Are you leveraging the full tax benefits of your family foundation or DAF to make the greatest philanthropic impact?
Many wealthy Canadian investors have holding companies and family foundations. Over the course of a generation, some investments have accumulated large embedded unrealized gains. It’s common to see investors who have shares purchased decades ago for a few thousand dollars that are now worth millions. And while this is a great result, such situations also come with tax consequences. This post describes an investment and philanthropic perspective that successful investors should consider while managing their capital gains tax liabilities.
One of the consequences of wealth is re-considering the purpose of it. While building wealth, the goals may be paying down a home mortgage, giving kids money for education, and saving for retirement. But once an investor is wealthy, the goals shift. Doing things like paying down a mortgage is no longer consequential. New priorities emerge such as philanthropy, preparing the next generation for the responsibility of wealth, and building a legacy.
When it comes to philanthropy, one of the most powerful tools is donating appreciated public securities. However, implementing it effectively requires careful planning. The right charitable donation, made by the wrong taxpayer or at the wrong time, may fail to produce the intended tax result.
Canada Does Not Have a U.S.-Style Estate Tax, But Death Still Triggers a Major Tax Bill
In Canada, we often refer casually to an “estate tax,” but Canada does not have a separate estate tax in the same way the United States does. Instead, when an individual dies, they’re generally deemed to have disposed of their capital property at fair market value immediately before death. If that property has increased in value, the deceased may realize a capital gain on their final tax return. For wealthy families, this deemed disposition can create a large tax bill, especially when the family owns shares of a holding company that itself owns appreciated securities, real estate, or other investments.
The Holdco Problem: Appreciated Securities Inside a Corporation
Consider a holding company that owns stocks with a cost base of $50,000 and a current value of $5 million. Economically, this $5 million represents real value. From a tax perspective, however, there is a $4,950,000 accrued gain sitting inside the corporation. If the holding company sells the securities, it will trigger a capital gain. If the shareholder dies while owning shares of the holding company, the shareholder may also face a deemed disposition on the value of the holdco shares. The results is these investors face a confusing mix of personal tax, corporate tax, estate administration issues, and liquidity pressure. But there are solutions.
Charitable Donations of Public Securities Are Very Tax Efficient
Canadian tax rules provide favourable treatment for gifts of publicly traded securities to registered charities and other qualified donees (like foundations and DAFs). When appreciated stocks are donated in-kind, rather than sold first and then donated as cash, the capital gain on donated stocks will have a zero taxable inclusion rate. The donor also receives a donation receipt for the fair market value of the stocks they donate. This is why donating stocks is far more tax-efficient than selling the securities, paying tax on the gain, and then donating the after-tax cash.
Who Owns your Stocks?
Tax strategy matters even more when you own your stock portfolio through a holding company. If an individual personally owns public securities and donates them to charity, the individual receives the donation tax credit. But if a holding company owns the securities and the holding company makes the donation, the donation belongs to the corporation. The corporate donation does not create a personal donation credit for the deceased shareholder.
This is an important distinction when it comes to capital gains realized at death.
A Corporate Donation Solves a Corporate Tax Problem, Not Automatically a Personal Estate Problem
If holdco donates appreciated public securities to a family foundation or DAF, the holdco can avoid taxable capital gains on those donated securities. The holdco can receive a donation receipt and may be able to deduct the charitable gift against corporate taxable income, subject to the usual limits. The non-taxable portion of the capital gain may also be added to the corporation’s capital dividend account (“CDA”), potentially allowing tax-free capital dividends to shareholders. These are significant benefits. However, they are corporate benefits. They do not, by themselves, eliminate the personal tax liability that may arise when the shareholder dies owning valuable holdco shares.
Why Waiting Until Death Can Be Dangerous
Many estate plans try to solve taxes at death by including charitable gifts in the will. This can work in the right circumstances, particularly where the deceased personally owns appreciated public securities, RRSP/RRIF assets, life insurance proceeds, or other assets that can be donated by the estate.
But when the appreciated assets are inside a holdco, the estate plan must consider this nuance. The executor may be trying to coordinate a terminal tax return, corporate tax filings, foundation receipts, post-mortem corporate transactions, liquidity needs, family beneficiaries, and CRA timelines all at once. That is a lot to ask of an estate administration process. Getting the tax receipt from charitable donations in the right place at the right time can be difficult in many circumstances.
