April 2012

A more sensible way of being generous

We all have causes that are dear to us, and we usually try to support these with donations to organizations that back them. But did you know that, from a tax perspective, some ways of giving are more effective than others? A short introduction to the concept of planned giving.

Whether it’s education for underprivileged children, help for the homeless, support for women who are victims of violence, or funding for a cultural centre or a music ensemble, the organizations that need our help are legion.

If you’ve already donated cash to a registered charitable organization, you likely know that such a donation is eligible for a tax credit, which allows you to reduce your income tax for that year, or the next five years (up to a certain limit). This is one way that the government encourages each citizen to contribute to Canada’s social and cultural development.

Another way of giving

But what you may not know is that it is also possible to make your donation in a form other than cash. For example, you can contribute securities, capital property, a life insurance policy, or even an RRSP by designating the organization as the beneficiary of the death benefit. Of course, it’s always a good idea to consult a specialist, since this type of donation can have significant tax consequences that have to be taken into consideration.

Nonetheless, this possibility opens the way to a very advantageous tax provision in the case of exchange-traded securities that are donated to a registered charitable organization:  exemption from the capital gains tax. Thus, if an eligible contribution is made in the form of listed securities, units of certain mutual funds, or participation in certain segregated funds, the gain realized on the disposal of this investment could be entirely tax free.

The following table compares two scenarios that demonstrate the full potential of this tax provision. In the first instance, the individual sells listed securities worth $10,000 in order to donate the proceeds to a charitable organization. This scenario is based on the assumption that the person bought the securities several years ago, that the adjusted cost base is $5,000, and that the capital gain is thus $5,000, half of which will be taxable. In the second scenario, the individual donates the investment itself directly to the same organization.

* Assuming that 50% of the gain is taxable and the individual’s marginal tax rate is 45%. **Example based on a Quebec resident. A federal tax credit for charitable donations is 15% on the first $200 and 29% on the remainder. However, taking the Quebec abatement into account, the respective rates are 12.53% and 24.22%. For Quebec residents, a tax credit of 20% is granted on the first $200 of a charitable donation and 24% on the remainder.

In the first case, the donor makes the donation after paying the capital gains tax. In the second, since no tax is applied, the organization receives a larger amount, while the donor can also claim a larger tax credit – an amount that can also be used for the cause, if desired.

A charitable donation strategy

As we can see, charitable giving can be planned and strategies can be developed to allow for each person’s specific circumstances:  type of asset, unrealized gains or losses, estate planning, etc. If the donations are large and regular, it would also be possible, with the help of a tax specialist, to manage your charitable giving strategy through a private or public foundation, which opens the door to a number of additional options.

In the end, the best way to effectively support your favourite cause is to work with your financial services professional to establish the strategy that is best suited to both your assets and your philanthropic goals.