Philanthropy: An Important Part of an Integrated Financial Plan

Some valuable considerations for your planned giving strategy.

April 14, 2018

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 these generous people, you might want to consider using certain tax-minimization strategies to enhance your philanthropy.

Here’s a brief look at some ideas for your consideration:

1: Amount of Gift

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: Beneficiary(ies)

There are three main types of beneficiaries: charitable organizations, private foundations and public foundations. Public and private foundations 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, and has come into a lot of money.

3: Tax Credits

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%.

4: Types of Donations

Different tax rules apply depending on the type of donation you make.

Cash
A cash donation to a registered charitable organization qualifies for the tax credit described above.
Securities
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 to make a cash donation you would have to pay tax on half the capital gain. (Capital gains have a 50% inclusion rate for taxation.)
Life Insurance
A donation in the form of life insurance can result in more money for the charitable organization because 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.
Estate Gift
In addition to life insurance, other donations can be noted 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.