If the deceased taxpayer owes taxes on the capital gains from the deemed disposition of their holdco shares, stock donated by the holdco won’t be necessarily be available to offset those gains. Timing plays a key role in addition to the location of donations.
The Estate Donation Regime Has Useful Flexibility, But Also Strict Timing
Under the post-2016 estate donation rules, a donation made by will is generally treated as a donation made by the estate, not as a donation made by the individual immediately before death. In practical terms, this means the executor must transfer the property to the charity or foundation before the donation receipt is issued and the tax benefit can be claimed. The estate generally has a 60-month window after death to make qualifying estate donations that may be carried back to the deceased’s final return, assuming the other requirements are met. This flexibility is helpful, but the timing is not unlimited. Litigation, illiquid assets, valuation disputes, family conflict, or administrative problems can delay an estate, putting valuable tax relief and the deceased investor’s intentions at risk.
The “Donate to Eliminate” Clause Is Not a Complete Solution
Some estate plans used a “donate to eliminate” clause, which directed the executor to donate enough to charity to eliminate taxes owing on death. That sounds simple, but the current estate-donation rules make the calculation much harder. The donation may occur after death, not immediately before death. The amount available for donation may change as taxes, expenses, investment values, and refunds change. Donation credits may not perfectly match the marginal tax rate. A clause that doesn’t specify a clear amount or percentage may also create tension with family beneficiaries, who may question whether the deceased truly intended to give away such a large portion of the estate. The better approach is to combine clear charitable intent with thoughtful tax modelling in life, rather than relying on a formula that may not work as expected after death.
Donating Private Company Shares to a Family Foundation is also Risky
One tempting idea is for the estate to donate shares of the holding company itself to the family foundation or DAF. This is much riskier from a tax and compliance perspective compared to donating public securities directly.
Shares of a private corporation may be non-qualifying securities when donated to a non-arm’s-length private foundation. In those cases, the donation receipt may be denied or delayed unless specific conditions are satisfied, such as the foundation disposing of the shares within the required period for acceptable consideration. Court cases have shown that using promissory notes or non-arm’s-length redemption structures can create serious tax risks. Families should be very cautious before assuming that a donation of private company shares will create a usable charitable donation credit.
Lifetime Giving May Be Cleaner
For many families with holdcos holding public securities with large unrealized gains, a more practical approach is to begin donating appreciated securities gradually during the shareholder’s lifetime (or as part of a “wasting freeze”).
The holdco should donate qualifying publicly traded securities directly to the family foundation over the course of many years. This will provide charitable tax credits to the holdco to offset current year’s taxes owing, reduce the corporation’s embedded gains, build the foundation’s assets, create a more gradual philanthropic program, and reduce the future value of the holdco shares that may be subject to deemed disposition on death. Instead of trying to fix the entire tax problem during estate administration, the family can manage the problem deliberately over time.
A Wasting Freeze Can Turn Tax Planning into a Long-Term Process
A gradual charitable donation strategy may also pair well with an estate freeze or a “wasting freeze.” Under a typical freeze, the current owner freezes the value of their interest in the corporation, often through fixed-value preferred shares, while future growth accrues to the next generation or to a family trust. Over time, shareholders can reduce the frozen interest through redemptions, capital dividends, shareholder loan repayments, or other planned distributions. If the holdco is also donating appreciated securities to the family foundation, the overall value of the owner’s frozen interest may decline over time. This can gradually reduce the capital gains exposure on death while transferring growth and philanthropic assets in a measured way.
The Shareholder Loan Must Be Real and Properly Documented
Some planning may leave the older generation with a shareholder loan receivable from the holdco, while the next generation owns the growth shares. A genuine shareholder loan can be simpler from an estate perspective than shares with large, accrued gains, because repayment of a bona fide debt is generally not the same as realizing a capital gain. Successful implementation requires consistency and execution. The loan must be legally valid, properly documented, and integrated with the rest of the corporate and estate plan. Poorly designed transactions can create shareholder-benefit issues, deemed dividends, valuation disputes, or unintended tax consequences.
The Family Foundation Must Be Ready to Receive the Assets
Your family foundation and DAFs are not just a tax-planning tool. They are registered charities with governance, investment, receipting, reporting, and disbursement obligations of their own. Before a large gift of securities is made, the charitable entity should be ready to receive the assets. It should have a brokerage account, an investment policy, a gift acceptance policy, conflict-of-interest procedures, a process for valuing and selling donated securities, and a grantmaking plan. If the foundation receives a large gift but has no plan for charitable disbursements, the family may have solved one tax issue while creating an administrative and governance problem.
