Three Ways to Make the Most of Your Charity Donation
Many of us would like to leave a legacy for our communities. Canada offers substantial tax breaks for donations, meaning there are ways of donating that will reduce the cost to the donor if the donor can use the tax deductions and credits effectively. Below are three ways to make the most of your charity donation.
Donate to Reduce Tax in Final Estate
On death, a person’s assets are deemed to be disposed of at fair market value. If that person was married, anything in joint name or with the spouse as beneficiary can roll over tax-free to the spouse. If not married, there can be significant tax on the final tax return. Anything left in the RRIF / RRSP account is added to income in the year of death. Any investments or property other than the principal residence with unrealized capital gains will have the capital gains realized on death. Property and RRSP/RRIF alone will often put a person into the highest marginal tax bracket, especially if he/she dies younger than the average life expectancy.
Some ways to donate to offset tax at death are:
- Designate a registered charity or donor-advised fund (DAF) as beneficiary of part of a life insurance policy, RRIF / RRSP, or TFSA. The benefit of this is that these investment vehicles bypass probate, so the estate executor does not have to deal with it and it cannot be subject to a will variation.
- Designate specific amounts or properties in your Will to go to a registered charity.
- Set up a charitable remainder annuity where the donor is guaranteed an income for life, but any remainder from the annuity goes to a specified charity, bypassing the will and probate.
Donate During Your Lifetime to Offset Yearly Tax
Donation credits can be carried forward up to five years and ecological land donations up to ten years. This means a donor can make a lump sum donation and use the personal tax credit up over a number of years. It is also worth noting that not all donations give the same after-tax outcome. Political donations have a higher donation tax credit. Donating publicly traded stocks or funds directly also has a better tax outcome because the capital gain on the stocks or funds is not included in taxable income. For example, donating a stock worth $1000 that was bought for $500 will give a charitable tax receipt of $1000 and save the donor from being taxed on the $500 capital gain.
Some ways to donate annually:
- Set up a life insurance policy with a registered charity as the owner. The donor receives a charitable tax receipt for the premiums paid each year. On the donor’s passing, the charity receives the death benefit.
- Donate appreciated stocks, mutual funds, or ETFs from a non-registered investment portfolio
- Set up a charitable remainder trust and receive an immediate lump sum donation receipt for the present value of the remaining interest. The income from the trust still goes to the donor yearly, but whatever remains is irrevocably the charity’s.
- Donate ecologically sensitive land after receiving certification from the Minister of Environment. The capital gain is not included in income, the donation credit can be used 100% against income (instead of the usual 75%) and the donation credit can be carried forward 10 years.
- Donate flow-through shares. The federal and provincial governments both provide incentives for purchasing mining and exploration flow-through shares and the donation of these shares can effectively reduce the overall cost of the donation to nominal amounts.
Most of the prior strategies discussed also work in a corporation. A donation can generally be deducted as a corporate expense against income subject to the same limit of 75% of net income as personal donations. Depending on your corporate tax rate, the tax savings could be anywhere from 11% to 50.67% in BC in 2019. In our experience, the best outcome for corporate donations is for a business owner with a passive company holding either real estate or investments. Passive income is taxed at the 50.67% corporate rate. The donation can further be enhanced by donating publicly traded securities or funds that have appreciated in value. Not only does the company receive a deduction for the value of the security, the entire capital gain is added to the capital dividend account from which a tax-free dividend can be paid.
If you would like to discuss charitable giving, the planning department of ZLC Financial would be happy to assist. We can recommend a customized solution depending on your circumstances.
By Chantel Gibbs, CPA CGA
Disclaimer: This document has been prepared for use by ZLC Financial. The views (including any recommendations) expressed in this commentary are those of the author alone and are not necessarily those of ZLC Financial. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. This publication is not intended, and nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with a ZLC Financial Associate. Neither the firm nor the author of this publication accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein.