Canada’s philanthropy sector is facing growing challenges. As fewer Canadians are donating, the philanthropic sector is increasingly relying on ultra-high-net-worth donors, raising concerns about long-term funding stability and broader public engagement.
To explore charitable giving in Canada, with a particular focus on evolving tax policies, Canadian Family Offices recently hosted an expert panel discussion. Panelist Ron Bernbaum, CEO of PearTree Canada, was joined by Karen Sparks, director of philanthropic advisory services at BMO Private Wealth; Aneil Gokhale, director of philanthropy, Toronto Foundation; and Nadia Wendowsky, vice-president, leadership & corporate giving at the Canadian Cancer Society.
The future of donor-advised funds (DAFs)
Panelists talked about how DAFs are frequently used as part of estate planning, especially by high-net-worth families. Bernbaum noted these funds are typically set up during major financial transitions, such as a liquidity event, or before anticipated tax changes. For example, in advance of expecting an increase in the capital gains tax rate, many HNW taxpayers donated private company shares or other appreciated assets into DAFs.
To maximize charitable giving while reducing taxes, Bernbaum says, many older high-net-worth individuals accelerate DAF donations recognizing that no one lives forever and to preserve a family culture of generosity. Donation receipts and other expenses integral to a structured plan carry forward into the terminal year return thus reducing estate taxes upon death.
Once the next generation inherits control of a DAF, however, they may not add more funds but will continue to distribute the income, typically dispersing five to 10 per cent a year. Ultimately, DAFs allow the original donor and their heirs to remain involved in charitable giving over time.
Bernbaum pointed to the recent increase in the disbursement quota for Canadian foundations to five per cent, saying further changes could be on the horizon. He noted how some influential donors are advocating for DAFs and family foundations to self-liquidate within 20 years.
Tax policy uncertainty
The panel discussed how recent changes to Canada’s Alternative Minimum Tax (AMT) and uncertainty around proposed increases to the capital gains tax inclusion rate have shaken the philanthropic sector by potentially increasing tax burdens on high-net-worth donors.
Regarding the AMT specifically, Bernbaum pointed out that after some aggressive lobbying from various charities to reduce the negative impact of donation tax credits, the government made adjustments.
The good news for charities, says Bernbaum, is that when presented with tax efficient giving strategies, Canadians tend to reinvest the money they save into increasing their charitable donations.
“In other words, if the cost of giving is less, Canadians will give more,” says Bernbaum.
Don Johnson’s historical change to the Income Tax Act
One name came up several times during the panel discussion: Don Johnson, a leading investment banker and former governor of the Toronto Stock Exchange. In 2006, Johnson was successful in convincing the Canadian government to eliminate the capital gains tax on gifts of publicly listed securities.
Bernbaum explained how Johnson’s work helped lay the groundwork for PearTree Canada.
“When you buy a flow-through share for a dollar, you write off a dollar, but for tax purposes it’s as if you paid nil. So you have a capital gain, even if there is an economic loss. In the original CRA tax ruling the CRA signed off on a simple three step donation structure that resulted in two deductions for one cheque but without incurring the capital gain and that’s all Don’s work. He spent eight years lobbying the government, and generally he was on his own,” says Bernbaum.” As a result of this approach over the past 17 years or so PearTree has funded over $4 billion of flow-through shares sourced for donation purposes. Moreover, there is a double social benefit in that $4 billion of flow-through share subscription funds $4 billion of northern resource job creation.
This strategy enables donors to maximize their contributions at a lower net cost while providing substantial support to charities and funding for Canada’s crucial mineral exploration industry.
During the panel, Bernbaum explained how, a moment after you buy the shares, you’re donating them to your charities of choice or your donor-advised fund. And a moment after that, PearTree facilitates nearly immediate liquidity in the charities and funds. So, adding two deduction sets of incentives together can reduce the cost of giving from 50 cents on the dollar down to less than 10 cents.
Disclaimer:This story was created by Canadian Family Offices’ commercial content division on behalf of PearTree, a member and content provider of this publication.
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