The Disbursement Quota Creates an Ongoing Grantmaking Obligation
Private foundations and most DAFs in Canada must generally meet an annual disbursement quota based on investment assets not used directly in charitable activities or administration. A large donation of securities to a foundation or DAF can therefore create an ongoing requirement to make grants or conduct charitable activities. Families committed to philanthropy usually benefit from this, but they need to plan for it. The foundation needs a clear mission, a grant making process, and a governance structure that can continue beyond the founder’s lifetime.
Solving the governance and disbursement challenges that arise from large gifts to family foundations can also be mitigated by using Donor Advised Funds (“DAFs”) concurrently. Securities can be donated directly to DAFs instead of family foundations. This way, the DAF administers the gift and provides receipt. Once the capital is inside a DAF, the donor can lean on the DAF service provider for philanthropic guidance (which charities to support and a strategic plan), and receive some flexibility in the timing gifts. Another way around is for family foundations to accept large gifts then make qualified donations to DAFs. Either way, DAFs can provide a type of “pressure valve” for large donations and timing considerations.
Valuation and Documentation Matter
For publicly traded securities, valuation is usually easier than for private company shares, but the process still matters. The donor, corporation, custodian, and foundation should document the date of transfer, the fair market value, the eligible amount of the gift, the receipt, and any advantage received. Corporate resolutions should approve the donation. Tax filings should properly report the transaction. If capital dividend account planning is involved, the corporation must be careful with CDA calculations and elections. Overstating CDA can create penalties. Under-documenting the donation can create unnecessary risk.
Liquidity Matters for the Estate
Another practical problem with waiting until death to make donations of appreciated securities is that taxes may become due before charities process receipts and issue refunds. Executors may be reluctant to distribute assets before receiving tax clearance, but the estate may need to make charitable transfers before the tax benefit is available. This creates a sequencing problem. The estate may need liquidity to pay taxes, expenses, and interim distributions while waiting for CRA processing.
Once again, lifetime giving reduces this problem because the transactions occur while the client is alive and able to coordinate them.
The Best Plan Usually Combines Lifetime Giving and Estate Planning
What I’ve written in this post is not an argument against charitable gifts by will. Estate gifts remain important to strategic philanthropy. A well-drafted will can direct gifts of personally owned securities, registered assets, life insurance proceeds, or residue to a family foundation or other charities. But for holdco-owned appreciated securities, the best planning may occur during life. Lifetime corporate gifts can reduce embedded corporate gains, build the family foundation or DAFs, support long-term grantmaking, and reduce the size of the tax problem left for executors.
A Practical Planning Framework for Wealthy Families
The first step is to build a clear inventory. The family should know which assets they own personally, which sit in the holding company, which belong to trusts, and which they have already transferred into the foundation. The second step is to identify accrued gains, cost bases, liquidity, corporate tax attributes, CDA balances, shareholder loans, and estate freeze values. The third step is to model annual or periodic donations of appreciated securities from the holdco to the foundation. The fourth step is to coordinate the tax plan with the will, powers of attorney, shareholder agreements, foundation governance, and investment policy. The fifth step is to repeat the review periodically, because tax rules, family circumstances, market values, and charitable priorities all change over time.
The Goal Is Simplicity, Not Complexity
The purpose of this planning should not be to create an overly clever tax structure. The purpose should be to simplify a family’s financial life, reduce uncertainty, and align wealth with the family’s philanthropic intentions. A large tax liability at death can create stress, conflict, rushed decision-making, and unnecessary complexity. A gradual lifetime donation plan can be more transparent. The family can see the foundation being funded. The next generation can participate in grantmaking. The founder can watch the charitable capital being used. This leaves fewer unresolved issues for the estate.
The Right Asset, the Right Taxpayer, the Right Time
For families with holdcos that own highly appreciated public securities, charitable donation planning can be extremely powerful. But the details matter. A donation by the estate is not the same as a donation by the holdco. A donation of public securities is not the same as a donation of private company shares. A lifetime gift is not the same as a post-mortem gift. The best planning often involves gradually donating appreciated securities from the holdco to the family foundation during life, while also maintaining a thoughtful estate plan for remaining assets. This approach can reduce tax exposure, support philanthropy, and provide greater clarity for the family. If your family owns a holding company with appreciated securities and you’re thinking about charitable giving through your estate or family foundation, contact me, because I’m happy to help: james@markdalemanagement.com
