Lifestyle Buy a building to donate to charity?

"Maybe you can help me," Suzanne wrote. We would like to buy a building to house people with mental health problems. Our investments have done really well and for us it would be a way to give back to the most vulnerable. The building would be taken care of by a non-profit organization. We would give $500,000 and we think we can find a fourplex around $1,000,000. I am thinking of the whole tax side. They weren't rich, though, the ensuing phone conversation revealed.

The situation

Now in their mid-sixties, Suzanne* and Serge* have been retired for eight years, after a career in the public service.

Their defined-benefit pension plans, paid-for home, and sober lifestyle gave them comfort for the future.

“That's kind of why we invested aggressively,” explains Suzanne. The value of our assets has increased enormously, and we always said to ourselves: when the value reaches 5 million net assets, we will donate 10% to charities. We are very concerned about mental health and housing. It is too expensive for those who live on social assistance by obligation. »

The question affects them all the more because one of their children is facing these difficulties.

“We would be ready to give $500,000 to an organization that deals with housing and follows up with patients,” says Suzanne. Maybe we can acquire the building ourselves. »

"I'm good at finding bargains!" “, she adds.

They identified two or three organizations that buy properties and rent them out to vulnerable people.

“The question is quite simple: we want to give as much as possible to charities rather than to taxes,” Serge formulates.

In addition to the 5 million they hold in stock market value, Suzanne and Serge have collected some $ 450,000 in 2021.

A profit of $250,000 came from the sale of a triplex and they pocketed stock market profits of $200,000. The essentials have already been distributed in RRSPs to the children, in RESPs to the grandchildren… plus a few little treats.

In short, to be able to make this donation, “we will have to sell something”, emphasizes Serge.

The $500,000 would be taken from current stock assets.

"Do we take that into our margin account where capital gains are taxed halfway?" wonders his wife. In our RRSP, which is made big and which we would like to reduce, but which has a higher tax rate? Or in our TFSA, where the withdrawal would not be taxed, but where we like to keep our investments because it grows tax-free? »

To deduct the tax bite, Suzanne brings up the idea of ​​making a donation of $250,000 in December 2021 and $250,000 in January 2022. the money? “, she says again.

Numbers

Suzanne, 66 years old

Retirement pension: $30,000

Serge, 65 years old

Retirement pension: $90,000

They haven't applied for PSV and RRQ yet

Fully paid family residence

Capital gains in 2021: $450,000

Whose :

$250,000 from the sale of a triplex

$200,000 for selling assets on stock markets

5 million in stock market assets, held in RRSPs, TFSAs and non-registered accounts

The solution

Search and discuss

Suzanne and Serge's dilemma "is interesting from a financial point of view, but also from a human point of view," says planner and tax expert Benoit Chaurette, advisor at the National Bank Private Banking Center of Expertise 1859.

Their objective is clear, he notes: to contribute $500,000 to housing people suffering from mental health problems.

But is the direct acquisition of an apartment building the best way to achieve this? Not sure.

“Suzanne and Serge have a vision, but they're not the ones who are going to implement it,” says the financial planner.

“The first thing to do when it comes to a major gift is to find a recognized charity and talk to the people responsible. »

There are already organizations that are specifically dedicated to the housing of vulnerable people.

In any case, Suzanne and Serge must ensure that they are registered as charities with the Canada Revenue Agency.

The CRA offers an online search tool for this purpose, he recalls.

Tax optimization

Although Suzanne has a knack for unearthing real estate bargains, buying and donating a building to the organization – and therefore a property in kind – “does not seem to be the simplest or most effective option. fiscally,” emphasizes Benoit Chaurette.

If Serge and Suzanne, for example, pay a down payment of $500,000 for a $1 million building that they donate to a charity, the latter will have to agree to take over the mortgage. The charitable receipt will be at fair market value minus the mortgage balance.

Not easy...

In the form of a building, the $500,000 donation cannot be spread over two years, as Suzanne suggested.

For federal tax, the maximum amount of donation eligible for the tax credit is 75% of net income, recalls the tax expert – in Quebec, this ceiling was eliminated in 2016.

In 2021, Suzanne and Serge realized significant taxable capital gains with the sale of their triplex and the liquidation of several investments.

To reduce the tax bill, they would therefore benefit from making a donation before the end of the year, which leaves them little time to get into real estate. (Because of this deadline, we forwarded this advice to Serge and Suzanne before publication.)

“We could achieve the desired result much more easily by giving money to the organization so that it acquires the building,” maintains Benoit Chaurette.

However, their total net income may not be high enough to use the full $500,000 deduction.

Fortunately, unused deductions can be carried forward and spread over one or more of the following five years.

Where to get the funds from?

In the highly probable hypothesis that Suzanne and Serge opt for a direct donation, where will they have to get the funds from? The couple discusses the RRSPs, TFSAs and non-registered accounts where their investments are held.

“Fiscal logic recommends maximizing tax shelters and not disbursing them quickly,” emphasizes Benoit Chaurette.

“What we usually recommend is to keep our accounts registered, and donate from investments that are non-registered. »

In the case of Suzanne and Serge, they would therefore have to collect assets taken from their margin account.

But there may be even better things to do. The couple could directly sell investments worth $500,000, thus making a gift of securities.

“When donating publicly traded securities or mutual fund units, the capital gain is not taxed – the inclusion rate is 0%,” explains the planner.

In addition, the couple would still benefit from a tax credit for charitable donations at the fair market value of the securities – $500,000 in our case.

Suzanne and Serge will however need to ensure that the charity has a brokerage account to receive these securities.

A foundation ?

The couple mentioned, no doubt on principle, the creation of a foundation. Benoit Chaurette succinctly poses the problem: “If an existing charity already has a mission in line with your objectives, why create a new foundation with the same objectives? »

You will have to invest money (a lot) and time (considerably) to set it up.

An endowment fund is a simpler alternative. Several financial institutions and major charities offer this solution, which consists of setting up a fund into which the entire donation is paid, for a charitable receipt of the same amount. There is nothing to prevent unused deductions from being carried over to the next five years.

"In the case of a major gift, these funds allow distributions to be spread out to one or more charities over several years," says our advisor.

But if the objective is to immediately and significantly help one and the same carefully identified organization, it is always easier to make a direct donation.

* Although the case highlighted in this section is real, the first names used are fictitious.

Are you planning a project that requires a wise use of your money? Do you have financial problems?