1. Presented By: DeWayne Osborn CGA, CFP Lawton Partners Financial Planning Services Limited Dosborn@lawton.mb.ca CGA – the “P” in Planned Giving!

2. Why Should CGAs Know this Stuff. Why are you Here? 10.Because you were motivated by the promotional materials! 9.Because you were in the area and thought “What the heck!” 8.Because you have the wrong room!! 7.Because you are thinking of changing jobs 6.Because you work in the area 5.Because you have a burning thirst for knowledge 4.Because you need the CE credits 3.Because you have your client's best interest at heart 2.Because you want to help your client 1.Because CA’s will never figure it out!

3. Presentation Overview (not in this order) : Based on my PD Network Paper Entitled: “Planned Giving Strategies”.Based on my PD Network Paper Entitled: “Planned Giving Strategies”. Introduction to Charitable Giving in CanadaIntroduction to Charitable Giving in Canada Discuss the major gift instruments – pros, cons, taxDiscuss the major gift instruments – pros, cons, tax Provide a Summary of the Major Legislative Changes since December 2002.Provide a Summary of the Major Legislative Changes since December 2002. Discuss New Sanctions and PenaltiesDiscuss New Sanctions and Penalties Provide Simple, yet Relevant ExamplesProvide Simple, yet Relevant Examples Website Resources Available to YouWebsite Resources Available to You Q and AQ and A CGA – the “P” in Planned Giving!

4. Source: CCRA CGA – the “P” in Planned Giving! 80350

5. What is a Charity? ITA 149.1(1) Three Types:  Charitable Organizations  Public Foundations  Private Foundations CGA – the “P” in Planned Giving!

6. All resources devoted to charitable activities 1 ; and More than 50% of trustees, directors must be at arm ’ s length; and/or Not more than 50% of capital contributed or paid in came from related persons (except other charities, municipalities, governments, etc); and Can carry on other businesses (e.g. annuities) Public Foundations can not incur some debt. Charitable Organizations and Public Foundations: ITA 149.1(1) CGA – the “P” in Planned Giving! 1 All really means 80%.

7. Same Aspects as Charitable Organization and Public Foundation except: More than 50% of trustees or directors are not at arm ’ s length; and/or More than 50% of capital came from related persons or companies. If a one-time event, Minister can permit temporary exemption until event is corrected or disappears. Example: when Foundation is created, the Directors may not be art arm ’ s length until other Directors are appointed. Private Foundations: ITA 149.1(1) CGA – the “P” in Planned Giving!

8. What is insomnia? Insomnia means a person has difficulty falling asleep or staying asleep during the night, or wakes up tired in the morning. Common causes of insomnia include stress, anxiety, depression, pain, and stimulants such as caffeine and nicotine. The cure: See the next slide or visit http://www.tcc- ci.gc.ca/main_e.htm (Tax Court of Canada)http://www.tcc- ci.gc.ca/main_e.htm

9. Old A + A.1 +B +(C X.045 [D – (E+F)])/365 + G New A + A.1 + A.2 + B + {C X.035[D – (E + F)]}/365 A = 80% of eligible amounts where the charity issued a tax receipt in the previous year. Excludes Enduring Gifts received. A.1 = 80% of the amount (if any) of property that was excluded from the 80% requirement that are indeed expended in the year. A.2 = Amounts of all enduring gifts (except specified) the charity transferred to other qualified donees. B = Gifts received from other charities. 100% for private fdn, 80% for all others. (other than enduring property or specified) Disbursement Quota: All Charities ITA 149.1(1), ITA 149.1(6), 149.1(6.2), 149.1(7) CGA – the “P” in Planned Giving!

10. A + A.1 + A.2 + B + {C X.035[D – (E + F)]}/365 C = # of days in tax year D = 24 month average of property not used for charitable activities or administration (e.g. Endowment Funds) E = all of A.2 + 5/4(A + A.1) F = 100% of B if a private fdn, or 5/4(B) for all others CGA – the “P” in Planned Giving! Disbursement Quota - Continued 3.5% can be changed from year to year.

