By Malcolm Burrows

May 14, 2025

This article was originally published here: https://enrichedthinking.scotiawealthmanagement.com/2022/07/15/the-benefits-of-in-kind-donations-of-public-securities-from-holding-companies/

Many investors with appreciated public securities in their portfolios are increasingly choosing to make charitable donations “in-kind” rather than giving cash. It’s a simple, tax-effective way to donate, enabling them to avoid realizing large capital gains and other tax advantages.

The donor may be an individual or a corporation – typically an investment holding company that is a Canadian-Controlled Private Corporation. Once the in-kind donation is made, the charity issues a tax receipt equal to the securities’ fair market value.

As we mentioned, an in-kind donation of appreciated public securities can provide tax benefits for holding companies – including:

1. A tax deduction for the fair market value of the donated securities. The deduction reduces the overall taxes payable by the corporation at the corporate tax rate, which may be up to 54%, depending on the province.
2. Nil capital gains. Unlike a sale of securities, a donation is exempt from capital gains tax. This can provide tax savings of up to 27%. The value of the saving depends on the amount of capital gain and the province.
3. Tax-free dividend. The full value of the capital gain associated with the donation of securities may be added to the corporation’s Capital Dividend Account (CDA). The CDA enables a tax-free distribution to shareholders, which means no dividend tax is paid.

A donation may be claimed against up to 75% of corporate income in the year of the gift. Any unused donation amount may be carried forward for up to five years and claimed against up to 75% of income.

Here’s an example:

George and Tejal Singh have an investment holding company, ABC Investments Inc., with a $10 million portfolio of public securities, primarily common stock. The company’s annual income is $400,000, primarily from dividends and capital gains. The corporation owns 10,000 shares of a successful tech company, purchased for $100,000 with a fair market value of $500,000. George and Tejal would like to make a $100,000 donation to charity. The company has a tax rate of 50%. The following table compares a donation of cash derived from the sale of securities versus an in-kind donation.

Donation of cash from securities sale vs. in-kind donation^*

^*For illustration purposes only

In-kind donations can offset sales

If you choose to sell a highly appreciated public security and donate cash instead of donating securities in-kind, it might be helpful to combine the sale with an in-kind donation within the same fiscal year.

Typically, a donation of approximately 30% will offset the capital gains tax on the balance of a position. Depending on the amounts, all or part of the sales proceeds may be distributed tax-free to shareholders via
a CDA.

This post was first published in All About Estates by Malcolm Burrows in 2022.

April 14, 2025

Generous but Complex and Opaque

Canada has the most generous tax incentives for charitable giving in the world, but few Canadian donors understand what they save and how the system works. Why the paradox?  Here’s a longer-than-usual blog providing an overview that I hope will help demystify the topic.

For starters, it is helpful to understand that the Canadian tax system is grounded in unspoken social policy.  We all must contribute to society, but there is a choice whether you do so by paying taxes or giving to charity. It’s a system that values the contribution of individuals to charities.

Historically, you would get your taxes back through the charitable tax credits, but still be out of pocket. Since 2016, due to federal tax increases, top marginal tax rates in most provinces are now greater than 50%. A higher tax rate produces a larger tax credit. With 50%+ rates, there may be little financial difference between donating and paying taxes.

Despite the significant tax savings, why is our system of donation tax benefits so poorly understood?  Simply, it’s opaque and complex.  Our federal-provincial tax system varies by province and is not well explained in standard resources.

How complex? Even Canada Revenue Agency’s donation calculator is incomplete and requires extensive footnotes.  It has since been retired and not replaced.  I don’t know of any publicly available calculator that addresses all provinces and tiers.

How opaque? Ontario has a five-bracket personal tax system with two surtaxes that affect donation tax credits. The Ontario Government website, however, doesn’t mention charitable donation tax credits among its list of “credit, benefits and incentives”. Its tax chart does not factor in savings from surtax rebates.

What’s a donor — or even an advisor — to do?

Tax credits

Let’s start with the basics for individual taxpayers. Canadian registered charities issue receipt for income tax purposes in recognition of donations received in accordance with a CRA prescribed form.  The taxpayer reports the eligible amount of the donation on his or her tax return. Spouses may share tax receipts, and it is typically advantageous for the higher income spouse to claim all donations. A receipt generates non-refundable tax credits that are claimed against net annual taxable income (see below for amounts). Credits, however, vary by province, the amount donated, and the taxpayer’s tax bracket and income.

