Understanding the Canadian Major Gift Donor

This Forum contains the sole opinions & insights of the author based on forty years of providing advice to donors and charities. Others may totally disagree with the author’s views. This Forum is intended as a conversation. Robust debate is invited. Please respond with questions and alternative viewpoints to askbobby@peartreecanada.com

Major gift donors in Canada have more than one profile.

But let us create one scenario for a wealthy Canadian:

Mr. A, is now 70 years of age. He built a terrific business with his spouse Mrs. A. They have three children, two of which are effectively operating the business.

Mr. and Mrs. A have substantial RRSPs, and a personal portfolio of non-registered securities of $1m. Ten years ago they effected an estate freeze converting their common shares into preferred and issuing new common shares to the children. The preferred shares are worth $10m. In fact, the preferred shares are not owned by Mr. & Mrs. A; they are owned by their holding company.

The premise of this Forum is to introduce the concept of corporate analysis in giving which is very specific to Canadian realities — as Canadian as maple syrup!

Owning assets in a holding company is normal for Canadian entrepreneurs. The reason for this is the Canadian tax system, which is modelled on a concept called integration. The premise is that if a Canadian earns income personally, the tax they pay should equal the tax that would be paid if they earned the income in a company, paid corporate tax, and then paid out a dividend with the after-tax income. Personal tax is paid on the dividend. The net amount retained after all taxes should be the same if the income is earned personally or via a corporation.

To achieve this integration there are many complicating attributes to the tax system. Dividend tax credits, capital dividend accounts, dividend refunds, refundable dividend tax on hand (RDTOH), and more, are all features of the system. One precept provides that if a dividend is paid to a holding company, no tax is payable until a dividend is paid up to the individual shareholder. This attribute is very important, and is a reason why holding companies are created.

If an active company makes excess income not needed in the company, owners would like to use the excess income for either personal purposes or to reinvest the monies in alternative investments. For personal needs, salaries and dividends are paid, and of course personal tax is paid. But why pay out assets to be reinvested to the shareholders and pay a round of tax. Instead, keep the cash in a corporation and reinvest 100 cents on the dollar. So excess profits are moved to holding companies.

So, Mr. and Mrs. A have built investments in their holding company, $7m of marketable securities and $3m of real estate. But before diving into tax pool, let me digress a little…


There is a Canadian think tank which regularly issues an analysis of philanthropy. It ranks fifty American states, The District of Columbia and thirteen Canadian provinces and territories in per capita giving. The thirteen Canadians are usually ranked 52-64 out of 64. The premise is that Americans are more generous, which may or may not be true. The data is based on personal tax returns (T1s and 1040s).

The American tax system does not have integration. There is double tax on corporate earnings paid out as dividends thus, there are few holding companies in the US (unlike Canada). There is a concept of an S corporation in the US where corporate income is taxed on the 1040. Major gifts are usually paid personally, whereas in Canada they often come from holding companies. Therefore, the comparison data for Canada-US philanthropy is unfair. We are generous in Canada.

The Tax Issues

The ‘As’ will be soon receiving RRSP payments which will bump up their personal tax returns. At age 71 Canadians must begin to withdraw monies out of their RRSP or RRIF, with minimum taxable withdrawals required under the Income Tax Act rules. The long-term effects / deferral benefits (at the second death) is that the value of the holding company, $20m, will be taxed at death as capital gains along with any RRSPs that may still be around.

Gift Planning Analysis

The children are solid financially, and thus there is certainly the possibility of the ‘As’ making substantial donations out of their estate (legacy planning) but actually can make substantial gifts while alive.

Gifts personally are certainly possible. Particularly as additional personal income from RRIFs (the registered plan into which RRSP assets are transferred after age 70) is coming, a personal gift of appreciated marketable securities (including Flow-Through Shares) are also a terrific gift to look at in building a donation base.

Owning assets in a holding company is normal for Canadian entrepreneurs. The reason for this is the Canadian tax system, which is modelled on a concept called integration.

In order to best help the donor to give more and more quickly, we need to be as tax efficient as possible. In doing so we should look at the holding company assets. Yes, if we are to make current donations we want to ensure that we save tax currently. The additional benefit is that if we are to transfer corporate assets to charity, we are also reducing the value of the ‘As’ shares in their holding company otherwise taxable on death (at capital gains rate – it’s the Canadian version of succession duties).

Effectively we have discovered why understanding the donor and their corporate assets are important to the major gift fundraiser — the “double dip” (if the donor were 35 years old the double dip is less apparent) and the more important realization is that is where the money is! Understanding the donors’ org chart is a basic need in helping donors. But understanding the org chart first requires donor disclosure which is only achievable where the major gift fundraiser has built a relationship of trust. A donor may have a strong affinity for your cause, may be otherwise taxable, but unless you have gained their trust in you as a competent advisor, the chance of a major gift is minimal.

The following will look at three simple ideas for the company. Each will be the subject of its own PearTree PG Forum where they will be looked at in detail.

  • The gift of appreciated marketable securities is terrific from a company. There is a donation deduction, it reduces the value of the company for estate purposes and there is a third benefit with the creation of a capital dividend account, which we will look at in detail.
  • The donation of Flow-Through shares can also save current tax, reduce the value of the corporation and add an amount to the capital dividend account.
  • If the ‘As’ donate personally, say preferred shares of the holding company, they will personally save tax. When the shares are redeemed by the company from the charity, effectively corporate assets are reduced and personal assets increased due to the personal tax savings, to achieve estate tax savings. There is a variation to this gifting technique which can be quite interesting which we can explore.

Legacy giving can also be planned using corporate assets. There is an interesting plan whereby the holding company purchases a policy on the lives of both Mr. and Mrs. A. The premiums will be paid by the company, which reduces the value of the company for estate purposes, the insurance proceeds received on death will be used by the estate to fund a legacy gift and yield more tax savings. We will explore this gift plan, which often yields a very low cost of giving.

The premise of this Forum is to introduce the concept of corporate analysis in giving which is very specific to Canadian realities — as Canadian as maple syrup!

We’d love to hear from you! Please direct any questions to AskBobby@peartreecanada.com and the answers will appear in the next Forum.

Robert (Bobby) Kleinman FCPA, FCA

Bobby started in philanthropy in August of 1994 by becoming the Executive Director of the Jewish Community Foundation of Montreal (JCF) which is seen to be Canada’s most donor-centred foundation.

Previously a Partner in Taxation at Ernst and Young, he is now a Planned Giving Consultant specializing in tax-assisted giving. Bobby has helped many Canadian charities design their planned giving programmes, and has written numerous articles on the subject. He is also Past-President of the Conseil de la Philanthropie du Quebec, the Table Ronde du Quebec of the CAGP, JIAS Canada, JIAS Montreal, and the Mount Royal Tennis Club.

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