Philanthropy: an important part of an integrated financial plan
According to Statistics Canada, about 82% of Canadians 15 and older make a charitable donation every year, and the total amount being donated has been going up over the last 10 years. More specifically, most of the increase is due to the 10% of people who make the largest donations.
If you are one of those people, you might want to consider a strategy that would leverage certain tax mechanisms to optimize your philanthropy. Here’s a brief look at some of the basics.
1: The amount
As a general rule, when filing your income tax return, you can claim a charitable tax credit to a limit of 75% of your net annual income (or even 100%, under certain conditions, in certain provinces). Revenue Canada provides ways to increase that limit, particularly if the donation is in the form of capital property or depreciable property. Also, the deduction may be spread over five years.
2: The beneficiary(ies)
There are three main types of beneficiaries: charitable organizations, private foundations and public foundations. Foundations (both public and private) allow donors to structure their giving via an organization that donates to various beneficiaries. Major donors will often establish their own private foundation. However, a public foundation may prove less complex because it is managed by a team representing several donors. Both could be interesting options for someone who has just sold a business, for example.
3: The tax credit
Generally speaking, your donations will generate a federal tax credit of 29%. (More precisely, there’s a 15% tax credit on donations up to $200, and a 29% tax credit on the amount over $200.) You will also receive a provincial tax credit. Depending on your province, your total tax savings could be anywhere from about 40 to 50 percent.
4: The type of donation
Different tax rules apply, depending on the type of donation you make.
A cash donation to a registered charitable organization qualifies for the tax credit described above.
There is an additional advantage to donating certain kinds of securities (such as shares in publicly traded companies or mutual fund units*), as the capital gain on those investments may not be taxable. By contrast, if you sell the securities first, in order to make a cash donation, you would have to pay tax on half the capital gain. Another advantage is that if the donation is made by the donor’s management company, this could increase the company’s capital dividend account and allow for the payment of tax-free dividends.
- Life insurance
A donation in the form of life insurance can result in more capital for the charitable organization, since the benefits will probably be higher than the premiums paid by the donor. In tax terms, if the organization is both holder and beneficiary of the policy, the donor will receive a tax credit equal to the amount of the premium. If the donor holds the policy, then, upon death, the estate will get a tax credit for a donation equal to the proceeds of the policy. Here again, if a management company is involved in the planning, additional options may be available.
- Estate gift
In addition to life insurance, other donations can be provided for in the donor’s estate plan. In some cases, a charitable organization can be named as beneficiary of the donor’s RRSP or RRIF, which will result in a tax credit for the estate. Other cases may involve such things as a testamentary trust or remainder trust. Professional advice is highly recommended in such situations.
- Other types
Real estate, valuables, works of art and other goods may also be donated. However, it might be necessary to have the fair market value and any realized capital gain properly assessed.
As you can see, there are a number of approaches to planned giving. Before proceeding, you might want to consult your financial security advisor, your mutual fund representative and a tax specialist.
* Mutual funds are offered through mutual fund representatives associated with SFL Investments Financial Services Firm or Desjardins Financial Security Investments Inc..
The following sources were used in preparing this article.
Statistics Canada, « Volunteering and charitable giving in Canada », 2016.
Government of Canada, « Gifts and Income Tax 2017 », 2017.
KPMG, Charitable Gifts— « Tax Savings for 2017 », 2017.
Finance et investissement, « Dons planifiés en vogue », October 15, 2017. « La fiscalité au service de l’art », July 11, 2012.
Actualis, « Do you donate just from the heart? », January, 2017.
Centraide, « Planned Gifts ».
Travail, Emploi et Solidarité sociale Québec, « Qu’est-ce que le don planifié? ».
Desjardins, « Planning your estate ».
Revenu Québec, « Receipts for Works of Art ».