Since 2016, there are three tiers of donation tax credits that are anchored by the three federal brackets: 15%, 29% and 33%. Tier 1: credits on total annual donations under $200. Tier 2: credits on total donations over $200. Tier 3: credits for donations made by donors with more than $221,780 in annual net income who can claim donations on income over $221,780 in net income.

Credits are better than deductions for most individual taxpayers. A deduction reduces gross income and the benefit will always equal the taxpayer’s average tax rate. (Corporate donations produce deductions.) A tax credit reduces taxes payable on a personal return and are claimed against net income.  Tax credits are more beneficial for most taxpayers because they are tiered. It is possible, especially for Canadians who donate more than $200 per annum, to receive a tax credit at a higher rate than their average tax rate.

How much more?  That depends on the province.

Donation Tax Credit Tiers

There are federal and provincial donation tax credits. (With the exception of Quebec, the provinces defer to the Feds for administration.) Tier 1, which applies to the first $200 of total annual donations, the federal rate is 15%. Provinces range from 5.05% (Ontario) to 20% (Quebec).  The combined rates are therefore 20.5% to 35%.

Anything more than $200 in total giving automatically jumps to the Tier 2 tax credit rate, which is the highest provincial tax rate in most provinces plus 29% federally. Tax savings are between 40.16% and 50% for donations more than the $200 threshold. This is higher than the average tax rate of middle income Canadians.

Ontario and Alberta are exceptions. Ontario tax credits has three tax brackets and two surtaxes that apply to donations over $200, which produces a combined tax credit ranging from 40.16% to 46.4%. The Ontario surtax system stealthily increases the provincial rate to 13.39% for taxpayers with net annual income over $100,392 (to 42.39% total) and to 17.41% over $155,625 (to 46.41% total). Alberta has a second tier donation credit rate of 50% versus 44% tax rate.

The third tier of donation tax credits can be claimed against net income in excess of $221,780. Except for New Brunswick, Quebec, Ontario and Alberta the tax credit rate is equal to the highest marginal rate in the third tier, which ranges from 47.7% to 54%. Alberta has the most generous rate, which jumps to 54% for every taxpayer – higher than the top marginal rate of 48%. In Ontario, taxpayers with net income greater than $221,780 receive a combined credit of 50.41%, less than the top tax rate marginal rate of 53.53%.

In order to claim a donation tax credit at the top rate there must be sufficient net income over $221,780 to claim against.  For example, to claim donation of $100,000 at the top rate the donor would need a net income of at least $321,780.  That is, $100,000 more than the top tier of $221,780.  If there is insufficient income, it is claimed at the next lowest rate.

Taken all together the lack of a good online donation calculator becomes more understandable.  It’s complex.

Exceptional gifts

There are three other donation incentives worth mentioning that make Canada a donation incentive leader.

These incentives are designed to encourage exceptional donations, i.e. larger than average gifts made from assets or capital (i.e. life savings). Most donors are unaware of these incentives because they only apply to gifts that may be made once or twice in a lifetime. There are three main incentives in this category.

Contribution limits

Donors may claim donations equal to 75% of their net annual income each year.  For example, if you earn $100,000, you could make and claim gifts of up to $75,000 in a year.

At death the contribution limit is higher. Since 2016, there has been a category of charitable gifts called “estate donations,” which includes gifts by will, life insurance policies, and RRSP/RRIF.  At death, estate donations can be claimed against up to 100% of net income in the final two lifetime years and against up to 75% of income over five years of estate returns. In effect, with proper estate planning and the right province, a Canadian taxpayer may eliminate taxes at death by giving to charity.  Moreover, in many situations, an estate donation will not disadvantage family heirs.

Contribution limits increase under certain conditions.  For example, donations of certified cultural property and ecologically-sensitive land can be claimed against up to 100% of next income for six and ten years respectively.  Donations of ordinary capital property are eligible for a “bump up” in the rate to ensure the donor is not out of pocket in the year of gift.  The bump up is 25% of value of the donated property, which gets added to lifetime 75% contribution limit.

