By Mark Therriault, CFP, CIM, BA (Econ.)
The culture of giving at NWM is deeply rooted. Stemming from John and Claire Nicola’s infectious passion for generosity, philanthropy resonates throughout the firm.
I am quickly approaching my 10 year anniversary with Nicola Wealth Management. As my career progresses so does my outlook on life. I have a new appreciation for giving back and helping those less fortunate and my inspiration comes from both my clients, and my colleagues.
NWM values giving and has formed the NWM Gives Back Charitable Giving Committee. The Committee aims to foster a culture of giving back in and outside of our firm. Facilitating numerous firm initiatives throughout the year, the committee also supports our employees’ personal initiatives through matching contributions. Over the years, we have developed relationships with some outstanding charity partners such as Canuck Place, Opportunity International, and Free the Children, just to name a few.
As a member of the Committee, I was honoured to represent NWM at We Day in Vancouver. I was moved by an arena full of students who earned their ticket by leading a charitable project in their community. It was inspiring to see these kids who were being educated about giving and being rewarded for taking action. The culture of giving is alive within the next generation!
About 5 years ago I started working with a new client with a passion for philanthropy. This client supported a school, foster homes, and had endless stories of people he had helped. Immediately, I had great respect and admiration for his dedication to giving back and making a difference.
Motivated to launch my own philanthropic journey, I initiated several fund raising and awareness initiatives with which he was, not only an inspiration, but a helpful mentor. To this day, I am compelled to continue giving back and foster the culture of giving.
A PGF allows you to donate funds in years when you have larger profits, have a large capital gain, or are selling a part or all of your business.
For example, a 55 year old business owner plans to give away 20% of his net worth to charity at death. If we integrate this into his planning now, we can deposit funds into the PGF account each year, which will reduce his taxes payable today. In the PGF account, the money will be invested and will grow. The business owner can continue to contribute to his PGF and may decide to donate this growth along the way. The advantage here is that the client is making donations in the years where his income is likely the highest it ever will be, he is likely earning more than they will be in retirement. As the fund grows, so does the ability to donate the growth.
Let’s jump ahead 5 years, the client is now selling his business, and is going to be facing a rather large tax bill. Assuming he has taken advantage of all the other tax planning available to him, he can also look to donate a portion of the shares outstanding to their PGF, as opposed to the proceeds from the sale of the shares. This would significantly reduce the taxes owed on the sale as well as generate a bigger donation for the PGF by planning ahead and donating the shares instead of cash after the fact.
With the proceeds of the sale, the client decides to invest the funds with NWM and has a portfolio that generates cash flow. If he has excess funds and the portfolio is continuing to grow beyond their income needs, the client can continue to use the same method that he was using before he sold the business. We look at the gains and distributions from the portfolio, and donate accordingly to the PGF to effectively reduce their overall taxes. In some cases, I have clients who pay close to no tax annually with this strategy.
Anytime clients want to make a donation, they simply call us and we take care of issuing the cheque and making sure it is donated to the organization of choice.
Over their lifetime, by giving, they have significantly reduced their overall taxes, and at the end of the day they have a large foundation account, that is generating significant cash flow and can now be sustained in perpetuity and be passed down from generation to generation effectively creating a family legacy of giving back.
Like many of our clients, we value community involvement and giving back. In many cases, philanthropy is a key item that connects us with our clients. We work closely with them to help satisfy their philanthropic goals.
As our clients know, we spend significant time with them on planning for today and for the future. For example, in order to help an entrepreneur client achieve his or her long-term financial goals we analyze their current situation, corporate structure, financial statements, taxes etc. We even develop strategies for the business succession in order to set them up to achieve their family’s financial goals. Often times, we realize that individuals are missing an opportunity to align their philanthropic wishes with their overall tax planning strategy.
This is where our Private Giving Foundation (PGF) comes into play. In essence, a PGF is an alternative to a private foundation, allowing donors to enjoy administrative convenience, cost savings and tax advantages by making their charitable grants through the fund.
Each donor subscribes to the foundation by setting up an investment account to which the contribution is deposited and managed. Donations are subsequently made from the investment account to an eligible charity of the donor’s choice. An official tax receipt is issued every time new contributions are made to the foundation, allowing the donor to enjoy an immediate tax benefit with the flexibility to make a gift to the charities of their choice when they are ready.
