Bobby's Blog

Weird Election; Weird Budget

2011-05-05T21:37:00.001-04:00

One of the after effects of the Conservative majority is that their budget will ultimately be passed into law. The flow-through donation shelter, as we knew it, is gone.

Taking away the capital gain exemption on a gift of marketable securities (mining flow-through shares) increases the cost of donation significantly. In Quebec, however, there is a capital gains exemption on a disposition of strategic investment shares and so the negative repercussions of the budget are only half felt in Quebec.

As a result, we have started to see Quebec mining flow-throughs being marketed here in Montreal where the end cost of the donation is 15%. Quebec promoters are hoping to meet with Quebec Finance to confirm the tax treatment. We will keep you informed.

Disbursement Quota Changes: What Does it Really Mean?

2010-03-05T13:26:00.021-05:00

The recent Federal Budget included a portion labeled "Helping Charities: Disbursement Quota Reform". (There were no other charity issues dealt with-the ability to do mining flow-through gifting shelters was not blocked; although we have to wait for the Quebec budget to ensure Quebec's incentives continue.)

The critical 80/20 rule is gone. Charities were required to spend at least 80% of their charitable receipt income on charitable activities. No longer. We will have to spend annually 3.5% of accumulated assets but the rest is gone-no ten-year rules, enduring property, etc.

The 80/20 was not working. Small charities had difficulty making the rules work. This was true for larger charities as well, if their fundraising events or mail campaigns were not making it. How many fundraising dinners announce totals of $500,000 but the costs of the event are half of that?

Thus, CRA was not really applying the 80/20 rule. If you didn't make it, you probably were not going to be bothered.

But the cost of fundraising is a concern. Last year, CRA released a paper on fundraising expenses. Simplistically up to 35% is acceptable, 35-50 questionable and over 50% problematic. Of course if 35% is acceptable then the 80/20 rule became inoperable, so effectively it had to be removed from the law.

In addition, the paper attempted to define what is considered a fundraising expense and what is not. There were charities that were claiming their direct mail pieces were educational and thus the costs of the fundraising program were charitable activities. So presumably the paper liberalized the 80/20 rule, by accepting 35%, but also set standards for what constitutes a cost.

So the 80/20 rule had to go. However, what is left is a vacuum. There is no legal stick to curb excesses. Yes, CRA was not applying the 80/20 rule, but if it saw a clearly terrible situation which it wanted stopped it could apply the rule to deregister a charity or threaten it.

At the end of the day
the "paper" is exactly that-
a paper. It is not law.

A final note: I have to believe that we are going to see more required detail on the charity tax return outlining costs of particular fundraising events. CRA's audits focus mostly on the propriety of receipts given. To move to evaluating the costs of fundraising programs may be far past the current ability of CRA staff and quite time consuming.

Bottom line:

So I have mixed feelings about this budget change. The 80/20 rule had to go - but I believe we are now open to increased fundraising excesses. Something will have to give.

Avoiding investment fraud: Asking the right questions

2010-03-01T14:12:00.008-05:00

The recent news of a newly discovered Ponzi scheme out of Florida and the daily news reports about Jones find us unfortunately still talking about fraud and how to avoid being part of one.

The common feature of the Madoff and Jones frauds was a lack of a custodian-a third party who holds the actual investment products invested on your behalf and from whom you receive a report on your assets.

This third party confirmation
of your holdings is a powerful tool
against many of the frauds
that have been experienced.

If you invest with money managers, we thought you might appreciate a due diligence checklist for investing. Accordingly, we asked Commonfund to provide one.

A not-for-profit, Commonfund was established over 30 years ago by the Ford Foundation to teach American universities how to properly invest. It has grown to be a major player in the investment business managing over $35 billion of assets. It is what is called a “manager of managers”. Thus it doesn’t invest in, say, particular equities, but instead, assembles a group of equity managers who Commonfund believes are good at what they do (will yield enhanced returns) but also are “safe”- the managers operate cleanly and stick to their knitting- invest in a risk pattern which mirrors how they market themselves.

And because it is a not-for-profit, Commonfund returns its profits to the charitable world by providing continuous educational opportunities - studies, conferences, articles, etc.

The JCF uses Commonfund as a “manager of managers” but also as advisors and teachers. We believe that they can do a much better job of investigating money managers as to their suitability than we can. An example follows.

In December 2008, we traveled to Commonfund’s offices in Connecticut as part of a due diligence process. The meeting started at noon but I interrupted immediately with a question. On the route down, my Blackberry had received 20 e-mails asking- “Did we get caught?” The Madoff story had just broken. Commonfund, thankfully, answered no. So I responded on the Blackberry- no, no, no…..