Claim period

Closely related to contribution limits are claim periods. For example, if you donate part of an inheritance and can’t claim it in a single year, you may carry forward the receipt for up to five years to claim against 75% of annual net income. The lifetime claim period is six years in total. As mentioned above, the claim period for an estate donation is up to seven years.

Capital gains exemptions

There is a second tax saving for donors who give certain types of appreciated capital property, such as public securities, cultural properties and ecologically-sensitive land. When eligible property is donated in-kind (i.e. not cash) to a charity, the taxpayer is exempt from the capital gains tax normally owed at disposition by sale or personal gift.  This incentive can provide up to 27% in additional tax savings, although it is more typically in the 5% to 15% range due to the value of the capital gain.

Add it all up and Canadians have a rich array of donation tax incentives. Together these surpass other developed countries in the world, even the United States. The greatest confusion relates to donation tax credits. The richest incentives are for exceptional gifts – frequently made from capital or assets — which require high philanthropic commitment. These are also the gifts that require financial, estate and/or tax advice.

This article was originally published on March 13, 2025 in All About Estates.

By: Malcolm Burrows

A common misconception about donor advised funds is that they are trusts, charitable purpose trusts.  At times, lawyers, especially those with expertise in trusts and estates, struggle with this distinction, as do donors.  In 2023, this issue came to the forefront when Canadian charities briefly thought they might need to report on certain funds under trust reporting rules.  Although donor advised funds have trust-like features, most are not trusts.

This fact has many implications for estate planning, as well as charitable effectiveness. It important to sort through the distinctions, limitations, and the paradoxes of the advised fund model.

Trust-like function and features

Donor advised funds look like trusts, but there are a few key distinctions.  A trust must have three features or certainties: settlor’s intention to create a trust, property in the trust, and objects or purposes of the trust relating to beneficiaries.  In common law, trusts are anchored in the settlor’s instructions and the protection of property.  The trust structure provides legal certainty, even though it may be impractical or illusory.  By contrast, donor advised funds are guided by recommendations and aligned charitable mission, not certainties or legal restrictions.

Donor advised funds are charity-owned funds that provide donors or designated fund advisor to make ongoing granting recommendations.  Some foundations allow donors to name successor grant advisors.  While donor advised funds may be structured as perpetual endowments, and hence, arguably trusts, most have flexible disbursement terms.  Donations to donor advised funds are unrestricted and irrevocable.  The host foundation owns the funds and may act on or reject a donor’s recommendations.

The promise of a donor advised fund is that the host foundation will approve the recommendations of donors — if they are consistent with the foundation’s charitable purposes and policies.  In practice, this works out remarkably well for donors, especially during their lifetime.  There is alignment.

Donor advised funds are simple structures to administer when there is a living donor or grant advisor.  When a donor dies it become more complex.

Legacy Funds

It’s especially important to differentiate between trusts and donor advised funds for estate planning purposes.  Donors are increasingly making large estates donations for multiple charitable purposes to foundations with donor advised funds.  These funds may have successor grant advisors, for example children, but they are just as likely to have no ongoing successor advisor.  If that is the case, the charitable advice provided by the donor, which is documented in a fund agreement or deed, is precatory and it falls to the foundation that holds the fund to make discretionary decisions.  In fact, if there is no third-party grant advisor providing recommendations, the fund is not a donor advised fund, at least according to CRA’s definition.

Benefits of Legacy Fund

There are three major strengths of using a donor advised legacy fund for estate planning purposes:

1. The donor can easily update the terms of the fund without changing their will.  This is because the fund is documented separately from the will.  This depends on drafting of the fund agreement, as well as governance and policies of the host foundation. As noted, the fund must exclusively support charitable purposes that that are consistent the host foundation’s charitable purpose. The will makes the gift; the fund documentation provides charitable wishes.
2. Foundations with donor advised funds may exercise internal cy-pres.  That is, unlike most trusts, there is broad power to interpret charitable purposes without reference to the public guardian or the courts.  Again, the donor provides charitable recommendations – for grants and charitable programs – that are not legally binding.  The host foundation has the legal ability to approve or deny.  This makes reasonable variations of purpose viable.
3. Ability to address changing public needs or replace charities.  Estate planning is an exercise in time travel.  It’s not surprising that trusts and funds may have objects or wishes that, in time, become too narrow or complex to carry out exactly as written.  Historic examples include fund to support water troughs for work horse or a cure for polio.  But slight variations arise often.  For example, there are insufficient funds, the community need has shifted; a charity has failed or is failing, or public policy has changed.  A responsible foundation with donor advised funds will have charitable expertise and the capacity to make these decisions.

