James and Shiela, owners of a successful manufacturing business in Western Canada, built their company from the ground up over a 30-year period. Ten years prior to selling their business, they undertook an estate freeze, valuing their preferred shares at $3 million. Now, with their business valued at approximately $5.7 million, they faced significant capital gains taxes as they prepared to sell the company to their two sons.
As they approached the sale of their business, James and Shiela were concerned about the millions of dollars in capital gains taxes they would incur. They also had a strong desire to incorporate philanthropy into their wealth transfer strategy. They sought advice from their Financial Advisor (FA), tax lawyer, and tax accountant to explore ways to manage the capital gains impact while fulfilling their charitable aspirations.
James and Shiela’s Financial Advisor recommended consulting with GiveWise Foundation Canada, a philanthropic organization that could potentially accept a donation of the preferred shares in their corporation. This strategy would allow them to bypass applicable capital gains taxes on the donated shares.
The proposed solution involved structuring the sale of the business as a phased purchase by their sons, while simultaneously donating portions of the preferred shares to GiveWise. This method offered the following key benefits:
Donation of Preferred Shares James and Shiela decided to donate $400,000 worth of preferred shares in the first year, followed by two additional donations of $200,000 each in the subsequent years. This totaled an $800,000 donation of preferred shares over three years. Their sons would purchase the preferred shares from GiveWise at no additional cost to them than if they were purchasing directly from the business owners.
Capital Gains Bypass By donating the preferred shares, they could bypass capital gains taxes that would have otherwise been triggered upon the redemption of the shares. Given the 50% inclusion rate for capital gains, $400,000 of the $800,000 redemption would have been taxable.
Tax Savings If the capital gains taxes had been applied, James and Shiela would have faced over $200,000 in taxes. By executing the share donation strategy, they not only avoided this tax burden but also received $800,000 in donation tax receipts. This provided them with approximately $400,000 in additional tax savings (due to their tax bracket).
Cost of Donation After all considerations, the net cost of their $800,000 donation was approximately $200,000, yielding significant tax savings and maximizing the effectiveness of their charitable giving.
Establishing a Giving Fund The $800,000 worth of shares was placed into a Giving Fund with GiveWise Foundation, which James and Shiela could distribute to charities on a flexible timeline that suited their personal and philanthropic goals.
The strategic donation of preferred shares allowed James and Shiela to reduce their capital gains taxes, avoid approximately $600,000 in potential tax liabilities, and establish a charitable giving fund with $800,000. By working closely with their financial, legal, and tax advisors, they effectively merged their desire for philanthropy with a tax-efficient exit strategy for their business.
Through the collaboration of professionals and charitable organizations like GiveWise, James and Shiela achieved:
Significant tax savings on the sale of their business
The ability to contribute meaningfully to causes they care about
A smooth and tax-efficient transition of their business to their sons
Greater flexibility in managing and distributing their charitable contributions over time
This case illustrates how careful planning and philanthropic strategies can enhance wealth transfers, minimize tax burdens, and fulfill personal charitable goals for business owners.
As a Canadian accountant, you play a crucial role in helping clients optimize their tax strategies. One impactful area is guiding them toward tax-saving charitable donations. By incorporating GiveWise Foundation Canada into your advisory toolkit, you can help clients achieve their philanthropic goals while maximizing their financial benefits.
GiveWise Foundation Canada is a reputable public charitable organization facilitating tax-efficient giving. By leveraging GiveWise’s platform, individuals and corporations can make strategic donations to registered charities, supporting meaningful causes while reaping significant tax advantages.
A GiveWise Giving Fund operates like a charitable bank account, enabling donors to:
Add funds and donate to any Registered Canadian Charity.
Set up recurring transactions for consistent giving.
Manage donations as easily as paying bills through online banking.
Do this and receive a single consolidated tax receipt!
Watch this explainer video to learn more about how a Giving Fund works.
1. Access to Tax Advantages
Maximize tax deductions, donation tax credits, and eliminate capital gains tax on donated appreciated securities.
Offer clients enhanced tax benefits through strategic giving.
2. Encourage In-Kind Donations
GiveWise accepts in-kind donations like securities, mutual funds, and real estate.
Clients avoid capital gains tax while receiving a charitable tax receipt for the fair market value of their donation.
3. Advise on Donation Strategies
Collaborate with clients to:
Align donations with financial goals, tax situations, and charitable interests.
Leverage the flexibility of Donor-Advised Funds (DAFs) for long-term charitable planning.
4. Facilitate Charitable Gift Planning
Explore advanced giving options, such as:
Gifts of securities.
Flow-through resource investment donations.
Bequests in wills for lasting impact and estate planning benefits.
5. Ensure Compliance and Reporting
GiveWise handles all compliance and reporting obligations.
Streamline the donation process with rigorous policies that reduce administrative burdens for accountants and clients.
6. Support for Private Foundations
Offer services like grant issuance and processing to simplify Private/Family Foundation operations.
Enhance privacy by transferring activities to a public foundation like GiveWise, reducing public scrutiny.
Use a Giving Fund as an alternative to setting up and running a Private/Family Foundation.
7. Leverage Networking Opportunities
Engage with organizations like the Canadian Association of Gift Planners (CAGP) and local Estate Planning Councils.
Enhance expertise through events, workshops, and seminars offering continuing education credits.
Incorporating GiveWise Foundation Canada into your tax planning discussions helps clients maximize tax savings and create a legacy of generosity. These conversations often foster deeper, long-term relationships between financial professionals and their clients.
Empower your clients to make a meaningful impact on the causes they care about while optimizing their financial well-being. GiveWise Foundation Canada is here to educate and support your clients every step of the way.
For more information or to get started:
Dan Kyte, Director of Finance and Investments
Email: dan.kyte@givewise.ca
Phone: 604.615.2141