11. CGA – the “P” in Planned Giving! Disbursement Quota Example: Issued receipts for $100,000 – no enduring gifts Spent $100,000 from a bequest receipted three years ago. Transferred $500,000 in enduring gifts to another charity. Received $200,000 in gifts from other charities No endowment funds

12. CGA – the “P” in Planned Giving! Old New Charitable Org. Public Fdn Private Fdn 160,000280,000320,000 820,000 860,000** ** Private Foundations must spend 100% and not 80% of amounts received from other charities.

13. Disbursement Quota:- All Charities ITA 149.1(1), ITA 149.1(6), 149.1(6.2), 149.1(7)  Bequests; and  Gifts resulting from RRSP/RRIF/Life Insurance beneficiary elections; and  Gifts from other charities that were Enduring property; and  Gifts subject to ten year direction. “Enduring” Gifts are Excluded from Disbursement Quota CGA – the “P” in Planned Giving! Gifts where no tax receipt was issued (planned giving).

14. According to Finance:  FMV exceeds the Advantage received by donor;  Advantage is: any consideration received by the taxpayer Or any person related to the taxpayer; What is a Gift: All CCRA Gift Brochures and Documents; ITA 248(30-31)  Transfer of property (not services) to charity; and  Transfer must be voluntary; and  No benefit to donor, or someone selected by the donor.  Must be accepted by the charity. Must satisfy four conditions: CGA – the “P” in Planned Giving!

15. Why Make a Planned Gift? ITA 118.1(1), 118.1(4), 110.1(1)  Individual gets a tax credit to reduce tax owing! Corp gets a deduction equal to tax rate;  Both can claim up to 75% of tax receipt in any year. Individuals claim 100% in year of death and previous year;  Can carry forward up to five years from year of gift; Wants to Help a Charity!!!!!!! Other Reasons: CGA – the “P” in Planned Giving!

16.  A gift that maximizes the donor’s philanthropic intent at a minimum cost (typically tax savings);  The end product of careful consideration of all the options available to the donor;  Can be outright or at death;  Generally not well understood by the charitable community, the donors, or CRA (Finance) Planned Giving is: CGA – the “P” in Planned Giving!

17. Gifts by Will 118.1(5) The first ever form of planned gift The most common planned gift Mistakenly thought to be the simplest planned gift (real estate, companies, kids, courts, lost relatives) If a charity has a planned gifts program, this is in it. Normally a very quiet program (subtle asks)

18. CGA – the “P” in Planned Giving!  Specific Bequest: I give my kids to ABC Charity  Restricted Bequest: I give $100,000 to ABC Hospital to find a cure for 8 yr old boys’ addiction to gameboys  Residual Bequest: I leave 15% of my estate to ABC Charity Main Issues:  Incorrect Name of Charity  Too much Discretion to Executor  Undue Persuasion  General Bequest: I give $100,000 to ABC Charity

19.  Deemed minimum cost and market value of $1,000;  Gifts of property over $1,000 must be valued by independent expert;  < $1,000, or too expensive to use professional, then may be valued by knowledgeable person from the charity;  Be careful with property created to be donated (e.g. preferred shares). Special Rules and Considerations: ITA 46(1),(2),(3),(5), 237.1, 248(35), IT 332R Gifts of Personal Property: CGA – the “P” in Planned Giving!

