WEALTH MANAGEMENT – MALCOLM BURROWS
By Malcolm Burrows
Early in my charitable planning career my employer was offered a donation of islands on Georgian Bay. Surrounding the 100-year-old family cottage were sheds, cabins and boat houses. The donors had a vision: it would be a children’s camp
It was a stunning property. Valuable, despite the sagging, mouse-infested buildings. But this gift by will was contingent and restricted. It would be a children’s camp, or nothing at all. The gift never happened.
Looking back, I feel the donors’ palpable regret and disappointment. They were in the late 70s. They loved those islands. It was unbearable to see the cottage sold, torn down, desecrated.
The charity, however, had no need of the islands or a camp. It had no funds to develop or operate the facility. We suggested, tentatively, that it could be sold and the funds used for the charity’s core mission. Regrettably, the donors thought we were rude and greedy.
Real Estate Restricted to Use
Since that first experience, I have met a number of well-intention donors with similar dreams. What dreams? A Victorian rooming house, well, mansion, for a humane homeless shelter. An artist’s cottage for a writer’s retreat. A country estate for a university campus. A farm for an animal sanctuary. A heritage house for a museum.
These donors were all deeply invested in their vision and property. As a result, they have a hard time understanding the practical issues for the receiving charity. Sometimes the charity already exists, and, of course, has other programs. Sometimes a new charity had to be created to carry out the purposes. Either way, the operational challenges were significant.
All property donations require a contingency plan. During the planning process, it’s best to address the monetary value of the property and the core mission of the charity. This discussion is essential, and just the start.
Due Diligence Questions
Here’s some practical questions for donors, gift planners, lawyers and charities to consider:
- What is best charity to hold the property and carry out the intended purpose?
- How will ongoing programs be funded?
- What are the zoning issues?
- Are there capital improvement costs?
- How much are taxes, insurance, programs, and maintenance?
- What happens after the first 20 years? Who will run the programs? Will there be a need?
- Is there any plan to make additional donations, in addition to the real estate?
- Is there a gift agreement? If so, does it include a variation of purpose clause so the property can be sold?
- If the property is sold, how will the funds be used?
Good charitable estate planning involving real estate starts with frank discussion. It’s important to recognize the cost and responsibility associated with big dreams and special properties.
And About Those Gifts from RIFFs
I get regular inquiries about donating funds from registered retirement income funds or RRIFs. The value of RRIFs has grown through careful saving and market gains, and these funds may represent surplus wealth. Some RRIF holders resent the requirement to take steadily increasing annual withdrawals from their RRIF. Add a dash of altruism and the idea of donating RRIF property arises.
The Basics
There are a couple of factors to remember when considering donating RRIF assets.
First, any withdrawal is taxed as income. So there is no advantage to donate appreciated public securities from within a RRIF. The taxation rate is not the 50 percent lower capital gains rate. If there is no capital gain and it will not be eliminated if securities are donated in kind.
Second, plan trustees are obliged to withhold 30 percent of any withdrawal for tax purposes. The withholding tax creates cash-flow problems for the would-be donor. For example, a desire to donate $100,000 is frustrated by having only $70,000 available. There is, however, a tax liability on the full $100,000 withdrawal.
Offset Donation Plan
From a tax perspective, it is a bad idea to make direct gifts from RRIFs during life. These gifts are tax inefficient and the withholding tax causes cash-flow issues. Still, it may make sense for a committed donor to use an offset plan to achieve charitable goals.
One approach is to donate appreciated publicly-list securities held outside the RRIF and withdraw an equal amount from the RRIF. The tax credit from the donation will offset the tax liability triggered by the RRIF withdrawal.
This donation is more tax effective due to nil capital gains from a gift of public securities. It also allows the donor to reinvest funds from the RRIF in a lower tax environment that provides higher control over cash-flow. It does not eliminate the withholding tax, so it is best to make the RRIF withdrawal in December to reduce the period when the donor is out of pocket.
AMT Proposed Changes
On January 1, 2024 it is expected that Alternative Minimum Tax (AMT) will be applicable to donations from individuals for the first time. This is worrying news for donors and the charities that rely on major donations.
The proposal is to increase the base AMT rate from 15 percent to 20.5 percent. For individuals with net income in excess of $173,000 tax savings from donations would be reduced under the proposal. Donation tax credits may be reduce by 50 percent. Rather than nil capital gains for donation of the public securities, a 30 percent inclusion rate would apply. This rate is a roll-back to 1997 levels. Moreover, it represents a profound change in the tax policy of the last 30 years.
Donors who have a large RRIF and taxable securities may want to explore the benefits of making a large gift of public securities in 2023, before the new AMT rules come into effect. This will allow them to receive the tax benefits described above.
The AMT proposals apply to individual not corporate donors. Fortunately, AMT would not apply to donations in the year of death. In other words, estate donations will not be affected.
Malcolm Burrows is a philanthropic advisor with 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own. malcolm.burrows@scotiawealth.com. He writes this column exclusively for each issue of Foundation Magazine.