There are many considerations when determining the amount and type of asset you wish to donate. Your donation decision should align with your overall financial plan. When deciding on the amount to give, consider your short- and long-term goals, retirement and estate plan.
If you donate a significant amount relative to your income, there is a maximum donation amount that can be claimed on your tax return or carried forward to a future tax return. Review with your tax advisor to confirm that all donations can be used and no credits go unused.
If you wish to leave funds to charity in your last will and testament, you could specify a fixed amount or a percentage of your estate. A fixed amount provides certainty but can be eroded in real terms by inflation. There must also be sufficient assets available in your estate to fulfill the donation.
Specifying a percentage may provide greater flexibility, but depending on the value of your estate, could result in a higher (or lower) amount donated than intended.
When deciding on the type of asset to donate, cash is often the simplest solution. However, there are alternative asset types you can give that may boost the tax efficiency of your donation.
Non-Registered Investments
An additional tax incentive is available when publicly traded securities, such as stocks, mutual funds, exchange-traded funds (ETFs) and segregated funds are donated in kind directly to charity. When the security is donated, any accrued capital gain is realized.
However, the taxable portion of the capital gain is reduced from 50% to zero. Consider donating securities with accrued capital gains, instead of cash, to enhance tax savings. You would benefit from the donation tax credit for the fair market value of the security donated and eliminate the capital gains tax.
If a corporation donates a publicly traded security, the entire non-taxable amount of the capital gain is credited to the corporation’s capital dividend account. This creates an opportunity to pay funds from the corporation to the shareholder as a tax-free capital dividend.
You may hold securities that are in a capital loss position and wish to realize these losses for tax planning purposes, to offset any capital gains you may have. Donating the security will realize the capital loss and generate a donation tax receipt, providing multiple tax benefits.
TFSA
You may wish to withdraw funds from your Tax-Free Savings Account (TFSA) to fund a charitable donation. A TFSA withdrawal is tax-free, therefore you can receive donation tax credits for the amount withdrawn and donated from your TFSA, without increasing your taxable income. TFSA contribution room is restored by the amount withdrawn on January 1 of the following year, giving you the flexibility to re-contribute amounts to your TFSA in the new year.
RRSP and RRIF
Funds held within a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) can be used to make a charitable donation. However, there are tax implications when using an RRSP or RRIF to fund a charitable donation; any donation from them is considered a taxable withdrawal.
This withdrawal is subject to source withholding taxes, which reduce the net after-tax amount available to donate. It’s also reportable as taxable income on your tax return, reducing the net tax benefit of your donation. RRSP contribution room is not restored after a withdrawal. You also lose the opportunity for future tax-deferred growth on the funds withdrawn from the plan.
Consider the tax implications of withdrawing from an RRSP or RRIF before making a donation. If you wish to proceed, you can request approval from CRA using form T1213 Request to Reduce Tax Deductions at Source to reduce or eliminate any source withholding tax from the RRSP or RRIF withdrawal. However, the withdrawal will remain taxable on your tax return.
Life Insurance
You may hold an existing life insurance policy, or wish to purchase a life insurance policy, which can be used to fund a sizable charitable donation. Donating a life insurance policy can provide significant support for your chosen charity, while preserving the value of your estate passed to your heirs. There are a couple of approaches to consider when donating a life insurance policy.
You can retain ownership of the policy, with the death benefit paid to your chosen charity. The charity can either be named as the direct beneficiary on the policy or can receive the proceeds from your estate through your will.
When the charity receives the death benefit, your estate will receive a donation tax credit, which can provide large tax savings upon your death, particularly if there are significant taxes owed by your estate. Retaining ownership gives you the control and flexibility to revise your beneficiary designation or will at any time, should you wish to change the recipient of the policy before your death.
An alternative approach is to transfer ownership of a life insurance policy to a charity during your lifetime and continue to pay the premiums. You’ll receive tax benefits throughout your lifetime, as each premium paid is eligible for a donation receipt. No further donation receipt is issued upon your death given the charity owns the policy.
The gift will generate a donation receipt for the cash surrender value of the policy on the date of the donation, or fair market value if an actuarial valuation is obtained. Tax rules may limit the donation amount that can be claimed.
More Information
- Tax Planning Considerations for Charitable Giving | The Benefits of Charitable Donations
- Tax Planning Considerations for Charitable Giving | Timing Considerations
Help Navigating Tax Planning and Charitable Donations
KWB Accountants & Advisors works with business owners to help you simplify your accounting, improve your profit, and achieve your goals – including helping you navigate succession and estate planning and the potential tax implications of the choices you’re considering. Book an introductory meeting with us to learn more about becoming a client.
This blog article was prepared in collaboration with Blueprint Planning Group.