A growing number of sophisticated investors are choosing to include the Donor Advised Account (DAA) as part of their overall financial plan and tax strategy. This piece will introduce you to the possibility of making a substantial permanent donation; one that can potentially grow and give in perpetuity on your behalf.
Now that your PGF is established…
Donating property in kind provides an excellent planning opportunity for donors who wish to contribute securities with unrealized long-term capital gains directly to the PGF account, instead of selling the assets and then donating the proceeds.
The financial results are better illustrated with an example:
By setting up a donor advised account within PGF and donating the shares to the fund in kind, our clients improved their tax results by 40%. Notice that the potential tax liability on the accrued capital gains is fully eliminated when the shares are donated in kind to a registered charity.
Once this transaction settles within the PGF investment account, a charitable receipt is issued to the client for the value of their donation. At that point, they can request a full redemption of the shares and a cheque to be issued to the chosen charity. This is a win-win situation for both our client and the charity.
When the property is owned corporately…
The same opportunity exists when an entrepreneur or business owner makes a gift of property to the PGF through their corporation. Depending on whether or not the company’s active business income in a given year is under the Small Business Limit, there are two very distinct consequences. The table below explains the financial implications of making an in-kind donation through a company during a year when active business income is under the Small Business Limit.
With Active Business Income UNDER Vs. OVER The Small Business Limit
When the asset is sold (option #1), capital gains taxes are paid at the corporation’s investment or passive rate of 45.8%. However, the charitable donation credits received as a result of donating the proceeds are calculated at the small business rate of 13.5%. Clearly, this strategy only provides a minimal tax saving opportunity to the company and gifting the shares in kind (option #2) provides the best result.
Now, assume that the business has an annual in¬come over the Small Business Limit. The tax results, while slightly different from the previous analysis, also provide significant savings when securities are donated directly to a foundation as opposed to selling the assets and donating the proceeds.
Benefits To You…
- As a donor, you do not have to decide immediately on a particular charity in order to obtain a tax receipt. For example, you may receive a large bonus or other significant income near the end of the year and not have time before year’s end to decide which charities to support. With a PGF, you obtain an immediate tax deduction for your charitable contribution. You can then recommend grants to qualified charities at a later time when you are ready to make those decisions (within the legislated requirements for distributions from the fund; see “PFG Guidelines” insert).
- Contributions provide tax savings up front that amount to a tax deduction of approximately 45.8%.
- Donations can be made in cash or in kind. In kind donations can be mutual funds, stocks, shares of private corporations, bonds, real estate, etc.
- The convenience and flexibility of a PGF account allows you to make substantial contributions to your account in profitable years and to sustain a similar level of giving to your favourite charities in leaner times.
- Your donations are deposited in a PGF investment account that will be administered by Nicola Wealth Management. Your advisor, along with our Portfolio Management Team, will assist you with determining suitable investment options for your contributions.
- Any potential asset growth within the PGF account accumulates tax-free, offering the potential for greater charitable grants in the future.
- Your PGF account can be named as the beneficiary of your registered assets, subsequently eliminating any tax liability upon death that arises from the disposition of your RRSP or RRIF.
- Setting up a private foundation is costly. As long as Nicola Wealth Management is managing the assets through PGF, virtually all administration fees are covered.
- Planning for future and succession planning
- Tax savings now and when selling the business
Overall, tax savings opportunities are significantly enhanced when securities are donated in kind as opposed to selling the asset and donating the proceeds.
The goal of charity is to provide help where it is needed.
Many of us enjoy financially supporting the causes we believe in and, as financial advisors, our goal is to help you find the most effective and efficient ways to do that. Our hope is that an option such as The NWM Private Giving Foundation provides you with more flexibility in your donations and the opportunity to continue giving for as long as the need endures. It is a chance to leave a lasting legacy that is built around the spirit of charity and philanthropy. But more importantly, it is a way to ensure that the worthwhile causes we hold dear continue to find the support they deserve.
For more information about The NWM Private Giving Foundation, please contact your financial advisor at 604.739.6450.
1 This is the highest combined Federal and Provincial tax rate for BC residents. In actual fact, charitable donations generate a tax credit to the tax payer; however, the net effect is equivalent to a deductible expense at the individual’s Marginal Tax Rate (MTR).
Disclaimer: This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Please speak to your advisor regarding your unique situation.