Risk of Donor Advised Funds

The biggest potential risk of donor advised legacy fund is a rogue foundation or a foundation without strong governance.  Simply approving grant recommendations works well when there is a living grant advisor.  But what happens when the donor is dead?  What happens, as is increasingly the case, there is no successor advisor for the fund?  What are the checks and balances?  Who makes decisions and how?  Donors and their legal advisors should ask these questions.

My view is a foundation has an obligation to embrace its fiduciary duties and develop strong systems to make discretionary decisions.  While donors always have the choice of appointing successor grant advisors, typically it is more effective if the donor’s wishes are well documented and the foundation has policies and processes in the area, back by deep charitable knowledge.  The foundation should be guided by the donor’s wishes and may make discretionary decisions.  Money can’t be left in limbo. Checks and balances are needed to ensure money gets used for charitable purposes on an annual basis. Ideally, this is purpose-driven exercise.

With trusts, by contrast, trustees are limited by the deed and trust law in their ability to interpret and evolve the purposes. There needs to be an external reference to the courts or in jurisdictions like Ontario, the Public Guardian and Trustee. This legal brake creates bureaucracy and sometimes a culture that upholds the literal instructions of a long-dead settlor.  It can produce a culture that focuses on risk management and protecting the past.

Looking for certainty

Donor advised funds are a paradox.  The donor provides their charitable wishes, not binding trust restrictions.  The foundation that owns the fund can reject these charitable wishes but, guided by good will and broad charitable purpose, will go out of its way to carry them out.  Legacy donor advised funds are not shaped by legal restrictions, but of donor/foundation mission alignment.  The foundation respects donor wishes and values, and acts as their proxy after their death.  Donor advised funds are more flexible than charitable trusts, and that flexibility provides a greater capacity to deliver greater charitable impact in the future.  Especially after the death of a donor/advisor, it is often more impactful because it responds to current needs in society at a future date. This system depends on strong foundation governance and charitable knowledge.

Charitable trusts provide the illusion of certainty, but over time, may be less likely to deliver it.

By: Malcolm Burrows

A version of this article was published in All About Estates on January 16, 2025.

In its Income Tax Act, Canada has two basic types of registered charity: charitable organizations and foundations.  These charity types are often paired to work together in a complementary fashion – ying and yang – to achieve shared purposes. This article is a short primer on the prevalence of this structure and how it can be used for charitable planning.

Doing and Funding

Charitable organizations are the most common charity type, representing about 87% of the 85,500 registered charities.  They are “doing” charities, that is, operating entities that carry out their own charitable activities.  By contrast, foundations – both private and public – are granting or funding charities.  A by-product of medieval trusts, foundations typically hold capital and make annual payments (grants) to operating entities.

Many readers of this blog will hear echoes of corporate structure.  There are operating companies and holding companies.  In the business world, opcos and holdcos work in tandem. The charitable equivalents of opcos and holdcos – charitable organizations and foundations – also work in together and have several planning applications.

Parallel Foundations

The most common charitable pairing in Canada are hospitals and hospital foundations. The first is The Hospital for Sick Children Foundation, which dates from 1973.  The need arose because Sick Kids had money from bequests and the invention of ground-breaking nutritional products like Pablum and Sun Wheat Biscuits. The foundation invested the endowment and became the fundraising arm for the hospital.

Many subsequent hospital foundations were established for the purpose of protecting donated assets.  When healthcare funding started to tighten in the late 1980s, Ministries of Health demanded that hospital use endowments for operating purposes, or risk getting funding cuts. The hospital countered that these were charitable trusts.  The workaround was to create a separate public foundation to hold and manage the assets. Over time these foundations became effective fundraising units.

