Planned Giving Strategies. Charitable Remainder Trusts

Transcription

1 Planned Giving Strategies Charitable Remainder Trusts 1

2 Charitable Remainder Trusts! What is a charitable remainder trust? Immediate charitable receipt Deferred gift to charity Irrevocable gift of capital to charity Income can be enjoyed by settlor or contributor Can be intervivos or testamentary 2

3 Charitable Remainder Trusts! Terms of trust require that: Registered charity or qualified donee must be expressly designated Equitable interest to charity can be valued Property transferred must qualify as a gift 3

4 Charitable Remainder Trusts! How is the equitable interest valued? Net present value of asset based on projected date the property will be transferred to the charity (i.e. on death) The longer the time frame, the lesser the value of the gift today 4

5 Example 1 (intervivos)! John is 65 years old! Creates a trust for the benefit of a registered charity and transfers a $1,000,000 GIC into the trust! During John s lifetime, he is entitled to the income! On John s death the $1,000,000 GIC will be transferred to the charity 5

6 Example 1 (cont d)! Valuation issues The NPV of the $1,000,000 today, will be a actuarially determined based on John s life expectancy The charity can issue a receipt for the NPV of the gift today 6

7 Example 2 (testamentary)! John (age 65) provides for the creation of a charitable remainder trust on his death! The income beneficiary can be a living relative! Provides for income during their lifetime with the capital ultimately bequeathed to charity 7

8 Example 2 (cont d)! NPV of gift will depend on beneficiary s life expectancy at the creation of the charitable remainder trust! The life of the trust can also be fixed, with a gift-over to charity after a sum certain number of years! This makes valuation of the gift a much easier exercise 8

9 Charitable Remainder Trusts! What kind of property can qualify? Valuation concerns can result for i. Artwork ii. Shares in a privately held corporation The property value must be ascertainable in order for the charity to issue a receipt 9

10 Charitable Remainder Trusts Ongoing taxation! Not tax-exempt! Taxed like any other intervivos or testamentary trust! Ability to designate under 104(21) capital gains to the tax-exempt capital beneficiary of the trust! Must meet paid or payable rule for 104(21) to apply 10

11 Ongoing taxation (cont d)! Transfer of property to charity occurs under 107(2)! No gift occurs at this time! Tax relief is limited to the front-end of the structure, when the equitable interest in the capital vests with the charity 11

12 Charitable Remainder Trusts Areas to tred carefully! Multiple beneficiaries problematic! Gift of an income interest / CRA does not have a consistent position on this! Encroachment on capital! Joint partner or common-law partner trusts / problems in valuing proportionate equitable interests 12

13 Capital Property Gifts! Described in Section 118.1(5) of ITA! Gifts made through the Will! Deemed to be made immediately prior to death 13

14 Designation of a Gifted Property! An individual is deemed to have received FMV at time of death! FMV exceeding ACB results in capital gains tax! Income Tax Act provides for reduced capital gains when donated to charity! Designation under subsection 118.1(6) of ITA 14

15 Post-Mortem Planning Example 1 Gifting property to a CRT Example 2 Gifting private company shares to a CRT 15

16 Example 1! NO GIFT Deceased s income (year of death) RRSP/RRIF income $ 100,000 Capital gains deemed disposition (mkt sec) FMV 200,000 ACB 100, ,000 X ½ 50, ,000 Approx tax thereon $ 55,000 16

17 Example 1 (cont d)! Using a charitable remainder trust! Property inserted at death! Income from property paid to family member for life! Property ultimately given to a registered charity named under the terms of the will 17

18 ! Charitable tax credit available in the year of death! Flexibility on type of property settled in trust! Ability to elect proceeds of disposition under subsection 118.1(6) 18

19 Assume:! Marketable securities of $200,000 settled into CRT! Elected value equal to FMV! Spouse designated as life income beneficiary! Qualified charity designated as capital beneficiary of CRT! Assume NPV of Gift = $150,000 19

