As Canadians are becoming older and wealthier, they are turning their attention to giving something back to society while they are still alive. As well, they are determining what kind of legacy they would like to leave.

This opens up an opportunity for financial advisors: you can provide a useful service in helping clients meet important life goals by making charitable giving an area of expertise. You can show clients the most suitable ways to build charity into a holistic wealth-management plan.

“Advisors need to guide their clients on philanthropic concerns from a wealth-management perspective,” says Anne Swarbrick, president and CEO of the Toronto Community Foundation. “That means making the most tax-effective decisions, as well as obtaining the highest possible value proposition. Advisors can help their clients realize their financial and philanthropic goals while improving the quality of life in their clients’ communities.”

Charitable giving is on the rise, and some of society’s highest-profile citizens are leading the charge. Last year, the two richest men in the world, Microsoft Corp. chairman Bill Gates and legendary U.S. investor Warren Buffett, decided to give away vast chunks of their fortunes while they are still alive. Closer to home, in February the Hospital for Sick Children in Toronto announced it had received the largest individual gift ever — from former Trimark Financial Corp. president Arthur Labatt and his wife, Sonia. The $30-million gift includes $25 million for the establishment of the Labatt Family Heart Centre, and a $5-million endowment that adds to the couple’s previous $5-million gift to the Arthur and Sonia Labatt Brain Tumour Research Centre. In 2006, Toronto’s Mount Sinai Hospital received the largest gift in Canadian hospital history — $50 million from philanthropists Joseph and Wolf Lebovic — and Toronto General Hospital received $37 million from Peter Munk, chairman of Barrick Gold Corp.

While gifts of this stature tend to raise public awareness of charitable giving and inspire other wealthy individuals to reach into their pockets, people of all ages and walks of life have been contributing more to charity in recent years. According to figures supplied by Statistics Canada, based on 2005 tax receipts, charitable giving rose to $7.9 billion that year, up 120% from $3.6 billion a decade earlier.

The trend is being fuelled by the change in federal tax rules that concern charitable giving. The new rules, introduced last May, enrich the tax benefits of donating qualified publicly traded securities such as shares and mutual fund units to registered charities other than private foundations by eliminating any capital gains taxes on the appreciation of donated securities. In addition, donors receive a tax credit based on the fair market value of the securities. Ordinarily, when securities are sold, investors must pay capital gains taxes on half of any appreciation.

Aside from the tax incentives, Canadians simply have more wealth than ever before and, therefore, more to give away. Ted Rechtshaffen, president of Toronto-based TriDelta Financial Partners, says his clients include people who have sold a business or inherited significant sums, or couples who have worked all their lives for companies with generous pension plans. When healthy returns in real estate and stock investments are combined with diligent saving in RRSPs, it often turns out that clients are approaching the end of their lives with far more money than they or their children need, Rechtshaffen says.

“Charitable giving may not have been a part of many people’s practice, but an advi-sor can provide value by offering advice on the various options available,” Rechtshaffen says. “Helping clients do good can be a fulfilling part of our job.”

Charitable giving can be done during a client’s lifetime or upon death — or both. Gifts can be made to charity in a variety of ways, including the donation of cash or securities, bequeathing money in a will or naming a charity as the beneficiary of a life insurance plan or a registered plan such as an RRSP or RRIF.

When the second spouse dies, any assets in a registered plan normally would be fully taxable as income on the deceased’s final tax return if passed to heirs such as children. But if bequeathed to charity, the donor’s estate can reap the benefit of a significant tax credit based on the value of the donation.

@page_break@While the donor is alive, the maximum donation credit that can be used to offset income taxes is 75% of the person’s net income, and any unused portion can be carried forward five years. In the year of death, however, the donation credit rises to 100% of net income. Furthermore, any leftover donation credit can be carried back to the taxation year preceding death if the tax return for the previous year is resubmitted.

Rather than making one-time donations to whatever charity grabs their attention at the time, a growing number of donors are creating long-term charitable funds in which a sum is invested with a view to giving a portion of the annual investment returns to charity every year. A portion of the return is also reinvested so that the fund continues to grow in perpetuity, as do the annual charitable donations.

Charitable funds can be created through a private foundation or a donor-advised fund under the umbrella of a public foundation. A donor-advised fund is essentially a mini-foundation that piggybacks on the structure of an existing public charitable foundation; donors can decide which charities they would like to support. Various public foundations offer donor-advised funds, including those accessed through some financial institutions or the nationwide network of individual community foundations called Community Foundations of Canada.

The other alternative is a private foundation, which is often the choice of “ultra-high net-worth” families, says Malcolm Burrows, head of philanthropic advisory services for Scotia Private Client Group in Toronto. Typically, a private foundation is set up by a family that wants to be involved in the disbursement of funds and possibly wants to create an occupation for future generations as the stewards of the family wealth.

There are disadvantages to private foundations, including substantial set-up costs, ongoing administrative expenses and governance responsibilities. In addition, gifts of securities to private corporations are not currently eligible for the same tax credits as securities given to public foundations or individual public charities, although there have been hints that the federal government may equalize the treatment in the next budget, scheduled for March 19.