20. Gifts of Personal Property: A Gifting Arrangement Waiting to Happen!!  Buy low Donate High effectively killed on December 5, 2003  But there was collateral damage from Finance’s Salvo. Repeat Salvos likely!  Introduced a host of issues for the charity, the donor and the advisor.  Legal opinions and for value appraisals tend to ignore certain provisions OR are heavily conditioned OR both

21. CGA – the “P” in Planned Giving!  Any arrangement where it may be reasonably considered that a person would enter the arrangement to: make a gift, or incur limited recourse debt.  If property was acquired at any time through a gifting arrangement, OR  Gift is made less than 3 years from acquiring the property OR  Reasonably conclude that the property was acquired for the purposes of making a gift.  FMV = Cost to donor. Gifting Arrangement: ITA 237.1, 248 (35)

22. Gifting Arrangement: 248 (36), (37), (38) CGA – the “P” in Planned Giving! FMV not reduced if:  Gift was as a consequence of death, OR  Property is: inventory, real property situated in Canada, Canadian Cultural Property, publicly traded security, ecological property. Transactions aimed at inflating FMV, or bypassing 248 (35) will be ignored. Hence FMV = Cost Limited Recourse Debt (143.2(6.1) did not make the final copy

23. CGA – the “P” in Planned Giving! Collateral Damage: December 5, 2003  Estate freeze preferred shares  Works of Art  Privately held preferred shares

24. Taxable Portion of Capital Gains cut in half for Gifts by Taxpayers of:  Publicly traded securities on Cdn and 27 foreign exchanges; mutual funds and segregated funds;  Prescribed debt obligations;  Can be applied after death (118.5). More Rules and Considerations: ITA 38a, 38a.1, Reg 3200, 3201, RC 4108(E) Does not apply to private foundations OR to capital losses! CGA – the “P” in Planned Giving!

25. Life Insurance: #2 in planned giving! Four ways to use life insurance in planned giving:  Take out a new policy with the charity as owner  Assign an existing policy to a charity  Name the charity as a beneficiary  In combination with other gifts

26. CGA – the “P” in Planned Giving! MethodPremiumsDeath Benefit New Policy YesNo Assign Policy After Assignment, yes Repaid Policy Loans No Beneficiary NoYes Combination Depends

27. CGA – the “P” in Planned Giving!  Bob and Mary purchase a 2-pay, joint LTD policy with death benefit of $500,000. The hospital is the owner. The annual premium was $10,000.  Upon the last death, the hospital get the $500,000  Present Value = $153,000 @ 3% inflation, Age 87  The After Tax Cost to the Donor = $10,800  8.6% return on investment There is no need to purchase first then assign to the charity!! Purchase New with Charity as Owner

28. CGA – the “P” in Planned Giving! Assign Existing Policy to a Charity Same policy as before, only Bob and Sue purchased it 3 years ago  The cash surrender value $12,000  Outstanding policy loan of $5,000  Tax receipt issued for $7,000  If Bob and Sue pay more premiums (which are not due) OR pay back the loan, receipts can be issued

29. CGA – the “P” in Planned Giving! Combinations: Sylvia age 73 and a non-smoker cannot use her cottage any longer.  All of her children have moved out of province and she has been assured that they do not want the family cottage.  She decides to donate the cottage to XYZ charity for a $150,000 (ACB) tax receipt.  The resulting tax saving of $67,500 was sufficient to purchase a $250,000 insurance policy with her children as equal beneficiaries.  XYZ charity sold the cottage to help fund its activities, and Sylvia left $250,000 tax-free cash to her family.

30. CGA – the “P” in Planned Giving! Issues with Insurance in Planned Giving: If charity owns the policy:  Donor can stop premiums. Charity needs to pay OR find another donor, OR collapse the policy (borrow a life). Charity is on the hook for payments – not donor  Many advisors know it best, hence convert other strategies to insurance.  Leverage is becoming more popular (faith based institutions)  Mental Incompetence can wreck the strategy.

31. CGA – the “P” in Planned Giving! Leverage Insurance: A big win, or a bigger headache! Recipe typically involves: Deductibility of Net Cost of Pure Insurance when used as collateral on a loan Deductibility of interest on money borrowed for investment purposes A Restricted Financial Institution (insurance company owned) Donor provided “comfort assets” for security A highly motivated sales force.

32. CGA – the “P” in Planned Giving! A multi million $ gift that costs you nothing!! In reality, if projections do not hold, the policy will implode form insufficient funding – but not for a several years. Promoters are asking faith based charities to provide high net worth people for a meeting to discuss. Gift is often a beneficiary election at the end – charity has no control.

