How PearTree Canada has helped transform philanthropy in Canada

Talk to Ron Bernbaum today and it’s clear he’s as enthusiastic about PearTree Canada’s core mission – helping philanthropists maximize the impact of their donations to Canadian charities – as he was when he founded the firm, 17 years ago. Back then, however, his idea for reducing the after-tax cost of giving by more than half was both innovative and radical, and when he pitched it to philanthropists and charitable organizations, some were skeptical. “The first few years were very challenging,” recalls Bernbaum. “I met with one charity board that basically said, ‘How can this be? This is too good to be true.’ They actually asked me to leave the room.”

Times – and minds – have certainly changed since then. Today, PearTree’s flow-through share donation platform (FTSDP) is an established and important strategy that helps high-net-worth Canadians donate to charities in a tax-efficient way. For PearTree, it accounts for over $500 million in structured financings for donation purposes every year. Since its founding in 2007, PearTree Canada has become a leader in the space, completing more than 700 flow-through financings for donation purposes. This means that more than 2,500 Canadian charities are supported annually through PearTree’s flow-through share donation platform, while providing vital financing for Canada’s mineral exploration sector.

The promise of flow-through share donations began to emerge in 2006, in the wake of the federal government’s decision to make charitable donations of stock 100 per cent exempt from capital gains tax. At the time, Bernbaum, a lawyer with a deep background in tax and finance, was on the board of a Toronto charity that was conducting a major fundraising campaign – “and we weren’t being very successful,” he recalls. An article by accounting firm PwC about the tax mitigation potential of flow-through shares for philanthropy had recently appeared, and a fellow board member mentioned it to Bernbaum: “They said, ‘Ron, you’re a tax geek. Do you know anything about this flow-through stuff?’”

The short answer was “not really,” but Bernbaum began to leverage his contacts in law, finance and the mineral exploration sector to find out more. Eventually, a workable platform for incorporating flow-through shares into charitable giving crystallized, and it was “remarkably simple,” Bernbaum says. Crucially, both the Canada Revenue Agency and Revenu Québec ruled in favour of the model in 2008, following efforts spearheaded by Bernbaum and others.

Here is how the strategy works: A donor, who must be an accredited investor, purchases flow-through shares, generating a tax deduction equivalent to their value. Then, the donor gifts the shares to the charity of their choice, which then sells them to an accredited investor (usually a brokerage firm, who buys at a discount to the donor’s original premium subscription price). All the steps happen the same day, without market risk. If there is no liquidity for the charity, then there is no subscription for the shares. The donor claims a charitable donation tax credit in the amount of the final sale value of the shares sold by the charity (same as the pledged donation amount). In effect, the donor “gets two deductions for writing one cheque,” Bernbaum explains.

Flow-through shares, which are issued by Canadian junior mineral exploration companies to finance exploration, are highly speculative investments, since the vast majority of exploration plays never turn into viable mining operations. The issuing companies rarely have significant revenues, so the bulk of their expenses, which are mostly labour and local service providers, generate a tax deduction they cannot use. With flow-through shares, however, the company can raise capital and pass along the tax impact to investors, who under a long-standing federal policy can deduct from taxable income the full value of their investment.

On the surface, flow-through shares might seem an unlikely fit for philanthropy, but Bernbaum was among those who recognized their potential early on – and honed it into PearTree’s Flow-Through Share Donation Platform. Using PearTree’s FTSDP significantly reduces the after-tax cost of a donation. For example, with a straightforward cash donation, the after-tax cost could run as high as 50 per cent. Under PearTree’s FTSDP, however, it drops to less than 10 per cent of the donation amount in all provinces.

For donor clients, PearTree facilitates every step of the process, making it efficient, convenient and quick. The firm’s team of legal, mining sector and tax experts work with clients to plan out donations for maximum tax efficiency, match flow-through share issuers and end-buyers with donors and charities, and broker negotiation on price and terms. Once those are agreed, the required transactions in the FTSDP are often completed in a matter of minutes.

Since PearTree’s first major financing in 2009, Bernbaum, as Founder and CEO, has watched the flow-through share donation space – and his firm – grow significantly. Today, PearTree facilitates over half of charity flow-through transactions in the country.

What’s the impact? For the mining sector, the firm has helped raise billions in exploration capital that ultimately provides jobs for Canadians. In addition, PearTree and its flow-through share donation platform have helped donors amplify their donation dollars for charitable causes throughout Canada while at the same time funding jobs in northern, remote and Indigenous communities.

“In all my years in this business, no donor has ever said they are going to save on taxes and keep the difference,” Bernbaum says. “The conversation with every one of our clients is, ‘How much more can I give?’”

This story was created by Canadian Family Offices’ commercial content division on behalf of PearTree Canada, which is a member and content provider of this publication.