Could a donor-advised fund help address the proposed AMT changes?
Donor-advised funds (DAFs) are charitable gift-planning structures offered by public and private foundations, as well as some charities (Photograph provided)
Historically, donating publicly listed securities—which qualify for a zero capital gains inclusion rate—has generated significant tax savings for individuals. Starting in the 2024 tax year, the proposed alternative minimum tax (AMT) changes could significantly reduce those savings. Individuals who make donating to charity an integral part of their financial and tax planning may need to revise their giving strategies.
A donor-advised fund (DAF) could be a solution. Here’s why.
THE CHALLENGE: CHANGES TO THE AMT CALCULATION
In the 2023 federal budget, the government announced changes to the AMT calculation, stating their goal of “ensuring the wealthiest Canadians pay their fair share.” If these changes are approved, the AMT rate will rise significantly from 15.0 per cent to 20.5 per cent, and the exemption amount will increase from $40,000 to $173,000 (indexed annually to inflation).
Changes to the calculation of the AMT were also introduced, such as:
- Full inclusion of capital gains under the proposed rules, up from 80 per cent under the existing rule
- Including 100 per cent of the benefits from employee stock options
- Increasing the capital gains inclusion rate for donations of publicly listed securities to 30 per cent from 0 per cent
- Limiting certain deductions and expenses, as well as most non-refundable credits, to 50 per cent—this includes the non-refundable tax credit generated by a donation receipt.
Let’s consider a client who annually donates significant amounts of publicly listed securities to charity. Under the new AMT rules, they would include 30 per cent of the capital gain from the donated securities (previously 0 per cent), and their donation tax credit would be reduced from 100 per cent to 50 per cent, impacting the tax efficiency of this gift-planning strategy.
THE SOLUTION: CONSIDER SETTING UP A DAF
DAFs are charitable gift-planning structures offered by public and private foundations, as well as some charities (the DAF holding entity). Donors contribute to a DAF when they need the donation receipt (matching the donation to the taxable event). Then they recommend which charities should receive grants from the DAF, when, and for what amount. Essentially, it allows someone to donate now and distribute later.
Individuals considering a future taxable liquidity event and donation could accelerate those plans into 2023. A DAF would provide a parking lot for their accelerated 2023 donations, which could then be used to support charities in future years.
Not all DAFs are alike, so it is important for your clients to explore options and understand how DAFs work within various DAF holding entities. This will ensure the DAF they choose can achieve their objectives.
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Abundance Canada is a public foundation with a long history of assisting clients with significant and complex charitable gift-planning scenarios. We have extensive experience facilitating all types of asset donations and our DAF model has been described by donors and advisors as simple, uncomplicated, and flexible. To learn more about DAFs, call 1.800.772.3257 or explore the resources available at abundance.ca.