Interest-free loans offer a variety of benefits
by Sherry Rodney Kushner and Dr. Edward Pearce
July 30, 1996; Canadian FundRaiser
Not all gifts involve outright gifts of property or cash. An interest-free loan is the donation to a charity of the right to use a portion of a donor's capital for a set period of time. In other words, it is the indirect gift of the interest earned by the capital loaned to the charity.
As this is a revocable arrangement and the loan will eventually have to be repaid to the donor, no charitable receipt is issued for either the principal or the interest. And the donor is not taxed on the interest income while the loan is outstanding.
There are a number of benefits to the charity with this gift type. Working capital is provided, the charity retains the capital and earns interest on it, an ideal alternative to borrowing from lending institutions. The donor benefits, since they make a gift to charity without any loss of capital; a tax receipt may result if the loan is forgiven; there may be a reduction in claw-back taxes; and for those making substantial charitable gifts, interest-free loans provide an indirect way to exceed the donation limit.
How do you encourage gifts of interest-free loans?
- Publicize the fact that an interest-free loan is another form of charitable giving. Many people have never considered the possibility of loaning the use of their capital to a charity.
- Promote the fact that interest-free loans are an easy way to make a charitable gift. The donor and the charity sign a simple agreement and the capital is forwarded to the charity for its use.
- Publicize the tax savings of an interest-free loan. Since the income is now in the hands of the charity and no longer subject to donor taxation, the tax savings can be surprisingly significant.
- Encourage interest-free loans to specific campaigns or programs. For example, some churches embarking on building campaigns have arranged all of their working capital from this program.
- Suggest an interest-free loan as a way of preserving the donor's capital. This is the quintessential element of an interest-free loan, since the donor can make a meaningful contribution without any loss of assets. An additional bonus is that for those who are subject to claw-back there may be an additional savings. A simple donation will not reduce exposure to claw-back, but the income reduction resulting from a no-interest loan will do so, saving still more tax. This will be even more beneficial for some when the threshold is reduced in coming years.
To learn how to establish an interest-free loan, what the issues are for both the charity and the donor, what the target market and specific marketing strategies are for this gift, and much more, you can order your copy of the new manual, "PLANNED GIVING: Making It Happen!", ($97.50 + GST) written by Sherry Rodney Kushner and Dr Edward Pearce, by calling (416) 696-8146, fax (416) 424-3016. This article is an adaptation, with permission, from the Section on Non Cash Gifts.