About an hour later I interrupted again - “Why aren’t we in Madoff- great profile, great returns?” The answer:

Commonfund had visited Madoff,
pulled out their list of questions
and found the answers lacking.

Further, an investigation of the auditor led to more questions. The conclusion: not a suitable Commonfund investment.

The bottom line: Ask questions; and remember to check out the custodian.

View the money manager checklist

Are Canadians less generous?

2010-01-05T15:46:00.064-05:00

The Fraser Institute issued in December its analysis of Canadian giving patterns. The analysis is based on 2007 personal income tax returns filed in Canada and the U.S.Although the number of filers who donate is similar in the two countries (26.6% U.S. vs 24% Can.) there is a large difference between the percentage of aggregate income donated. In this case, Americans donate 1.6% of their income while Canadians less than half this amount (0.73%). The conclusion is that Americans are more generous.

This may indeed be correct but cannot be proven by the Fraser Institute's study as it is flawed. The reason for this is Canada's system of taxation of companies differs markedly from the U.S. Many American small business operate out of a corporation (to limit liability) but the income is taxed on a personal tax return (it does not pay to remit corporate tax and then individual tax on dividends). Canada's corporate system is set up (integration) so that there is no or little penalty of earning income in a company (and with small business deductions even beneficial to be taxed in the company). Furthermore, the U.S. company is severely limited in its ability to make significant donations. In Canada a corporation can deduct for tax purposes up to 75% of its income for donations made.

Thus, comparing individual tax return data

between the countries

is like comparing apples and oranges-
they are both fruit and sweet but not identical.

For donations one has to add private corporate giving to the totals. Simply stated there is a much larger probability that a Canadian small business owner would make a $1 million gift to the local hospital out of his operating or holding company than via his personal tax return as compared to his cousin in the

U.S.

In the Fraser Institute data the $1 million private company gift does not count. Americans may be more generous than Canadians (and probably are) but the study does not justify this conclusion.

What continues to be sadly illuminating is Quebec's place among the provinces. While

Canada

's number is 0.73%, Quebec's is 0.33%, placing Quebec in last place (Manitoba leads at 1.02%). I certainly expected this gap to close and the feeling on the street is that Quebecois charity is on the rise. One just has to think of Centraide's success. Hopefully future studies will yield better results.

For more on corporate giving, please have a look at the chapter on Corporate Estate Planning in the National Gift Planning Handbook.

Update on: "Aggressive tax planning schemes"

2009-10-20T10:48:00.000-04:00

On Thursday October 15, 2009 the Minister of Finance of Quebec announced measures to counter "aggressive tax planning schemes".

This blurb will review the measures as they relate to donations. The first new measure requires taxpayers to disclose to Revenue Quebec significant tax saving plans, if the plans are subject to confidentiality agreements (if the advisor restricts the taxpayer from disclosing the plan to others) or if the advisors receive remuneration for their advice contingent on the plans working and a tax benefit being realized.

We are not aware of donation tax shelters which would be caught by this disclosure requirement. The ones making the rounds now (mining flow-throughs) are not confidential and the fees paid to the promoters are not contingent.

In addition, new legislation strengthens Quebec's ability to attack GAARable transactions in 3 ways by:

Expanding the Quebec Taxation Act's definition of GAAR

Extending the statute bar period for GAAR assessments by three years and

Imposing new penalties on transactions subject to GAAR.

Obviously, donations which are part of a series of transactions to which GAAR applies would be subject to these new rules.

Donation Tax Shelter Update

2009-10-14T14:23:00.000-04:00

Over the last few years we have expressed caution over a series of donation tax shelters where the donor "made money" on the transaction. CRA has assessed many taxpayers who were involved. We have learned of a a new spate of assessments received by Montrealers recently. We expect these assessments to continue.

We are much more positive over a series of shelters which are being effected currently. They involve the purchase of mining flow-through common shares with a subsequent gift of these shares and an almost immediate sale by the charity of the shares. In short order the charity has the money, the donor obtains mining deductions and credits and donation credits. CRA has issued rulings on these shelters and have publicly expressed positive sentiments concerning them.

The cost of a donation
can be 8-10 cents
on the dollar.

Nothing is ever easy and we have some concerns over the complete value of the donation receipt.

The bottom line:
Donors must look at AMT issues and other concerns. But all in all this concept is very inviting. In essence when Finance eliminated the gain on a gift of marketable securities the natural choice was to find low ACB shares to gift. Mining shares of course have nil ACBs and so are very inviting. If you’d like to learn more, feel free to contact me.