The Giving Season is Upon Us: Charitable Considerations
December 01, 2024
Many Canadians make charitable donations of one sort or another. We are good at giving: according to the latest Statistics Canada data, more than 40 percent of taxpayers with income over $150,000 donated to charity.1 For many of us, charitable giving is a way to support causes important to us and can often contribute to leaving a lasting legacy. Some engage in deeper philanthropic efforts, which involve a more strategic and long-term planning approach to charitable giving.
There are a variety of ways to make contributions, but some offer more advantageous tax benefits, making the after-tax cost of your donation lower.
Donation Tax Credit Details
Any qualified donation to an eligible registered charity or other qualified donee2 results in a tax receipt for the fair market value of the donation, which will entitle the donor to a tax credit. The federal credit is 15 percent of the first $200 donated per year and 29 percent beyond this threshold (or 33 percent, to the extent that an individual has taxable income that is taxed at the federal rate of 33 percent3). After taking provincial tax credit into account, the total benefit may exceed 40 to 50 percent, depending on province of residence.
As an example, a taxpayer at the top marginal tax rate in BC would receive a combined federal and provincial tax credit of 53.5% for amounts over $200. In Ontario, individuals paying the top tax rate would receive a combined tax credit of 44.16% (33% federal plus 11.16% provincial).
This credit can also be pooled with your spouse to be claimed by whichever spouse can use it to their best advantage. Moreover, donations can be carried forward for up to five years. Charitable donations are limited to 75 percent of net income in any year except upon death. Donations of up to 100 percent of net income are allowed for tax purposes in the year of death and the year preceding.
Updates Based on The 2024 Federal Budget
- Alternative Minimum Tax (AMT): Only 80% of the charitable donation tax credit can be used for AMT purposes, reduced from 100% previously. Additionally, 30% of capital gains on donated qualifying securities are now included in the AMT base. The AMT rate has increased to 20.5%, with the exemption threshold rising to $173,000.
- Capital Gains Inclusion Rate: The capital gains inclusion rate for private company shares or real estate donations has increased to 66.67% for donations made after June 24, 2024. Donations before this date retain the 50% inclusion rate.
- Electronic Receipts: Charities can now issue electronic donation receipts securely, without the need for specific physical details like the appraiser’s address.
- Foreign Charities: Qualified donee status for certain foreign charities has been extended from 24 months to 36 months.
- Donating Public Securities: Tax efficiency remains high, with the elimination of capital gains tax for donations made directly to registered charities.
If you are looking to engage in charitable giving this season, here are just a handful of options to consider:
What to Donate
Cash Donations — Donating by cash, cheque or credit card is the type of giving we’re most familiar with, but it is the least efficient method with a cost of 50 to 80 cents on the dollar after tax.
Donating Appreciated Public Securities — If you donate stocks or fund units that have appreciated in value, there is potentially a further benefit. Gifting publicly traded securities with accrued capital gains directly to a registered charity not only entitles you to a tax receipt for the fair market value, but also eliminates the associated capital gains tax. This can bring the after-tax cost of the donation down to 20 cents on the dollar.
If you make this donation with corporate assets, your corporation also receives a CDA credit for 50% of the gain that would have been paid, allowing for a tax-free dividend to be paid from the company in addition to the charitable deduction your company receives. If you are considering this option for the 2024 tax year, please let us know well in advance of the year end as charitable donations must be made in-kind before December 31st and settlement times may vary.
Life Insurance — Insurance may be another vehicle that can be used to support a giving strategy with after-tax costs of perhaps 15 cents on the dollar. In some cases, it may even provide benefits while you are alive.
For example, you could have a charitable organization purchase an insurance policy on your life while you donate the cash or appreciated shares to pay the premiums. This way, you would receive a tax credit for the premiums donated. Dividends from the policy could be paid to the charity annually in addition to the eventual death benefit.
If you wish to leave a legacy, you may also consider owning a life insurance policy yourself and naming the charity as the beneficiary, which would create a charitable receipt in the amount of the death benefit. There are a variety of tax-efficient ways to use insurance to support your charitable endeavours.
Private Company Shares — If you own shares in a privately held corporation, a donation won’t qualify for the elimination of the capital gain as with a public security, but may be considered an excepted gift. 4 Particularly as part of an estate plan, a donation of these shares can be used to reduce taxes on your estate, create a large legacy, while also allowing your heirs to get money out of your company tax-free.
Other In-Kind Gifts — You may also consider donating personal property which a charity can then convert to cash. For example, by donating a used car to charity, you may be eligible to receive a tax receipt for its appraised value. Similarly, you may be able to donate a legitimate work of art to a public gallery. Special tax rules may apply to in-kind gifts so check with a professional tax advisor on how to best handle the situation.
Where to Donate
Directly to a charity — Individual donations directly to charity, much like cash donations, are the method most familiar to most. Charities need annual funds to continue operations. If considering a donation of a significant amount you might consider other options below that offer the same initial tax benefit but additional control to flow funds to charities over the years or establish a names.
Private Foundations — Individuals who wish to set up a fund in excess of $1 million - $2 million may consider establishing a private foundation as a vehicle for charitable activities. Money paid into the foundation may result in an immediate tax benefit while the foundation can direct future gifts as it sees fit. Foundations are often seen as a way to involve multiple generations in the philanthropic process. However, the ongoing cost of the foundation may be a disadvantage. Also, the details of the foundation, its directors, and activities becomes a matter of public knowledge published on the CRA website.
Donor-Advised Funds or Community Foundations — Giving through a donor-advised fund or a community foundation may be a cost-efficient and more private alternative to establishing a private foundation. They can eliminate certain legal and administrative costs, while still allowing you to direct donations and achieve tax benefits. They also allow for more privacy than a private foundation. The benefit of a donor-advised fund is that the contribution will be deductible in the year it is made, but funds can be distributed in future years. The donor may also be able to advise on how funds are invested by the charity until their distribution.
Get More Information
These are just a handful of ideas. We can offer perspectives on these or other options and have the resources here to support these types of endeavours. For those wishing to make substantial gifts, we can help to provide support in building a philanthropic plan that allows for strategic giving into the future. Planning ahead can help to maximize the potential tax benefits, such as timing your charitable donations to use the maximum available tax credits. For example, making a charitable gift at the time you sell your business or when you exercise stock options may help to reduce your resulting tax liability. Charitable giving can also be a wonderful way of creating a legacy, but the options and their outcomes in estate planning can be complex. Where major gifts are concerned, we recommend seeking independent professional advice. If you need assistance, or would like perspectives on charitable giving considerations, please don’t hesitate to get in touch.
Notes:
- https://www150.statcan.gc.ca/n1/daily-quotidien/220412/t003d-eng.html
- https://www.canada.ca/en/revenue-agency/services/charities-giving/givingcharity-information-donors/making-a-donation/which-organizations-issue-officialdonation-receipts.html
- https://www.canada.ca/en/revenue-agency/services/charities-giving/givingcharity-information-donors/claiming-charitable-tax-credits.html
- https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/non-qualifying-security.html