“You Don’t Know What You Don’t Know Series” – Charitable Strategies Can Help Build Your Wealth Along With The Charities You Support

Apr 15, 2021 | Paul Chapman


Building charitable strategies into your wealth management plan creates the ability to streamline your giving, and often help build additional wealth for you, your estate and the charities you choose to support.

Canadians are known throughout the world for their generosity and benevolence. With recent studies indicating a growing interest in philanthropy, many are wondering about different ways to give back more effectively to their communities. Over 75% of adults make some form of charitable donation over the course of the year. And while giving typically tends to be more reactional and sporadic in nature, most individuals generally don’t incorporate giving into their overall wealth or estate planning. If you donate to one or multiple charities annually, you need to consider your alternatives on this front – utilizing a charitable giving program can give substantially more to charity over the long-run (on the same amount of capital contributed up front), while also keeping substantially more in your pocket to pass on to your family.

Building charitable strategies into your wealth management plan creates the ability to streamline your giving, offers tax benefits and tax exempt growth of funds, and may greatly contribute to creating an enduring legacy. Traditional avenues include establishing a private foundation or an endowment fund. While these are certainly worth keeping in mind, many involve significant set-up costs and considerable administration.

One of the most powerful strategies on this front that I’ve seen is right here at RBC Dominion Securities. Deemed the “Charitable Gift Program” (CGP), it is specifically designed for individuals and families who wish to support charitable causes without the costs associated with establishing a private foundation. Through this program, you can make initial and ongoing contributions to a charitable gift program administered by the Charitable Gift Funds Canada Foundation (CGFCF); one of Canada’s leading independent charitable foundations. As the principal donor of your charitable gift fund, you may recommend grants to the charitable organization of your choice, and your Advisors continues to work with you to develop an investment strategy for your gift contributions. You receive official charitable donation receipts for the full market value of your contributions, which will be substantially larger in this program than investing each year directly as many do. Let’s look at an example to illustrate:

The Smiths have a $3mm investment portfolio, and give $35k/year to a couple charities of their choice. They want to maximize the ‘distance’ their donations go, and want to leave something for their kids when they pass.  Assuming they achieve a long-term return of ~5.5% on their investments, and will live another 40 years, let’s look at two options:

Option A – Status Quo

With their annual donations of $35k over the next 40 years, the Smiths will ultimately give $1.4 million to a charity of their choice. Each year, they get a donation tax credit and can re-invest that refund back into their portfolio. Here’s what this scenario looks like:

Option B — Implement Charitable Gift Program

Here, if the Smiths donate that same planned $1.4 million as a lump sum now to a Charitable Gift Program, they’ll be able to take advantage of a larger donation tax credit up front and can have the fund grant that money over time. By doing so, they’ll have two portfolios: one as a charitable gift fund, within RBC’s CGP, and one personally.

In donating the $1.4 million to an RBC Charitable Gift Fund up front, the clients were able to benefit from the foundation’s tax exempt status by having the funds invested in a tax-deferred manner over the 40 years. With this approach, annual grant disbursements at a minimum 3.5% (the CRA’s requested disbursement quota) of the fund balance are made over their lifetime, and there’s over $1.5 million still available for future grant recommendations, even after CGP recovery rates and investment management fees.

The Takeaway

Option A donates $1.4 million in the clients’ lifetime and leaves $10,521,253 to the next generation. With Option B, the Smiths have granted $2.1 million to their preferred charitable causes over the 40 years, and they still have a charitable gift fund closing balance of $1.5 million. This option also leaves ~$9.5mm to the next generation. Utilizing this strategy created over $1.1 million of additional wealth, including $2.2 million in additional charitable capital by donating a lump sum into a charitable gift fund today. These strategies are also powerful when one utilizes a personal corporation, and/or incorporating permanent insurance strategies into the mix.

If you give to charity on a regular basis, and would like to incorporate charitable giving into your wealth management strategy to increase your contributions as well as your wealth and legacy, let’s have a conversation.