For clients who don’t want to commit to the long-term responsibilities of a private foundation, Scotia Private Client Group recently introduced a program called Aqueduct, for clients who want to invest a minimum of $250,000 in a donor-advised fund.

“Our marketplace is the high net-worth client, and we advise our clients on charitable giving as part of broader tax and estate planning issues,” Burrows says. “We help them in donating complex assets such as public securities, employee stock options, real estate and private company shares — all of which may involve complicated planning issues.”

Within the past year, a handful of financial services institutions, including RBC Dominion Securities Inc. and Mackenzie Financial Corp. of Toronto and Investors Group Inc. of Winnipeg, have also launched innovative donor-advised charitable funds, allowing clients to create personal charitable funds that will provide long-term charitable support.

In these cases, the financial services institution maintains investment control of the assets that are invested in the charitable-giving plan, allowing the advisors who sell the institution’s products to earn sales commissions and trailer fees, as well as hang on to their money-management relationship with the client. The individual donor may decide which of the more than 80,000 registered charities in Canada he or she would like to support with the return generated by the investments held in the plan.

“We have individuals who are philanthropic by nature and want to create a lasting legacy under their name or that of a loved one,” says Tony Maiorino, vice president of DS in Toronto. “Others are not so philanthropic but want to take advantage of the tax credit. But even if philanthropy is not the primary driver, at the end of the day the charities still benefit.”

Maiorino estimates that about 65% of the contributions received in DS’s new program last year were in the form of securities, spurred by the federal government’s new tax incentives.

“If people are going to give a gift anyway, securities that have appreciated in value can be one of the most effective ways of doing it,” he says. “A good chunk of our donations were in the form of flow-through shares, which tend to have some of the biggest capital gains, as the gains are calculated on an adjusted cost base for the shares of zero.”

Clients with donor-advised funds may name their individual charitable fund, possibly identifying it with the family name or honouring a loved one or an important cause. They can add to their donor-advised fund over time, make a bequest in their will or appoint their fund as the beneficiary of a life insurance policy when they die. To provide for the time when the donor is no longer willing or able to manage the fund, he or she can name a successor or simply leave directions on how to direct the annual disbursements. The individual charities chosen by the donor to receive annual charitable gifts can be changed by the donor any time.

The annual granting rate for a donor-advised fund is decided by the sponsoring foundation’s board of directors, but government rules require that a minimum of 3.5% of the value of assets be disbursed each year; this amount could be higher if the assets are generating healthy returns. If the fund has been in existence more than 10 years, all or some of the original capital can also be paid out to chosen charities. Prior to the 10-year threshold, only the annual disbursements can be paid out.

TD Waterhouse Canada Inc. and Bank of Montreal have also introduced proprietary charitable-giving programs that allow clients to establish donor-advised accounts. BMO, for example, is involved in an alliance with the Community Foundations of Canada; advisors that work within BMO’s banking and brokerage operations are introducing local community foundations as a way for clients to set up donor-advised charitable funds. While the foundations assume the responsibilities of administration and directing the annual disbursements to chosen charities, BMO maintains responsibility for investing the assets.

Community foundations exist in 155 communities across Canada, and allow any public donor to set up a donor-advised charitable fund to support any registered charities they choose. Minimum amounts depend on the foundation and the terms of the donor-advised fund. Annual fees typically run up to 2% of assets, depending on the foundation, and are used for research, administration, reporting, investment management and grant-making activities.

The combined assets managed by Ca-nadian community foundations currently totals $2.5 billion. While these foundations are geared toward average Canadians, some wealthy people are also using the convenient community foundation structure to donate significant amounts through donor-advised funds, says Swarbrick. The Toronto Community Foundation has some charitable funds of up to $10 million, she says, while the Moffat family of Winnipeg has established a $100-million charitable fund with the Winnipeg Community Foundation.

Swarbrick says the Toronto Community Foundation is willing to work out strategic alliances with interested money-management firms and investment counsellors. The foundation already has arrangements in place with a couple of Toronto-based financial services firms, including Davis-Rea Ltd. Investment Counsel and Manitou Investment Management Ltd. Under these agreements, the firms maintain investment control over the assets in donor-advised charitable funds held by clients, while the Toronto Community Foundation looks after the administration and annual charitable-granting responsibilities. The foundation monitors the return on investments while maintaining the right to assume investment responsibility if the investment firm does an unsatisfactory job and fails to manage the assets according to prudent investment rules.

The formation of a donor-advised charitable fund or private foundation often encourages family cohesion because there is a passing down of philanthropic values and a sense of responsibility, says Marvi Ricker, vice president and managing director of philanthropic services at BMO Harris Private Banking in Toronto. Ironically, charitable giving also enhances a family’s ability to hold on to its wealth. Ricker cites research by California-based Williams Group that shows 70% of families fail in preserving family wealth beyond the transition to the next generation, and of the 30% that are successful, family philanthropy plays a big part.

“Establishing a charitable fund allows a family to come together in something important,” says Ricker. “It allows people to get involved in giving. They are not just writing a cheque and walking away; they are contributing their time and expertise to things they care about.” IE