Guerlane Noël explains that despite the pressures of Q4, advisors need to check in on a crucial tax decision
Each month at WP we focus on a particular topic of interest to advisors. This November we’re focusing on practice management, with a special focus on tax & estate planning.
The final months of the year sneak up on us all. September and October breeze by in a flurry of post-summer catch-up and November hits with a wall of onrushing deadlines. For advisors, those deadlines include a host of crucial tax decisions with serious implications for clients’ tax filings. As advisors weigh questions around tax loss selling, property purchases, capital gains, and a host of other considerations, Guerlane Noël says that a client’s charitable giving receipts need to be factored in.
Noël is Assistant Vice-President, Tax and Estate Planning and Head of Canadian Taxation (Quebec) and Strategic Philanthropy for Mackenzie Investments. She outlined just how significant charitable giving can be as a tax benefit for clients at this time of year. She explained that advisors can maximize charitable giving benefits for their clients by building giving plans that optimize what they give and use the donation of securities to create a double tax advantage.
“Most taxpayers understand that if they give money to a registered charity, it will reduce their taxes. But because of the more sophisticated conversations that are happening between advisors and their clients, we see that it’s important to integrate a strategy to this tax advantage,” Noël says. “We understand that what people want to do as a good action today can become something even greater over time. That’s where strategy comes in and makes the link between legacy, family values, and something greater than just a tax advantage.”
Moving away from one-time gifts
Charitable giving on an ad-hoc basis is, for advisors, a useful way to solve one-time tax problems. Clients know they’re about to get a major tax bill, there are causes they support, and the advisor sees charitable giving as a way to solve their tax problem. Noël says that this can have utility, but that strategic giving can connect tax planning to deeper client needs like legacy and meaning.
Even just from a tax optimization perspective, donating cash is not the most advantageous strategy. Donating securities in kind will allow the client to claim the full value of the security on their tax receipt, without incurring the capital gains tax bill that would come if they sold the security to donate it. That security can then grow in the charity’s account, increasing the overall value of the impact in a way that cash alone might not.
A strategy built around securities donation can then involve multiple charities, touching different aspects of a client’s life. It can also bring in conversations about vehicles like the donor advised fund (DAF) which can help clients make gifts at specific times for tax purposes, but distribute their giving and impact at other seasons when charities might need the assets more. The conversation can open up deeper understanding of the client and show an advisor what kind of legacy their client wants to leave.
“I always say that philanthropy is not about the numbers, not about the tax. To me, it's only a side benefit. So when we talk about philanthropy, it's really the impact that we want to make for a cause, for something that is really important to us. Sometimes it has nothing to do with money,” Noël says.
Building a donation strategy now
While planful giving has huge strategic advantages, Noël is quick to say that this is not something that can be done on December 26th under serious time pressure. Certain charities may not be able to receive donated securities, for example, and the act of donating them can be more complex than a simple cash gift. Setting up a DAF can take time and educating clients about their unique mechanisms and functions can take longer.
Advisors should begin this process with client education and understanding. Noël says that they can talk to clients about tax advantages alongside the kinds of charities and causes that they want to support. That can inform a list of charities they want to donate to and whether something like a DAF is worth exploring. From there, gifts can be meted out through cash or securities as needed to achieve the clients’ goals around legacy, giving, and tax.
Noël notes that sometimes the donation of securities needs to be taken on a case by case basis. Certain securities, based on their cost base or other factors, might not incur the kind of tax savings that an advisor or client expects. Noël insists that advisors need to demonstrate their expertise as part of their giving strategies for clients by calculating the advantage created from each security donated.
While year-end is a busy time, Noël insists that advisors should make these philanthropy conversations part of their year-end review work. She says that these conversations should begin as early as September or October to ensure enough runway to build a meaningful strategy. She suggests opening the conversation with questions about the causes a client wants to support before establishing the next steps in the process.
“Start the conversation with the client's intention. Whenever we start with that point, it means that the rest will flow, and in a way that it's really aligned with the client's objective,” Noël says. “That is not only related to tax, that is oftentimes mainly related to what they want to leave.”
