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or many Canadians, there comes a time to givesomething back. When we do well, we oftenfeel a desire to give — it’s natural. Whether it’sa religious group, a school or educationalinstitution, medicine, science or simply theless fortunate, many Canadians find a way to

support a worthwhile cause, even in hard economic times.According to Statistics Canada, Canadians filing taxes

reported making charitable donations of over $8.6 billion in2007, up 1.4 per cent from 2006. However, as expected, therecent economic slump has impacted charitable giving inCanada. Community Foundations Canada indicates thatdonations are down 37 per cent compared to last year. But according to Brad Offman, vice-president of strate-

gic philanthropy for Mackenzie Financial Corp, the long-term trend is up. Offman expects charitable donations to soarover the next decade. What’s more, he sees not only anincrease in overall giving, but a vast shift in the wayCanadiansgive to charity.In the United States, about 80 per cent of charitable giv-

ing is done through advisors. Not so in Canada. Offman esti-mates that only 15 to 20 per cent of Canadians use a finan-

cial advisor to facilitate charitable giving, with the largemajority giving to charity directly. However, he expects thatnumber to increase dramatically over the next 10 years,approaching the 80 per cent mark in Canada as well. “This presents a very interesting opportunity for advi-

sors,” says Offman. “I think we’ll see a huge trend of givingthrough the advisory channel, as opposed to directly to char-ity. Advisors need to be prepared, both emotionally and tech-nically, to face this challenge.”

The Advisor’s RoleSure, it’s easy to write a cheque, donate old clothing or makean online donation to a charity of choice. On the contrary,more sophisticated types of giving, involving life insurancestrategies, charitable remainder trusts or donor-advised fundsrequire the services of an expert. This is a call to duty forfinancial professionals.“Unlike many other aspects of financial planning, the topic

of charitable giving is values-based,” says Offman. “Advisorswith the strongest relationships will be in the best position.” Unfortunately though, many financial advisors feel

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Charitable contributions in Canada have held steady, despite the globaleconomic crisis. Sources say philanthropy is set for a big rebound in the years ahead, according to Michael Callahan. But are financialadvisors tapping into their clients’ aspirations to leave a legacy?

ShapingaLegacy

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uncomfortable broaching the subject of charitable giving andomit it from the planning process unless the client raises theissue first. The problem is, of course, that clients are oftenunaware financial advisors can offer charitable giving guidance,so they don’t initiate the discussion either. Advisors beware —those who fail to relate charitable giving opportunities to theclient can be sure a competitor will inevitably do so. “Taking a proactive approach can build deeper advisor-client

relationships and enhance client loyalty. It’s important that advi-sors be knowledgeable about the various ways charitable giv-ing can be incorporated into financial planning and be able topresent a full range of options available to a client,” adds Offman. There are several creative solutions, in particular the use of life

insurance, donor-advised giving programs and charitable remain-der trusts, that advisors can discuss with philanthropic clients.

Use of life insuranceMany clients, and perhaps advisors alike, are often unaware ofthe ways in which life insurance can be incorporated into char-itable giving. Life insurance solutions can provide clients withan opportunity to help a favourite charity while minimizingtaxation. Some common strategies include the following.

Transfer an existing paid-up policy. This is an attractive optionfor clients with older policies, many of which have been fullypaid up. The values of older policies have often grown substan-tially, due to the reinvestment of dividends, making such dona-tions quite attractive. Clients who chose to donate an existingpaid-up policy to charity will receive a charitable tax receipt forthe cash surrender value of the policy.

Designate a charity as beneficiary on a new or existing policy.Of course, for existing policies, the beneficiary designationwould have to be revocable in order to accommodate thischange. Upon death of the insured, the designated charityreceives the proceeds of the life insurance policy and the estateof the insured will receive a charitable tax receipt for thatamount. The tax deduction can be applied by the estate in theyear of death or carried back to the preceding year.

Transfer a new or existing policy to charity with a pledge to payannual premiums.This is an interesting solution, providing theclient with tax savings each year. The way it works is that theclient will continue to pay the required annual premium, butin turn will receive an annual charitable tax receipt for theamount of that premium. Note, however, that no receipt isissued for the proceeds of the life insurance upon the death ofthe insured.

Designate a charity as beneficiary of an RRIF or RRSP. On thesurface, this may not seem like an insurance strategy, but thereis an insurance component. The client making the RRSP des-ignation also purchases a life insurance policy of equivalentvalue, electing a beneficiary of choice, such as the estate. Upondeath, the charity receives the proceeds from the RRSP and

TAX AND ESTATE PLANNING issues a charitable tax receipt for the donation, while the estatereceives the life insurance proceeds tax-free.

