The Taxman Giveth


By John Nicola, CFP, CLU, CHFC

“Let your heart feel for the afflictions and distress of everyone, and let your hand give in proportion to your purse.”
George Washington

A couple of weeks ago we wrote about the impact of the Tories’ decision to tax income trusts and thereby stop the “massive hemorrhaging” of lost government revenue. (It is interesting to note that in 1993, trusts in total were less than $10 billion in capitalization versus over $200 billion in 2006. The federal deficit in 1993 was over $30 billion, and tax rates were much higher overall. In 2006, we have a massive surplus, lower tax rates and trusts proliferate. Clearly they were an evil that needed to be stopped.) It is not my intent to dwell on trusts and taxes which the government is trying to extract from you – in fact just the opposite. By employing charitable strategies before the end of 2006, your personal or corporate taxes can be dramatically lowered while substantially helping your favourite charitable organizations.

It is not my intent to dwell on trusts and taxes which the government is trying to extract from you – in fact just the opposite. By employing charitable strategies before the end of 2006, your personal or corporate taxes can be dramatically lowered while substantially helping your favourite charitable organizations.

As we wrote in our newsletter a year ago – you can “do well while doing good” (deeds, that is). We invite you to download our newsletter Doing Well By Doing Good from our website at www.nicolawealth.com (you can find all our past articles under Newsletters & Downloads, simply click on “Read previous issues”).

Below is a brief synopsis of some of the most effective charitable strategies.

Donor Advised Accounts:

This is an investment account where a donor contributes capital and makes annual gifts from the income of the account to charities that he or she chooses. The distributions have to be a minimum of 3.5% per year, but they effectively allow the account to grow in value while supporting the current and future needs of the donor’s chosen charities. For our clients, we have established a public charitable foundation called the Philanthropy Preceptorship Fund (PPF) and quite a few families have funded donor advised accounts.

Basically they work as follows:

  • The client donates $25,000 or more to open the account
  • We manage the investment account for the client as we would their other investment accounts with us
  • They let PPF know which charities they want to support each year and the amount in each case (3.5% is the minimum but effectively there is no maximum)
  • The client (donor) will receive a tax deduction for the capital contributed to their account each year and, if done personally, the tax savings would be 43.7% (see newsletter for a more detailed example)

Allow me to make a personal observation here: I have seen a number of clients open their PPF accounts with a small initial donation only to make major additional contributions in subsequent years. Not only do they find this incredibly tax effective, but they enjoy their ability to share their wealth in a meaningful and accountable way with those organizations in the community that mean the most to them; a perfect blend of good financial and philanthropic planning.

Charitable Insured Annuities:

These are very safe investment vehicles (similar risk to high grade bonds or GIC’s) that provide the following:

  • Current cash distributions to the donor’s favourite charities
  • A tax-free endowment that bypasses all estate costs and creates a gift in perpetuity for those same or other charities
  • A tax-free income to the donor for their lifetime

Charitable insured annuities are a great example of how good tax planning can create benefits for charities and donors alike.

Gifts of shares or assets of private companies:

For those of our clients who have much of their wealth tied up in private companies, there are many effective strategies where gifts of either shares or assets can be made that provide both immediate and future tax benefits.

Since each case is different and fact specific, we cannot provide much additional detail here; however, if this appears to be an area of tax and philanthropic planning that you would like to learn more about, then please contact us.

It is important to remember that for most of you, the deadline for receiving tax deductions for 2006 is December 31st. Nevertheless, as a practical matter, you really need all decisions and documents completed by December 15th at the latest.

If you have not taken advantage of any of the above strategies, then please consider them. I can tell you that personally I have done all three and they have worked out wonderfully well.