Charitable giving is becoming the next frontier of financial planning as Canadians grow older and wealthier. The trend is being further fuelled by the change in federal tax rules in the 2006 budget that completely eliminates the capital gains tax on donations of publicly listed securities or mutual funds that are gifted to charity.

Riding the interest in charitable giving, companies such as RBC Dominion Securities Inc. and Mackenzie Financial Services Inc. , both based in Toronto, have recently launched charitable funds that make philanthropy more rewarding — not only for clients who donate, but for financial advisors who offer related strategic investment and tax-planning advice.

“There is growing recognition that charitable giving is an integral part of holistic financial planning,” says Brad Offman, assistant vice-president of strategic philanthropy at Mackenzie. “People plan for retirement, and they plan for death, but charitable giving is often about how they want to be remembered after death. Helping clients leave a legacy is something advisors need to view as a logical extension of financial planning, and it can deepen the client relationship as passions, values and dreams are discussed.”

In May, DS launched RBC DS Charitable Gift Program, a proprietary plan allowing its clients to donate cash or securities to their own donor-advised fund, then recommend grants to the charitable organizations of their choice.

In June, Mackenzie launched Mackenzie Charitable Giving Fund, which allows investors with a minimum of $25,000 to establish and name their own charitable fund, then decide which of the more than 80,000 registered charities in Canada they would like to support with the return the investments in their plan generate each year.

The concept of these plans is similar to multimillion-dollar private foundations, which have typically been the preserve of wealthy families that can absorb the costs of establishing and administering them. With these new charitable funds, Mackenzie and DS — in partnership with the Charitable Gift Funds Canada Foundation, one of the leading foundations in the country — provide the investment and the administrative expertise. They also make sure the targeted charities receive their support every year.

Essentially, each donor’s individually named fund is housed under the umbrella of the larger foundation, which administers the collective charitable funds.

The benefits of these new plans for advisors are numerous, and include the ability to expand their businesses by keeping charitable assets in their books. Advisors’ value can be enhanced by helping clients with tax- and estate- planning issues associated with charitable giving.

“By helping their clients with charitable-giving strategies, advisors have an opportunity to make a true difference in the communities in which they live and work,” Offman says.

With Mackenzie’s charitable fund, client contributions will be invested in one of several existing Mackenzie balanced mutual funds eligible for the program, including Cundill Canadian Balanced, Cundill Global Balanced, Ivy Growth & Income, Maxxum Canadian Balanced, Sentinel Income and Universal Canadian Balanced. The annual granting rate will be decided by CGFCF directors, but a minimum of 3.5% of the value of assets will be available for disbursement to the client’s choice of charities every year, and it could be more if the mutual funds perform well.

Each year, the disbursement rate will be a little different, depending on a variety of factors that go into the calculation formula, Offman says. Typically, only a portion of any investment growth will be reinvested, so each client’s charitable fund will grow over time, as will the annual grant.

There are some community foundations already in existence that allow contributors to establish a donor-directed fund under the umbrella of a larger foundation, and major financial institutions such as TD Waterhouse and BMO Financial Group are promoting these plans to their clients. However, Mackenzie’s charitable fund offers the opportunity for advisors throughout the independent broker-dealer channel to retain control of the client’s assets after they’ve been donated to the charitable fund. With Mackenzie’s plan, advisors benefit from trailer fees and commissions generated on the investments held in the account, as long as the account exists.

Donors may choose to add to their fund over time, make a bequest in their will or name their charitable fund as the beneficiary of a life insurance policy when they die. For the time during which the donor is no longer willing or able to manage the fund, he or she can name a successor and leave directions on how to direct the annual disbursements. This can be done in perpetuity, or the donor can recommend the fund be closed and the balance paid out to charities, providing the fund has been in existence at least 10 years. Prior to 10 years, the rules governing charitable foundations dictate that only the annual disbursements may be paid out.

@page_break@Minimum grant to any one charity is $500. Investors may change charities every year if they wish, and may switch from one eligible Mackenzie fund to another.

“The donor-advised fund presents an opportunity for the donor to pass down charitable values to the next generation, and for the advisor to develop a relationship with the next generation and retain business,” Offman says. “Many advisors worry about what will happen to an account when a wealthy client passes away.”

The Mackenzie plan charges an administration fee of 1% in addition to the usual MERs on mutual funds, and the client’s financial advisor receives the applicable trailer fee, as well as sales commission on the back-end load fund. The front-end option offers the trailer fee only. Larger donations of more than $500,000 receive a MER discount of close to a percentage point, and donations of more than $5 million get an even greater discount, which will tier down with size.

The RBC fund operates on the same principle as the Mackenzie fund, with the CGFCF providing the administrative framework for the charitable foundation, and each client naming the individual account and directing the contributions. Once the funds have been transferred to the client’s charitable account, the client can choose to have them invested in a pre-approved list of proprietary and third-party mutual funds, or in a separately managed account holding qualifying individual securities including stocks and bonds.

If the client chooses the mutual funds, RBC advisors receive any applicable commissions as well as trailer fees. If the separately managed option is chosen, advisors receive a portion of the management fee charged. For example, on a balanced mandate, the RBC advisor would receive 93 basis points of the 2.15% charged on managed assets.

The separately managed account makes sense for clients who want to have some influence on the securities held in the account. They may want to avoid tobacco stocks, for example, when the returns are being used to support charitable causes. The minimum investment for RBC’s fund is $50,000 and it is available only through RBC advisors. This is a more restricted distribution network than that of the Mackenzie charitable fund, which is widely available through all advisors who sell Mackenzie funds.

“The program is a response to our clients’ wishes to include charitable giving in their long-term financial plans,” says Anthony Maiorino, vice president at DS.

In the past few years, TD Waterhouse and BMO have also introduced proprietary charitable-giving foundations, allowing clients to establish accounts and select their favourite charities to receive annual grants. The charitable accounts are promoted through the network of advisors in the banks’ banking and brokerage operations.

Tax changes in the 2006 federal budget will have a profound effect on giving, Offman says.

The charitable donation tax credit effectively wipes out tax on appreciated shares, mutual funds or segregated funds. Normally, these assets would be subject to capital gains tax on half the gains upon their sale.

“Charitable donating can be one of the easiest, most effective tax-saving strategies available,” Offman says. “Any advisor not talking to clients about it isn’t doing his or her job. It’s like not mentioning RRSPs.” IE