Purchase wealth replacement insurance. In this case, the clientwould make a cash donation to a desired charity and receivethe corresponding tax credit. The tax savings are then used topurchase life insurance, with the estate as beneficiary. Dependingon the client’s personal situation, the tax savings can potential-ly fund an insurance policy adequate to replace the entire valueof the gifted property.

Donor-advised programsThe donor-advised fund has become one of the most popularphilanthropic tools in recent years. Created for the purpose ofmanaging charitable donations on behalf of others, a donor-advised fund offers individuals the opportunity to establish a lowcost, flexible vehicle for charitable giving.

“We establish donor-advised funds for people who want todonate a one-time sum and for those with annual givinggoals. A donor-advised fund achieves all the financial advan-

Canadian entrepreneurs and business leaders have been busy in recent years in their philanthropicefforts. Here is a breakdown of some of the largest single cash donations in the country.

1. $105 million to McMaster University’s medical schoolIn 2003, Michael Degroote, former CEO of Laidlaw Transport Ltd., made the largest single donation in Canadian history.

2. $100 million to the Winnipeg FoundationCommunications giant Randy Moffat made the second-largest charitable gift in 2001 to help needy children and families.

3. $70 million to the Art Gallery of OntarioFormer chairman of Thomson Corp. Ken Thomson, who died in 2006, made his donation to the AGO in 2002.

4. $64 million to McGill UniversityRichard H. Tomlinson, founding director of Gennum Corp. and an alumni of McGill, gave the university its biggest single cash donation.

5. $30 million to Royal Ontario MuseumMichael Lee-Chin, former president of AIC Limited, made the lead donation for the ROM’s Renaissance project and had the Michael Lee-Chin Crystal named in his honour (see cover image).

Notable Donations

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tages and personal satisfaction that comes with establishingyour own private foundation, but with significantly less costand complexity. It also means dealing with just one charity,which can then distribute to many other charities on thedonor’s behalf,” says Nicola Elkins, CEO and founder,Benefaction Foundation.Benefaction is a new charitable public foundation that works

with affluent individuals and their financial advisors to devel-op powerful, cost-effective strategies for giving. “It is all aboutefficiency, control and minimizing tax burdens. We are the out-sourced solution for affluent Canadians who want to give butdon’t want to be burdened with administration,” adds Elkins.Donor-advised funds are often provided by community

foundations and financial services companies. Once an accountis opened and designated to the client’s fund, the donor canthen contribute cash or securities, usually subject to initial min-imum contribution requirement of $10,000 to $50,000 depend-ing on the foundation. The donor advises on the selection ofcharity and how the assets are to be invested.A donor-advised program offers many benefits to donors:

• control and flexibility — client maintains control in terms of directing the donations to alternate charities; • simplified administration — the sponsoring organization does the record-keeping and due diligence. Lower administration costs can make a meaningful difference, leaving more money available to charities;• identity protection — unlike private foundations, a donor-advised program can protect a donor's identity if requested; and

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• investment management — depending on the program, clients may be able to advise the sponsoring charity on how it should invest the assets. Donor-advised giving programs present advisors with an

opportunity to offer their clients innovative, cost-effective solu-tions and to integrate philanthropy into overall financial, taxand estate planning. “We can help advisors retain existing assetsthat they might otherwise lose directly to a charity and to attractnew assets by offering a more holistic wealth management solu-tion,” adds Elkins.

Charitable remainder trustOffering somewhat of a deferred gift, yet still (potentially) pre-senting clients with immediate tax benefits, a charitable remain-der trust (CRT) can be an effective financial and estate plan-ning tool. Unfortunately, new tax law interpretations and a lackof clarity surrounding CRTs have made them somewhat of anambiguous structure. A CRT is a planned donation whereby a donor makes a gift

to a charity through a formal trust agreement. Here’s how itworks: the donor (settlor) transfers property to a trustee whoholds and manages it in accordance with the donor’s instruc-tions. In cases where the transferred property is income-pro-ducing, the net income is paid out to the donor and/or othernamed beneficiary(ies) throughout the lifetime of the trust. Thetrust terminates either at the death of the donor or after a spec-ified term of years, at which point the remaining trust assets aredistributed to the charity. One of the main problems is the fact that we do not have a

clear regulation of CRTs. The Canada Revenue Agency (CRA)has issued Interpretation Bulletin IT-226R, which discusses the

