What does an entrepreneur need to know about making a charitable donation?


Gifts of Private Companies and Real Estate

Entrepreneurs create much wealth in Canada with their businesses and real estate holdings. These dedicated owners are often also very committed to charitable giving.  They seek to pass on their community, not diminished, but better than it was passed on to them.

However, it is challenging to make gifts from their wealth.  Company shares and real estate holdings are often illiquid.

Yet, with careful planning, significant gifts can be made now.  There are also new gifting opportunities coming in 2017.

Consider an example of Daniel and Helen – two successful siblings.  Daniel grew a family business; and Helen assembled a real estate portfolio.   Daniel wishes to create an ongoing endowment to fight poverty issues.  Helen wishes to help a youth community centre.

Daniel’s current gift

Daniel has a challenge.  Complex rules apply to gifts of private company shares.

The default tax rule prohibits a charity from issuing Daniel a tax receipt (to reduce his taxes) unless the charity sells the gifted shares within five years of the donation.

Fortunately, there is an “exempted gift” rule.  The five year sale period is avoided if the shares are gifted to an “arm’s length” public charity such as Daniel‘s community foundation.

The foundation can hold the gift in perpetuity and produce an annual income.  Daniel can advise about distribution of the income to his preferred charities.

However, without further planning, the foundation would have valuable shares but no easy way to produce an income for the annual gifting.

Instead of giving his current shares, Daniel could reorganize to create and donate new preferred shares with a fixed value.  These shares could then be repurchased from the foundation by the company in yearly installments to create a cash flow.

Each repurchase would usually be taxed as a dividend, but the foundation can receive it tax free.  Each repurchase may also allow Daniel’s company to claim a refund of some pre-paid taxes (amounts that may have been collected from past company earnings). The refund may be up to 1/3rd of the repurchase amount.

This gift plan is just one of the options available to Daniel.  In the right circumstances, it reduces taxes now and creates an ongoing annual refund.  It gives the foundation a secure gift and cash flow for the annual income.  Most importantly, Daniel will fulfill his wish to make his community better.

Daniel’s future gift

In the future, Daniel’s long-term plan may be to pass his business on to the next generation, but it might also be sold.  After 2017, in a sale situation, new tax rules may give Daniel extra savings by eliminating the tax on the capital gain in his shares – somewhat like the current rules for gifts of publicly-listed shares.  However, the proposed rules are more restricted.  Still, if Daniel thinks he might sell and also continue his philanthropy, then it is important that he be aware of this option now – as he prepares his company for that possibility.

Helen’s current gift

Helen has learned that the youth centre is searching for a new permanent location.  One of the properties that Helen has held in her portfolio for many years is well-suited to their needs. However, Helen cannot afford yet to gift the full value of the property.

Helen can arrange a “bargain sale.”  The youth centre society will pay up to 80% of the appraised value.  Helen will receive a tax receipt for the difference between the amount paid and the appraised value. The sale proceeds and the tax savings from the receipt will more than offset any taxes triggered by the sale.

Helen’s future gift

The new rules in 2017 may also benefit Helen.  The capital gains taxes that would be triggered by a sale of real estate may be reduced to the extent that Helen gifts proceeds of the sale to a charity within 30 days of the sale.  Again, the proposed rules have complexities, but Helen may want to keep them in mind for future planning.

Entrepreneurs are a driving force in our community.  With careful planning, they can share their success and pass along our community even greater than it was passed on to us.