Sharing the wealth: why it pays to donate private shares to charity in your estate plan

A planned charitable donation allows you to make a gift to one or more registered charities as part of your estate plan—a great way to support a cause after you’re gone. But as an incorporated physician, you can also plan a gift that can reduce the tax burden on your estate: you can donate shares from your private corporation.

Here's how it works

Shares held by an incorporated physician at the time of his or her death are subject to capital gains. But if those shares are donated to a registered charity, the tax burden on the estate can be reduced substantially.

There are a couple of challenges, though. First, you may not want to have a charity as one of the owners (shareholders) of your corporation—it may not be part of your overall estate plan.

Second, there’s a catch if the charity is a private foundation or you are not at arm’s length with the charity’s directors and officers. In these cases, the tax credit can be issued only if the charity is able to monetize (i.e., sell) the donated shares within 60 months of receiving the donation. That can be tough to do—private shares can be hard to value, and the organization you donate to will need to find a buyer.

To resolve either of these issues, your corporation can buy back the shares.

Using insurance can help

But how to fund this repurchase? Incorporated physicians can use a life insurance policy paid for by the corporation.

The corporation designates itself as the beneficiary of the policy. On the death of the physician and after the shares have been donated to the charity under the will, the corporation immediately uses the proceeds of the life insurance policy to buy the shares back from the charity.

It’s a relatively simple approach that lets you make a significant gift to meaningful causes without reducing or depleting any inheritance for your loved ones. Not to mention the other pluses of life insurance: While you’re alive, you can use the investment component of the policy to grow savings tax-free. And on your death, the insurance proceeds are tax-free.

To go one step farther, your executors can designate your estate as a graduated rate estate (GRE). This allows them to make better use of the donation tax credits to reduce income tax payable by your estate.

In this case, your executors can claim donations up to 75% of net income in the year the gift is made or the year before the GRE designation; donations up to 100% of net income in your terminal tax return with a one-year carry back; and donations up to 75% of net income in the five years following the year of the donation.

This approach isn’t for everybody. Not only can it be difficult to value the shares, you need to choose a very skilled executor to do this properly with help from professional advisors. Still, it’s worth considering as a way to support your favourite cause while reducing the tax burden on your estate for your loved ones.

Before making any final decisions, talk to your tax advisor and MD Advisor* to review how each option could affect your overall financial and estate plans.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

Estate and trust services are offered through MD Private Trust Company.

All insurance products are sold through Scotia Wealth Insurance Services Inc., an insurance agency and subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc.  

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.