The use of parallel foundations has subsequently spread to every hospital in the country, many arts organizations, churches, schools and colleges, and social service organizations. The motivation is often protecting assets from the long-arm of government funders, but there are other reasons.  Some independent schools and churches, for example, have used parallel foundations to protect assets from liabilities that may arise from their charitable activities, such as sexual abuse claims.

Agency Funds

Another pairing of foundations and operating charities turns on investment management.  Community foundations have traditionally offered small local charities with low-cost investment management through an offering called agency funds.  This structure is so common that the use of public foundations is a requirement of government endowment programs, such as the long-running Heritage Canada arts endowment matching program.

Historically, agency funds were structured as a pure investment offering by the public foundation, which means the operating charity still owns and reports on the funds. This arrangement is under scrutiny by provincial securities regulator, however, due to the perception that foundations are acting as unlicensed investment managers.

Agency arrangements are being replaced by a structure where the operating charity transfers ownership of the funds to the foundation, but the funds have a flexible mandate and can transferred to another foundation.  Now a variety of public foundations provide this service.  These include the Ontario Arts Foundation and Aqueduct Foundation. Some charities report another benefit.  By transferring capital “off-book” to a public foundation it make their balance sheet look less “rich” to certain funders.

Charitable Purpose Property

Recently in my practice, we have worked with several donors who want to donate a piece of real estate – a house or rural property – for a specific charitable use.  For example, an artist residency program or a therapeutic riding camp.  Specifically, they want to establish a charitable organization to carry out these activities.  This is typically a small, volunteer-run, niche charity with community leadership.  Often it is a combination life and estate plan.

Rather than donate the real estate to the operating charity, which may have a limited lifetime, the donor establishes a donor advised fund at Aqueduct Foundation to hold, manage, and maintain charitable purpose real estate.  Often there are also investments – a flexible endowment – that provide annual operating funds to the “doing” charity.  Aqueduct also has aligned charitable purposes, which means the property is used for charitable activities and not subject to the disbursement quota.

There are several reasons for this two-charity structure.  They include assets management, protection of charitable property, long-term support for the operating charity, and reducing administrative burden on family and community volunteers.  Moreover, as many of these operating charities are small, passion projects there is a chance they will cease to exist within 10 or 20 years.  The use of a two charity structure enables the donor to both protect and repurpose the charitable property in the future – often well after they are gone.

On June 25, 2024, the capital gains inclusion rate increased from 50% to 66.6%.  Many Canadian investors sold public securities to crystallize gains at the lower tax rate.  As the end of the year approaches, some of these investors are thinking about making an exceptional donation to offset the tax that was incurred in the spring.

An in-kind donation of appreciated public securities is the most tax-effective way to make a simple donation to charity.  For an individual, this kind of donation produces two tax savings:  

1. a donation tax credit (up to 54% depending on the donor’s income and province)
2. nil capital gains (up to 33% depending on the capital gain).

If the donor is a holding company, it would receive a tax deduction, not a tax credit. Corporations also receive a third tax benefit: a tax-free dividend. The full value of the capital gain associated with the securities may be added to the corporation’s Capital Dividend Account (CDA), which enables tax-free distribution to shareholders. 

This fall, Aqueduct Foundation is seeing an increase in donations post capital gains crystallization.  Simply put, the best time to give is when there is a big tax bill.  A donation to offset taxes allows you to choose how you want to contribute to society.

Aqueduct would be pleased to discuss your situation and see if a donation and a donor advised fund makes sense. Contact us for more information.  

A version of this article was published in All About Estates on July 18, 2024.

The philanthropic community has a perpetuity obsession.  Critics of perpetuity believe that preserving capital, restricting payout, and existing forever is the pernicious norm.  Admittedly, for some foundations, perpetuity a sacred ideal, an aspiration that is sometimes unquestioned.  Foundations that “spend-down” are valorized as rare entities that value community impact over capital.  But the reality is more complex.  There is a long history of foundations that aren’t perpetual, and in Canada they are now, arguably, in the majority.

Perpetuity – A Legal Default

Perpetuity is a compelling legal concept.  In the past the term was routinely used in gift agreements and charity founding documents without being properly thought through. How long, exactly, is perpetuity?  Really, can property last forever without degrading?  For many years perpetual was a word that was used as a legal default in charitable trusts.  It is an aspiration, but also routinely used precedent language.  A legal habit.  And “habit”, as Samuel Beckett said, “is the ballast that chains a dog to its vomit”.  (Just try to get that image out of your mind.)

