It’s a classic win-win situation. When people provide financial support to charitable organizations, it benefits both the charity and donor. Obviously, charities can use the money to serve specific needs within the community and perhaps beyond. Meanwhile, the donor is rewarded with the satisfaction of helping a cause they find meaningful.
Philanthropy is an important pillar within many financial plans, and there are several tax-efficient ways to give that may benefit you and your chosen qualifying charitable organization. Again, win-win! Let’s briefly explore four strategies for donating tax effectively.
Donating securities If you hold publicly listed securities like stocks, bonds, mutual funds or ETFs that have appreciated in value, consider an “in-kind” donation where these securities will go directly to the registered charity rather than being sold in the market. Doing so will allow you to avoid some taxes, as such in-kind donations are generally exempt from capital gains tax in Canada. It also means the charity can access the full value of the donated securities, whereas selling the securities and then donating the after-tax amount to charity results in less money to support your chosen cause.
Donor-advised fund (DAF) A DAF allows you to make charitable donations for multiple years right away, and claim an upfront tax deduction for the entire amount. This strategy is especially useful in years when you expect significant income, and could use a large federal/provincial (territorial) donation tax credit to lower the amount of taxes you owe. You can then advise the fund on which charities to support over the next several years, and how much to allocate to each charity (if you’re supporting more than one). Typically, a DAF’s management and administration are outsourced to a charity or financial institution, freeing you from cumbersome and often-complex duties. You may advise that the money inside your DAF be invested.
Charitable trust When setting up a charitable trust, you’re permitted to hold assets like cash, securities or real property within it. A charitable trust is a legal structure that pays tax on income generated by its holdings, and requires ongoing legal oversight. A common type of charitable trust is the charitable remainder trust. It can provide you with a steady stream of income and then once the trust is terminated (e.g., when you die), the remainder of the trust’s assets are directed to charity. With a charitable lead trust, the opposite takes place, as your chosen charity receives income for a predetermined period, and then the remaining assets are available for your (or your beneficiary’s) own use.
Life insurance policy When donating a life insurance policy, you name your chosen charity as this policy’s beneficiary and owner. In exchange, you’ll receive a donation tax receipt for the cash surrender value of the policy. To donate the policy upon your death, you (as the policy owner) will continue to pay all premiums on the policy until such time that the charity, as policy beneficiary, collects the death benefit. This death benefit isn’t subject to probate tax because it’s not being distributed from your estate. Meanwhile, your estate can use the donation tax credit for the full amount of policy proceeds, to help lower the taxes owed on your terminal (i.e., final) tax return.
Other considerations
Also remember that you may aggregate donations from past years and claim them up to five years later. This strategy is useful when you might not have significant income tax to pay in a particular year, and wish to carry forward your donation amounts to a year when you’d like to offset potential taxes. As well, if you have a spouse or common-law partner, one of you may claim some (or all) of the combined donations to make the most of Canada’s multi-tiered tax credit structure and lower your overall taxes.
Consult with an Alterna Advisor today to see which charitable giving strategies are suitable for your particular financial situation and philanthropic preferences.
