Charitable gifting strategies as a tax and financial planning tool

This is the first in an ongoing series on using charitable giving to enhance tax and financial planning options for philanthropists.

For many Canadians, a committed philanthropic journey can be long and winding—and it can often start for a variety of reasons.

Some embrace giving as a means to indulge their passion for helping others and making life better for people across their community. Some do it to leave a lasting legacy that’s felt long after their living years. Others do it to bring their family closer together and to instill a sense of charitable responsibility across generations. Some dig deep into their pockets to help in an acute crisis. Case in point: we’ve seen unprecedented generosity from coast to coast in the wake of the coronavirus pandemic.

Others take the initial plunge towards long-term funding of charities for personal tax and financial planning reasons. Specifically, they look to reduce their tax burden by making large charitable donations that can provide funding to one or more preferred causes. An increasing number of Canadians are choosing to give back by opening a donor advised fund as a way to establish a family foundation. As we’ve noted in recent blogs, the reasons for opening a Canada Gives Foundation account are numerous.

But what about funding your Foundation? On that front, there are several options.

You may decide to make an outright gift of cash, donate listed securities of public companies or gift shares of privately held companies. You may also give real estate, or even valuable pieces of artwork if the recipient charity’s gift acceptance policy allows them. Others bequest part of their estate to fund a foundation upon their passing or opt to gift a life-insurance policy or an annuity.

Donors who work closely with a professional financial advisor often develop a customized funding strategy that combines a number of gifting tactics. Whatever your preference, it’s important to develop a funding strategy that aligns with your short-, medium- and long-term personal financial and philanthropic goals, while also reflecting the reality of your current financial circumstances.

Tax laws and philanthropy

Tax and financial planning considerations are an important part of being a philanthropist. The good news: Canadian tax laws have been designed to encourage philanthropic giving. Put simply, individuals can claim a tax credit for charitable donations, which are amounts that can be used to reduce the balance owing to the Canada Revenue Agency on taxable income.

As noted in the e-book Planned Giving for Canadians, the federal tax credit is 15 per cent of the first $200 of charitable gifts, 29 per cent of gifts in excess of $200 and 33 per cent of gifts if your taxable income is in excess of $200,000.

In most provinces, the combined rate will be at least 40 per cent to 50 per cent of the gifts for donors whose taxable income is less than $200,000. For donors with taxable income in excess of $200,000, the combined tax credit could be as much as 4 per cent more.

The maximum amount of charitable contributions that can be claimed in any one year (except on the terminal tax return) is limited to 75 per cent of net income in most provinces, while contributions may be carried forward for up to five years.

Is cash king?

A cash gift is by far the simplest form of donation and may be executed through everything from one-time online transactions to credit card payments. In some cases, it may also be the ideal gifting option.

If you’ve come into a substantial inheritance, for example, or you’ve exercised lucrative stock options and decide to gift a significant sum to a charity, you’ll receive a donation receipt for the full amount of your gift. Depending on your taxable income and where you reside, it could be as much as 45 per cent of the value of the gift. Your foundation can immediately deploy those funds, if required, or invest them.

Of course, cash isn’t the only potentially beneficial gifting option from a tax perspective.

The listed securities advantage

By gifting listed securities, you may realize even more tax savings than you would by gifting cash.

Not only will you receive a donation receipt for the market value of the listed securities—which, as noted in Planned Giving for Canadians, includes all publicly traded shares, rights, debt instruments, mutual funds, segregated funds, ETFs and Canada or provincial bonds—you won’t have to pay tax on any capital gains realized in the transaction. Best of all, the process is relatively seamless. You (or your portfolio manager) will make an electronic transfer from your investment account to your foundation account. Sometimes the process of gifting securities will happen almost immediately, while in others it could take several weeks to complete. Note that the value of the gift is based on the fair market value on the day it’s received by your foundation.

Most importantly, gifting securities can offer tax planning flexibility. For example, selling securities with an accrued capital gain may trigger a tax liability. By donating some shares to your foundation, you may eliminate most /all of that tax liability. Also, tax savings can be realized when exercising employee stock options.

How? When you exercise stock options, you receive a taxable benefit equal to the difference between the fair market value of the shares on the day of exercise and the option exercise price. If you donate the acquired shares to your foundation, the taxable benefit may be eliminated.

Your financial planner or tax advisor will be able to help you develop a personalized strategy that best meets your needs—and a key part of that discussion will include your philanthropic goals and how best to fund your foundation to achieve those objectives.

While you may have embraced charitable giving as a financial or tax-planning tool, there’s little doubt those benefits will likely be outweighed by the sheer joy of bringing positive change to the people and community around you.

Stay tuned for more in our ongoing series on tax-planning ideas for charitable giving.

The Canada Gives Team

Note: This blog is not intended as investment, tax or financial advice. Always consult your financial planner or tax advisor for more detailed information on gifts of insurance, real estate, bequests in wills—and develop a strategy tailored to your specific financial circumstances. If you have further questions, please contact us at info@canadagives.ca.