A reasonable fee would be charged for the seminar to compensate you for your
time. At the seminar, you could roll out a simple 18 yet effective review process that attendees
could purchase, or that you would include as a value-added benefit in your financial audit.
The idea is that once charities understand the implications of the new rules, they will be more
likely to prioritise their resources to ensure they are able to cope.
18
Simple in terms of the number of processes reviewed. These charities do not have complicated
DQ calculations, capital gains pools, endowment funds, and so on. Their primary exposure will
be in their tax receipting practices and completing the T3101A return correctly.
Planned Giving, Part 3 — Update • 13
While other opportunities undoubtedly exist, it is important to understand that the magnitude
of these regulatory changes will likely not be repeated for many years. Hence, the need for
CGA expertise to assist charities meet their new obligations is now, not tomorrow!
Conclusion
This three-part article has provided a comprehensive review of planned giving in Canada. In
Part 1, a broad perspective of planned giving was presented. Topics included the types of
charities in Canada, the regulatory environment, how to claim a charitable contribution, and a
brief introduction to the more common planned gift strategies.
In Canada, planned giving strategies can generally be grouped into four categories: gifts by
will, outright (or current) gifts, gifts using insurance products, and gifts using trusts. All
planned gifts must conform to the regulatory requirements and charities have to report their
annual fundraising efforts (including planned giving), as well as all of their expenditures, on
the T-3010A. This annual report contains a formula used to determine if the charity is
adequately using its resources for charitable activities. This formula is called the
disbursement quota (DQ) and the impact of planned giving on the DQ was presented.
In Part 2, three of the four gift categories mentioned in Part 1 were discussed in more detail
from the perspective of the donor, the charity, and the donor’s advisor. The categories
presented were gifts by will, outright gifts, and gifts using insurance. Gifts using trusts was
presented in Part 3. Each category was broken into the following sections: how the strategy
works, tax implications for donors, regulatory and other issues for the charity, issues for the
advisor, and examples.
In this update to Part 3, gifts using trusts was explored in the same manner as the other
categories in Part 2. In addition to the discussion on trusts, two tables were presented that
summarized the proposed infractions for charities that break the rules, and the associated
penalties. A detailed discussion of the new disbursement quota calculations was presented as
well as some potential business opportunities for CGAs in the audit and not-for-profit fields
were explored. Finally, some disturbing trends in the proposed legislation were presented and
the potential impact of those trends on the recipient charities and advisors was discussed.
DeWayne Osborn is the General Manager, Compliance Officer, and in-house expert on
charitable and planned giving at Lawton Partners. He joined the firm in 2000.
With more than a decade of experience serving in senior positions of not-for-profit
organizations, Mr. Osborn has become one of Canada’s leading authorities on planned
giving. He is a much-sought-after speaker, consultant, and advisor on the complexities and
tremendous financial and philanthropic benefits that can be achieved by applying taxeffective strategies for gifting real property, cash, securities, life insurance products, wills,
and bequests. His expertise covers all aspects of charitable operations including endowment
fund polices, accounting system audits, and policies and procedures for gifts and
endowments.
Mr. Osborn received the 2003 Certified General Accountants Association of Manitoba
Sharing Expertise Award in recognition of his ongoing dedication to numerous charities and
his leadership in furthering greater awareness and acceptance of planned giving. He is the
official planned giving media contact for CGA-Canada.
Planned Giving, Part 3 — Update • 14
The Chair of the Canadian Association of Gift Planners Board of Directors, Mr. Osborn has
made numerous planned giving presentations to the public, as well as to accountants,
lawyers, financial planners, and their respective associations. He has also created a
subscriber-based planned giving website designed to help charities and advisors of all skills
and experiences. All CGAs have access to this resource through the PD Network at:
DeWayne Osborn's Planned Giving Resource Website
Ian Barnes is the Director of Finance for The Jewish Foundation of Manitoba. He joined the
Foundation in 2000. Mr. Barnes has been involved in the charitable sector for15 years;
mainly in the controllership area and also as a volunteer Board member of various charities.
His primary role is to ensure the Foundation complies with charitable tax law and provides a
resource to facilitate gift planning opportunities.
This is an update to Part 3 in a series of articles by Mr. Osborn on Planned Giving.
Planned Giving, Part 3 — Update • 15