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Allied professionals
Taxes are the problem, gifting is the solution
3
Perspective
4
Donation Decision Tree
Cash
Ryan is owner
ABC Foundation is beneficiary
Annual premium payments are not deductible
(the original $130,000 annual donation was deductible)
Estate receives $3.6M donation receipt equal to the
death benefit
Offsets tax owing in on his terminal return, year prior
and any prior year of the GRE.
#3 The Double Double
HEIRS CHARITY
YOUR ASSETS
Donation $500,000
Donation tax credit (50%) $250,000
Life insurance policy Lets see
DB comparison at year 30
$880,000
$860,000 $853,739
$841,470
$840,000
$820,000
$800,000
$780,000
$760,000 $745,483
$740,000
$720,000
$700,000
$680,000
EA 20 ADO EA 100 ADO UL - LP10
#5 Put the Cookies Back in the Jar
DB comparison at year 30
$880,000 IRR: 4.90%
$860,000 IRR: 4.84%
$840,000
$820,000
$800,000
$780,000
$760,000 IRR: 4.35%
$740,000
$720,000
$700,000
$680,000
EA 20 ADO EA 100 ADO UL - LP10
#5 Put the Cookies Back in the Jar
Donation $500,000
Donation tax credit (50%) $250,000
Life insurance policy initial death benefit* $338,737
Tax-free death benefit at year 30 $853,739
Equivalent growth rate needed on shares 2.7%
(tax rate 50%)
Benefits
Donor makes a substantial donation today and can
offset current tax liabilities immediately
Charity receives substantial donation today
Family receives recognition for the gift today
Donor funds estate replacement insurance using net
tax benefits
Donors estate receives total death benefit funded by
the donation tax benefits
Strategy 6
Parents Kids
Preferred shares Common shares
Corporation
#6 Estate Freeze Shares
Proposal
Parents wills revised to direct estate trustee to donate
50% of the preferred shares to charity and leave the
other 50% of the preferred shares to their children
Corporation purchases $1,000,000 life insurance on
parents (joint last to die)
On death of surviving spouse, charity receives $1M
preferred shares
Corporation uses the life insurance proceeds to
redeem the shares from the charity
#6 Estate Freeze Shares
Results :
Charity receives $1,000,000 cash after redemption
Corporation retains $1,000,000 CDA (assume nil ACB)
Children receive $1,000,000 preferred shares
Whats an IFA?
#7 Charitable IFA
Tax rules
Interest deductibility (paragraph 20(1)(c)):
Purpose test loan used for the purposes of earning
income from a business or property
Paid or payable
Legal obligation
Limited to a reasonable amount
#7 Charitable IFA
Tax rules
Collateral life insurance deduction (paragraph 20(1)(e.2)):
Assignment of policy required by lender
Lender is a restricted financial institution
Interest on loan is deductible
Lesser of premiums payable and net cost of pure
insurance (NCPI)
Prorated to amount owing as percent of death benefit
#7 Charitable IFA
During life
Purchase policy
Collaterally assign policy
+ other assets
Holdco
Loan advances = premium
Loan advances used to
(re)purchase investments or
(re)invest in business
#7 Charitable IFA
On death
Client dies Net death benefit
CHARITY
GRE
donated to charity
Holdco Policy pays off loan,
net death benefit
received by policy
beneficiary
#7 Charitable IFA (example)
Insurance details:
Basic annual premium $119,085
Annual ADO $175,550
Total annual premium $294,635
Premium offset From year 11
DSIR 5.5%
#7 Charitable IFA (example)
Tax details
GREs tax rate 50%
Corporate tax rate 51%
Average corporate income needed to $169,353
use tax deductions
Tax savings reduce net interest costs Yes
Donation objective $1,000,000
Tax savings from donation $500,000
#7 Charitable IFA (annual outlays)
$350,000
$300,000
$200,000
$150,000
$100,000
$50,000
$-
53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
#7 Charitable IFA (compare at year 40)
$16,000,000
$15M
$14,000,000
$12.5M
$12M
$12,000,000
$10,000,000
$4,000,000
$3M $2.7M $2.7M
$2,000,000
$-
No IFA Standard IFA Charitable IFA
Total premium / net interest cost Death benefit / net death benefit
Conclusions