33. Charitable Gift Annuities IT 111R2 Revoked December 20, 2002  Two Kinds: self insured and re-insured;  Both offer guaranteed, non-reducing payments for life or term of years;  Re-insured offer guarantee periods (other than term or life). Residuals may be eligible as gifts (118.1(5.2))  Can be single life or joint (spouse, sisters, brothers, etc.);  All or majority of payment is tax free;  Tax receipt = (amount donated – cost of annuity).  Advantage is in play here. CGA – the “P” in Planned Giving!

34. oMary gives $50,000 to her church for an annuity that pays her $3,000 annually for the rest of her life. oThe cost of the commercial annuity contract required to make her annual payments is $35,000. oTherefore, her gift to the church is $15,000. o Annuity payment using commercial contracts are backed by ComCorp to $2,000 per month. oTax treatment is the same. Gift amount will vary. CGA – the “P” in Planned Giving! Annuity Examples:

35. Life Insurance, RRSP, RRIF: More Rules and Considerations – Cont’d: 118.1(5.1),(5.2),(5.3)  Now beneficiary designation qualifies as gift made by individual (deceased) – not corporate;  Transfer must occur within 36 months of death; May apply to residual values of annuity;  Can be extended with permission from Minister.  Enduring Gift  Great for endowment fund building CGA – the “P” in Planned Giving!

36. “Bumps” in Contribution Room for Gifts of Capital Property:  Increase contribution room from 75% of income by 25% of the taxable capital gain;  Increase contribution room by 25% of any recaptured depreciation.  25% of reserve claimed on non-qualifying securities. Special Rules and Considerations - Continued: 110.1(1), 118.1(1), 40(1.01) CGA – the “P” in Planned Giving!

37. “Bumps” in Contribution Room - Example:  The FMV is determined to be $85,000. Bill gets a tax receipt for $85,000. He has a $75,000 recapture and a $5,000 in taxable capital gain.  His charitable contribution room is ((30,000 + 75,000 + 5,000) X 75%) + Bump of (75,000 + 5,000) X 25% = $102,500.  Bill is retiring from farming. His income is $30,000. He has a tractor that the Museum wants. He bought it for $75,000 some time ago and it is fully depreciated. It is the only asset in its CCA class.

38.  Donor, the estate, or anything that is non arms-length with the charity and its officers and like officials; then Non-Qualifying Security: ITA 118.1(13), 118.1(18), 118.1(6), 110.1(3), 110.1(6),40(1.01)  Privately held security, or debt obligation;  No gift is deemed to have been made until the above conditions are cleared. Once done, tax receipt the lesser of the FMV when gifted, or when condition was cleared. Includes death of individual.  Disposition still occurs regardless.  Special reserve elections available. CGA – the “P” in Planned Giving!

39. Non-Qualifying Security – Excepted Gift:  Privately held share gifted at arms-length to a charitable organization or public foundation only.  Tax receipt issued immediately for FMV at that date.  No further requirements of charity or donor. The Compromise: ITA 118.1(19) CGA – the “P” in Planned Giving!

40.  Must be gifted to a designated institution;  Schedule “A” or Schedule “B”;  Value (tax receipt) determined by CCPERB;  Cost base disposition (no capital gain);  No income limit (e.g. 75%);  Donation can be carried forward for up to 5 years. Special Gifts: Gifts of Cultural Property: CGA – the “P” in Planned Giving!

41.  Revocation of Charitable Registration. Penalties for Charities: Prior to March 22, 2004 ITA 149.1(2), 149.1(3), 149.1(4) Web users, please refer to Chapter One – Sanctions and Penalties for a complete listing CGA – the “P” in Planned Giving!

42. PD Network http://www.cga-network.net/pdnet/nav.do?section=50

43. CGA – the “P” in Planned Giving! Questions??? Thanks You – Enjoy the Conference!