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Charities must advance both altruistic motivations and tax efficiencies
by E. Blake Bromley
March 13, 1996; Canadian FundRaiser

Creative tax planning takes on greater significance to charitable funding when one considers the demographics of wealth in Canada. The billions of dollars of wealth created since World War II must change hands as the creators of this wealth die, and most of this wealth will pass of course to the deceased's children. However, while charities may not benefit directly in that transfer, many of those inheriting this wealth are already comfortably rich, which offers an increased opportunity to obtain charitable funding from these children who have surplus funds. Often, this gifting takes place almost immediately after the death of the parents. Creative tax planning will be an important tool in obtaining funding from this wealth.
Is the intergenerational wealth transfer a mirage?
This intergenerational transfer of wealth, however, has the danger of becoming a mirage for charities. If charities are going to benefit from these transfers, they must actively and aggressively solicit them in the next five to ten years. If our social safety net continues to break down and the Canada Pension Plan proves to be underfunded, people will no longer feel wealthy enough to transfer significant gifts to charity.
There is a growing sense of pessimism about the amount of money needed to survive in a country which may no longer have universal healthcare and taxes back social benefits from all but the very poor. Canadians are only beginning to have these doubts and insecurities. If these fears become widely held, charities can forget about receiving billions of dollars in the coming intergenerational transfer of wealth.
Donors with children who have different values
A more reliable source of charitable funding arises from the fact that a significant portion of this wealth will not be passed on to the next generation. There are several reasons for this. One of the most important is that many wealthy people have children who do not share their values.
Consequently, they are not sure they want to pass it on to their children. However, most wealthy persons are also quite sure they do not want to send the money to Ottawa. When they consider the very real possibility of children challenging testamentary gifts to charities under the Wills Variation Act they are often open to some creative ideas about tax planned charitable giving while they are still alive. Estate freezes have turned the tables
Another situation which leads to money passing to charity rather than the children is when there has been an estate freeze in favour of the children. Frequently the result is that children are richer than the parents. Many people froze their estates back in the 1970's shortly after the introduction of the new Income Tax Act, when everyone thought two million dollars was a lot of money and 4% was a high interest rate. Consequently the tremendous inflationary growth in the 1980s all went to the children, who are now significantly wealthier than the parents. The parents have little interest in passing that "little" money they have left to the children and are attracted to the tax efficiency of moving some of their wealth into charity.
The most startling and encouraging fact about the demographics of philanthropic wealth is that most persons setting up private foundations are in their fifties. The common belief is that people set up foundations when they are in their eighties and have one foot in the grave. That stereotype is often true in the United States, because the US. has a fundamentally different system of taxation. The US. has a combination of income tax, estate tax, gift tax and generation-skipping tax, while Canada has only an income tax with a statutory "deemed disposition upon death".
While the US. has low tax rates on income and capital gains, estate taxes are 54%, comparable to Canada's highest marginal rate. When a person make a testamentary charitable gift in the US., there is a complete exemption from estate taxes, a significant tax reason to delay a charitable gift until it can be made by will rather than as an immediate lifetime gift. Delaying a charitable gift and making it by will in Canada is frequently just an invitation to have lawyers and children dissipate the estate in litigation costs under the Wills Variation Act.
Entrepreneurs diverting growth into private foundations
Since Canada has deemed disposition upon death there are no advantages to giving by will. If wealthy entrepreneurs understand this, they will sometimes accelerate triggering their capital gains by selling property for cash or gifting it to charity. With proper tax planning and using donation gift receipts to reduce tax payable, a person can limit the amount of capital gains upon death by diverting growth into a tax exempt private foundation. This virtual philanthropy requires careful tax planning but can result in many private foundations being set up by reasonably young people.
Most of the many private foundations I have set up were for people who at the time were in their 40s or 50s, and only a few were for people 70 or older. The donors in their 40s and 50s are not usually donating one or five million dollars at the outset, like traditional foundation funders. Instead, they are people in their high income years who are prepared to gift fifty to a hundred thousand dollars annually to a private foundation and utilize the tax receipt in the years when they can get the maximum benefit for it because of their high marginal rate.
Actually, consistent with virtual philanthropy, more of them are diverting earned income or business transactions into a tax exempt foundation rather than making outright donations. Several years of such donations and diverted income combined with tax free growth and compounding for ten or fifteen years means that there is a private foundation with several million dollars of capital when they retire. The result is that when the entrepreneur has the time for philanthropy but no longer has a large salary, the money is already in the foundation to fund an active philanthropic "career" during the entrepreneur's retirement years.
Look for young foundation funders
These young donors are using a private foundation to accumulate charitable dollars until they have enough time and funds to begin searching for solutions to problems rather than just funding services. One of the most important reasons to seek out relatively young foundation funders is that they have the self-confidence and optimism to believe they can divert millions of dollars to charitable causes and always make more money for themselves. They are less vulnerable to the fears of the elderly that no amount of money is enough if their health fails and the social safety net is gone. These young people want their charitable dollars to pioneer new solutions and are open to collaborating with operating charities to accomplish this.
Advance both altruistic motivations and tax efficiency
Charities must move beyond the simplistic assumption that wealthy donors are giving only because of ego, marketing and tax. These factors must be considered but are not enough to result in a gift if there is no underlying charitable intent. Further, wealthy donors who achieve their tax efficiencies through their private foundation, focus on the mission and values of an operating charity much more than a casual donor responding to a direct mail appeal. If they are going to "invest" in the charity they want to know that it fulfills its purposes compassionately, competently and efficiently.
Creative tax planning is increasingly important as a means of demonstrating to the potential donors that gifting assets to charities is a useful way to accomplish both benefit to the community and estate planning. This tax planning, however, must never overwhelm the charitable intent. It is impossible to explain the apparent contradiction between claiming that altruism is fundamentally more important than tax motivations and asserting that the future of charitable funding lies in creative tax planning. Charities which develop the sophistication and subtlety to simultaneously but separately advance both altruistic motivations and tax efficiencies will be richly rewarded by virtuous, vulgar and virtual philanthropists.
Based on a presentation by E. Blake Bromley of Douglas, Symes and Brissenden of Vancouver BC, to the 1995 Annual Meeting of the Canadian Association of Gift Planners, Toronto, Ontario. Last of three parts. Would you like to read the previous article in the series?