a) Proceeds of sale/donation $100,000 $100,000

b) Initial cost of investment $10,000 $10,000

c) Capital gain (b - a) $90,000 $90,000

d) Tax credit to Colleen $44,000 $44,000

e) Taxable capital gain (50% x c) $45,000 $0

f) Tax owing by Colleen (46% x e) $20,700 $0

g) Net tax benefit to Colleen (d – f) $23,300 $44,000

* Assuming Ms. Farrell is in a 46 per cent marginal tax bracket, has sufficientnet income to claim the full amount of the donation and would receive a com-bined federal and provincial tax credit of $44,000 in her province of residence.

In the end, Colleen is substantially further ahead bydonating the securities instead of selling and donating theproceeds. Or in other words, the gift of securities can bemade for significantly less than the net cost of an equal giftof cash. By donating stock, clients can enjoy the satisfac-tion of supporting a worthwhile cause of their choice whilemaximizing their tax benefits.

New Tax Rules on Gifting

Since 1996, the federal government has introduced morethan 20 tax incentives to encourage charitable giving.Perhaps the biggest change came in the 2006 federal budg-

et, which completely abolished the capital gains tax on the dona-tion of publicly listed securities, mutual funds and segregatedfunds to a registered charity. Clearly this opens the door foradvisors to deepen relationships with clients by discussing newstrategies that were previously unavailable. If a client holds publicly traded securities or mutual funds

that have increased in value, it may be more beneficial to donatethose securities directly, as opposed to selling the securities anddonating the proceeds in cash. The reason is that the tax normal-ly owing as a result of the capital gain is wiped out. Furthermore,the client becomes entitled to an income tax deduction for thefair market value (FMV) of the securities donated.

An example.Ms. Colleen Farrell wants to make a donationof $100,000 to the ABC Foundation, a registered charity shefavours. Colleen has securities valued at $100,000 that she wantsto use for the donation. Should she donate the securities direct-ly or should she sell the securities and donate the proceeds? Let’stake a look at how each scenario pans out.*

Sell securitiesand donate proceeds in cash

Donatesecurities

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CRA’s administrative position with respect to these structures,although the term “charitable remainder trust” is not mentionedin the bulletin. The ambiguous treatment of capital gains ontransfers to CRTs is of particular concern. The CRA is unclearif the transfer can occur at cost or if fair market value (FMV)rules are applicable. Complicating matters more is the interestrate calculation of the gift receipt. Instead of providing a ratefor the calculation, the CRA suggests a “reasonable rate” be used,which is open to interpretation.Another concern is cost. There may be considerable over-

head involved with CRTs, meaning they may not make sensefor smaller donations. Another point worth noting is that inorder to qualify for a charitable tax receipt, the contributionmust be irrevocable. In this case, the client cannot have any ofthe capital returned. The CRA is very clear on this point — ifthe trust agreement allows the trustee to return any portion ofcapital from the trust to the donor, the gift is deemed not eli-gible for the charitable donation tax credit.But there are still some advantages of using charitable remain-

der trusts. The donor can get a tax credit for the charitable dona-tion now, but without entirely giving up control of the assets.And while the contribution must be irrevocable in order toachieve the immediate tax credit, the donor may have some dis-cretion over the way the assets are invested, while still continu-ing to enjoy the income stream produced from the investments. In addition to immediate tax relief, another advantage of CRTs

is the ability to reduce probate fees. When the trust is created,

Philanthropy is playing anincreasingly important role infinancial planning and advisorsneed to be prepared to tacklethis topic with their clients.

assets transferred to the trust are removed from the donor’s estate.The assets from the trust are not a part of the donor’s will and aretherefore not subject to probate fees upon death. This providesan estate planning opportunity for advisors to discuss with clients.Since establishing a charitable remainder trust often requiresthe services of a lawyer and an accountant, it presents advisorswith another great opportunity to build centres of influence. Philanthropy is playing an increasingly important role in

financial planning and advisors need to be prepared to tacklethis topic with their clients. Advisors who work with clients tohelp them realize a philanthropic vision are provided with plen-ty of opportunity to strengthen relationships with clients whileworking with other professionals in the community. By work-ing together, advisors can identify creative solutions that helpclients achieve their charitable giving objectives.

MICHAEL CALLAHAN, CFP, is a freelance writer and securities-and-insur-ance-licensed financial planner in Ottawa, Ont. He can be reached atcallahan_michael@yahoo.com.