“Maybe you can help me,” Suzanne wrote. We would like to buy a building to house people with mental health problems. Our investments have done really well and for us, it would be a way of giving back to the most vulnerable. The building would be taken over by a non-profit organization. We would donate $ 500,000 and we think we can find a quadruplex around $ 1,000,000. I am thinking of the whole tax side. They weren’t wealthy, however, the telephone conversation that followed revealed.
The situation
In their mid-sixties, Suzanne * and Serge * have been retired for eight years, after having made a career in the public service.
Their defined benefit pension plans, their paid home, and their sober lifestyle have reassured them for the future.
“That’s kind of why we invested aggressively,” explains Suzanne. The value of our assets has increased enormously, and we have always said: when the value hits 5 million net assets, we will give 10% to charities. What concerns us a lot is mental health and housing. It costs too much for those who live on social assistance by obligation. ”
The question affects them all the more because one of their children faces these difficulties.
“We would be ready to give $ 500,000 to an organization that deals with housing and follows up with patients,” says Suzanne. Maybe we can buy the building ourselves. ”
“I’m good at finding deals! She adds.
They identified two or three organizations that buy properties in order to rent housing to vulnerable people.
“The question is quite simple: we want to give as much as possible to charities rather than taxes,” Serge formulates.
In addition to the 5 million they hold in stock market values, Suzanne and Serge collected some $ 450,000 in 2021.
A profit of $ 250,000 came from the sale of a triplex and they pocketed a stock market profit of $ 200,000. Most of it has already been distributed in RRSPs to children, in RESPs to grandchildren… plus a few treats.
In short, to be able to make this donation, “we will have to sell something,” Serge emphasizes.
The $ 500,000 would be taken from current stock market assets.
“Do we take that in our margin account where capital gains are half taxed?” wonders his wife. In our RRSP, which is made big and which we would like to reduce, but which has a higher tax rate? Or in our TFSA, where the withdrawal would not be taxed, but where we like to keep our investments because it grows tax-sheltered? ”
To deduct the tax grab, Suzanne brings up the idea of making a donation of $ 250,000 in December 2021 and $ 250,000 in January 2022. “I don’t know if it would be a possibility for us to leave a foundation where we would put money? », She says again.
Numbers
Suzanne, 66 years old
Retirement pension: $ 30,000
Serge, 65 years old
Retirement pension: $ 90,000
They have not yet applied for PSV and RRQ
Fully paid family residence
Capital gains in 2021: $ 450,000
Of which :
$ 250,000 from the sale of a triplex
$ 200,000 for the sale of assets on the stock market
5 million in stock market assets, held in RRSPs, TFSAs and non-registered accounts
The solution
Search and discuss
Suzanne and Serge’s dilemma “is interesting from a financial point of view, but also from a human point of view,” says the planner and tax expert Benoit Chaurette, advisor at the Center of Expertise of Banque Nationale Gestion privée 1859.
Their objective is clear, he notes: to contribute $ 500,000 to the housing of people suffering from mental health problems.
But is the direct acquisition of an apartment building the best way to achieve this? Not sure.
PHOTO KARENE-ISABELLE JEAN-BAPTISTE, THE PRESS
Benoit Chaurette, advisor at the National Bank Private Management Center of Expertise 1859
“Suzanne and Serge have a vision, but it is not them who will implement it”, formulates the financial planner.
“The first thing to do when it comes to a major donation is find a recognized charity and talk to the people responsible. ”
There are already organizations specifically dedicated to housing vulnerable people.
In all cases, Suzanne and Serge must ensure that they are registered as charities with the Canada Revenue Agency.
The CRA offers an online research tool for this purpose, he recalls.
Tax optimization
Even if Suzanne has a talent for finding real estate deals, the purchase and donation of a building to the organization – and therefore of a good in kind – “does not seem to be the simplest or the most effective option. fiscally ”, underlines Benoit Chaurette.
If Serge and Suzanne, for example, pay a down payment of $ 500,000 for a building of $ 1 million that they donate to a charitable organization, it will have to agree to take over the mortgage. The charitable receipt will be at fair market value less the mortgage balance.
Not easy …
In the form of a building, the $ 500,000 donation cannot be spread over two years, as Suzanne argued.
For federal tax, the maximum amount of the donation eligible for the tax credit is 75% of net income, reminds the tax expert – in Quebec, this limit was eliminated in 2016.
In 2021, Suzanne and Serge realized significant taxable capital gains with the sale of their triplex and the liquidation of several investments.
To reduce the tax bill, they would therefore benefit from making a donation before the end of the year, which leaves them little time to get into real estate. (Due to this deadline, we forwarded these tips to Serge and Suzanne before publication.)
“We could achieve the desired result much more easily by giving money to the organization so that it acquires the building,” says Benoit Chaurette.
However, their total net income is unlikely to be high enough to use the full $ 500,000 deduction.
Fortunately, unused deductions can be carried forward and spread over one or more of the next five years.
Where do you get the funds from?
In the highly probable scenario where Suzanne and Serge opt for a direct donation, where should they get the funds from? The couple discusses RRSPs, TFSAs and non-registered accounts where their investments are held.
“The fiscal logic recommends maximizing your tax shelters and not disbursing them quickly”, underlines Benoit Chaurette.
“What we usually recommend is to keep our accounts registered, and donate from investments that are not registered. ”
In the case of Suzanne and Serge, they would therefore have to cash in assets taken from their margin account.
But there may still be more to do. The couple could directly sell investments worth $ 500,000, thus donating securities.
“When donating publicly traded securities or mutual fund units, the capital gain is not taxed – the inclusion rate is 0%,” explains the planner.
In addition, the couple would still benefit from a charitable tax credit for the fair market value of the securities – $ 500,000 in our case.
Suzanne and Serge will however have to ensure that the charity has a brokerage account to receive these securities.
A foundation ?
The couple mentioned, in principle no doubt, the creation of a foundation. Benoit Chaurette succinctly poses the problem: “If an existing charity already has a mission in line with your objectives, why create a new foundation with the same objectives? ”
It will take money (a lot) and time (considerably) to put it together.
An endowment fund is a simpler alternative. Several financial institutions and large charities offer this solution, which consists of setting up a fund in which the entire donation is paid, for a charitable receipt of the same amount. There is nothing to prevent unused deductions from being carried forward over the next five years.
“In the case of a major donation, these funds make it possible to spread out distributions to one or more charities over several years,” says our advisor.
But if the goal is to immediately and significantly help one and the same carefully identified organization, it is always easier to make a direct donation.
* Although the case highlighted in this section is real, the first names used are fictitious.
Are you planning a project that requires wise use of your money? Do you have financial problems?