20 With GIFT to CRT: Deceased s income (year of death) RRSP/RRIF $100,000 Capital gains 100,000 x ½ x ½ 25, ,000 Approx tax thereon 47,218 Charitable tax credit (45,866) $ 1,352 20

21 Charitable Tax Credit Carryover Federal credit $150,000 x 29% $43,500 Manitoba credit $150,000 x 17.4% 26,100 69,600 Utilized on Terminal T1 (45,866) Available for carry back to prior year $23,734 21

22 Planned Giving Strategies EXAMPLE 2 Shares of a Privately Owned Investment Holding Corporation 22

23 Example 2! A privately-owned holding corporation holds publicly-traded securities! The corporation also has a significant balance in RDTOH! The shareholder has no immediate cash need to liquidate the corporation! Charitable giving intentions as well as wealth transfer to heirs 23

24 Current situation Shareholder 100 % HOLDCO FMV= $2,000,000 RDTOH= 400,000 ACB= 100 PUC=

25 Potential tax implications on death Deemed proceeds on death ACB Capital Gain Tax thereon $ 2,000,000-2,000,000 $ 464,000 Problems! Wealth is still trapped in the corporation! A second level of tax will result if surplus is paid out to the heirs 25

26 Double tax on winding up the corporation Deemed dividend on windup RDTOH recovered Tax 35% Net cash available to heirs Assumes $ 2,000,000! Sec 164(6) loss carryback within first taxation year of estate! No subsection 40(3.6) stop-loss concerns 400,000 2,400,000 (840,000) $ 1,560,000! No inherent gain or securities within the corporation 26

27 So What can be done?! Will Gift of controlling portion to a registered charity, or! Gift all shares to the charity, or! Direct the wind-up and liquidation of the corporation to heirs and charity 27

28 Problems! Charities generally do not wish to receive shares of privately-owned corporations! Family members compromised by a minority position, or! Loss of control by the testator! Significant tax cost on wind-up or disposition on death 28

29 The Plan! The shareholder could provide for a will Gift to a CRT 29

30 One Solution! Provide for a fixed sum to charity say $500,000, with a gift-over of the remaining assets (after tax) to the heirs Shareholder 100 % of the shares HOLDCO ACB = $100 PUC = $100 RDTOH= $400,000 Investments - $FMV = $2,000,000 30

31 Section 86(1) Reorganization of Capital! All old common shares exchanged for two new classes of special freeze preference shares plus nominal value new common shares to beneficiaries! All new shares have an aggregate value equivalent to the old shares Example: Class A pref (voting) $ 1,900,000 Class B pref (non-voting) 500,000 Common - $ 2,400,000 31

32 On Death! Gift of $500,000 Class B preference shares to CRT! Estate redeems $500K of Class B pref and $700K of Class A pref resulting in $1.2M dividend payment Cash of $500,000 paid to CRT! Demand promissory note to beneficiaries! Dividend refund of $400,000 32

33 Tax Implications Taxable Capital gain on Deemed disposition On Death Terminal T1 ($ millions) $ $ Estate 1,200, (6) election (350,000) - Deemed dividend on redemption of Class A pref 850, ,000 Gross-up 0 175,000 Taxable Income 850, ,000 33

34 Tax Implications (cont d) Tax thereon T1 Terminal Estate Federal 29% 246, ,000 Dividend tax credit - (116,667) Donation tax credit (assumes NPV of $400K) (116,000) - Federal Tax 130, ,333 Provincial tax (approx) 74, ,000 $ 204,000 $ 241,333 34

35 Corporate Structure Trustees Beneficiaries income Common shares $ 0 Class A Pref 1,200K Note 255K 1455K CRT HOLDCO 500,000 cash FMV = $1,455,000 FMV = $500,000 TOT TOTAL value of 1,955K vs. ONLY $1,560K 35

36 Advantages! Tax costs on death crystallized! Estate simplified! Shareholder leaves a Legacy! Income Received by CRT can be paid to beneficiaries during lifetime 36