The concept of perpetuity is medieval in origins and was encoded in trust law.  Capital was land.  It was held to produce income to pay for good works.  While traditionally trusts for private benefit were time limited, charitable trusts could be perpetual to provide long-term, future benefit.  Perpetuity, or permanence, reflects an aristocratic world view.  Politically, there is an encoded message of stability and continuity.  Which may partly explain the reaction to the idea of perpetuity today by some critics.

Is perpetuity the norm?

I believe that perpetuity is not the norm among Canadian foundations, at least in practice.  A high percentage of private foundations are annual, flow-through entities.  Others became “perpetual” because the pre-2010 10-year gift language in the Income Tax Act but aren’t being managed for perpetuity.  Some are time limited, or spend-downs.  Still others never get going or run out of steam.  They either get revoked by CRA or apply for voluntary revocation.

The CRA charities database tells a story of foundation mortality, not perpetuity.  Private foundations often have a limited life.  As of July 2024, there have been 10,312 private foundations registered since 1967, and 3,476 or one-third are revoked and no longer exist.  There are 6,836 are still registered, and 3,357 or 49% are less than 15 years old.

Headline Examples

Foundations with public, limited durations are, however, getting headlines.  One example is the 70-year-old Ivey Foundation, which announced it was spending down its $100 million endowment in five years “to enhance its efforts to advance Canada’s net-zero economy and increase the capabilities of the Foundation’s core partners on the front lines of Canada’s climate and energy transition.”  This is bold and responsive, but it is not by any means the only example of Canadian spend-down foundation.

A new and large private foundation in Canada is The Waltons Trust, which is a self-described “limited life grant-making foundation”.  It was founded by David Graham, the former owner of the cable company, Cablecasting that was sold to be bigger rival 20 years ago.  Mr. Graham died in 2017 with no children.  The foundation now has over $100 million and is run by trusted friends and associates.

Quiet examples

But not all Canadian examples are as public, and some are even larger.  Aqueduct Foundation has a $180 million spend-down fund that is quietly granting to zero.  The R. Samuel McLaughlin Foundation, established by the founder of General Motors in Canada, granted out $100 million dollars in the early 2000s.  Its founder had placed a 50-year sunset deadline on the entity.  It quietly granted all its capital and closed shop.

Flexible foundations

The recent growth in the number and value of private foundations in Canada is certainly driving examination of “spending pathways”.  There is a contemporary bias that a spending plan needs to be clearly established at the outset, alongside mission, vision and values. A recent article in The Philanthropist Journal funded by the newly-minted Definity Insurance Foundation explores various options.  Unfortunately, the U.S. experience is so much better publicized and documented, and this paper misses many Canadian examples.  It also mislabelled a common, non-doctrinaire model: the flexible foundation.

The article uses the term “accidental spend-down”, which I believe is both wrong and pejorative.  I think most foundations are flexible and evolve over time, and that is a good thing.  A flexible endowment is one that has capital but also uses it along with investment returns over time to maximize public impact.  A rigidly defined foundation timeline is unnecessary  Indeed, it may extend over two or three generations, but that is different than truly perpetual.

An unrecognized norm

Many well-known, established Canadian private foundations are on a slow, unannounced spend-down. Why? Because they spend more than the minimum annual 5% disbursement quota each year.  They spend at a rate that is greater than the historical rate of return.  They are also human institutions that can run out of steam due to inter-personal dynamics.

A minority of foundations have explicit spend-down mandates or sunset dates.  By analogy only a small minority of people know their date of death, or companies know when they will go out of business.  That’s OK.  Labelling flexibility as “accidental spend-down” downgrades the importance of engaged, dynamic philanthropy that changes over time.  The emphasis should be on philanthropic responsiveness and finding the right balance between current and future community needs.

Sure, flexible foundations have invested capital and will be around for a long-time, but many foundation boards like the option to grant and spend beyond the minimum annual disbursement quota of 5% per annum.  They are committed to charitable benefit and impact.  These foundations may appear permanent, but they will evolve, and change. They won’t last forever, and that’s fine.  They do their work quietly and effectively.