You may want to give a portion of your assets to charity when you die, or you may wish to donate throughout your lifetime, or both. There are several factors to consider in deciding when the timing is right for you.

Donations During Your Lifetime

If you donate during your lifetime, your chosen charity will receive the funds right away to help fund its charitable objectives, providing an immediate impact. You will benefit from the donation tax credits your gifts generate each year and reduce your taxes payable on an ongoing basis.

If you want to make a large lump sum donation during your lifetime, review your current and anticipated net income levels with your tax preparer to ensure no tax credits go unused and all donations can be claimed on this year’s tax return or any of the following five years of tax returns.

Keep in mind that each donation reduces your net worth. The tax savings do not offset the amount you have given to charity. Review your financial plan with your financial advisor to ensure any donations made now will not impact your future financial needs and goals.

Donations at Death

With a donation at death, you retain control over the assets during your lifetime and decide how these assets are to be distributed at death. Incorporating charitable giving into your estate plan can build a legacy after your death that continues to support the causes important to you.

You can specify a charitable bequest in your will or as a direct beneficiary on certain plan types. Plan types that can accommodate a direct beneficiary designation include RRSPs, RRIFs, TFSAs, and life insurance policies.

Whichever method you choose, you should ensure any beneficiary designation is consistent with your will to minimize the risk of any uncertainty or dispute.

There are advantages and disadvantages to using a beneficiary designation to give to charity. Naming a charity as a direct beneficiary may avoid an assessment of probate fees on that plan, and the funds generally will not be available to satisfy any creditors of your estate, although exceptions can apply.

However, specifying the charitable donation in your will can provide several benefits. These include flexibility, such as to designate alternate charities should one cease to exist, and to draft detailed instructions if you want to give varying percentages or amounts to multiple charities.

Your executor can also use all available estate funds to determine the most tax-efficient way to donate, such as to give publicly traded securities. Navigating these considerations is complex, and careful drafting in your will is required. Seek estate planning guidance from your tax and financial advisor and an estate lawyer.

If a donation is made by a direct beneficiary designation, or by a graduated rate estate within 60 months of the date of death, the donation tax credits can be claimed on any of the following tax returns:

• The deceased’s final tax return.
• The tax return for the year preceding the year of death.
• The tax return for the estate in the year of donation or an earlier taxation year.

These tax rules provide a significant opportunity to reduce taxation. You may have sizable income reported on your final tax return, which can increase the donation tax credit rate and tax savings. However, consider that a large donation at death will result in significant donation tax credits.

Although there is flexibility as to how the donation tax credits can be claimed, you should review your anticipated taxation at death with a tax advisor to determine whether there will be sufficient income to use all of the donation tax credits. If there is the potential for unused tax credits, and tax efficiency is important, consider an alternative approach in order to generate donation tax credits by giving during your lifetime.

Choosing How to Give

There are different approaches you can take when deciding how best to make charitable donations. A charity can take various approaches to achieve its charitable objectives and a charity may complete its charitable activities directly, or distribute funds to other charities:

• If a charitable organization typically uses its funds directly to support its charitable work, then your gifts are generally used to support the organization’s charitable activities. This can be beneficial, as your funds are available immediately to help the charitable cause.
• If a charitable foundation can use some, or all, of its funds to support other charitable organizations, then it may operate a donor-advised fund to facilitate ongoing support to other charities.

Donor-Advised Fund

A donor-advised fund can elevate your charitable giving plan, as you can create an endowment fund to provide long-term support to the causes important to you. A donor-advised fund is an account you can set up with a charitable foundation, and you can name the account, for example, after your family name. You’ll receive a donation tax receipt for any gifts made to the account (which usually includes gifts of publicly traded securities).

Once in the account, the funds are invested. Any growth or income generated by the investment accrues on a tax-exempt basis, as the funds are held within a charitable structure. Disbursements are then made on an ongoing basis from the account to the charities you wish to support, and you have the flexibility to select the amounts.

Establishing a donor-advised fund can enhance the impact of each dollar you donate. By having the funds invested, with professional money management and growth potential from the investments, this can fund your charitable causes well into the future, while preserving the capital.

This structure provides flexibility, as you can select and modify the investment, the amount disbursed each year and the recipient charities. It is also a great way to receive charitable tax benefits up front if you are undecided on which charities to eventually support.

Private Foundation

Another potential option is to create your own private foundation. A private foundation is a charitable foundation where the majority of its directors, trustees or donors are not considered to be independent of each other, for example close family relatives.

A private foundation can facilitate an active involvement in the charitable process. The directors or trustees of the foundation can control the investment policy, carry out the foundation’s own charitable activities, disburse to other charitable organizations, determine the amount and timing of disbursements, associate philanthropy with an individual or family, and involve future generations as members of the board or trustees.

A private foundation is often incorporated (to provide limited liability to its directors) or can be set up as a trust. Consider the potential legal and accounting costs to set up the foundation’s structure and apply for CRA charitable registration, as well as the continued filing and record-keeping obligations.

Also, factor in the potential time commitment required from the directors or trustees to operate the foundation, and whether you can find suitable individuals. It’s also important to have a succession plan in place to continue the foundation in the event of your death or incapacity. A foundation should exist for an extended period to maximize its charitable impact.

More Information

• Tax Planning Considerations for Charitable Giving | The Benefits of Charitable Donations
• Tax Planning Considerations for Charitable Giving | Deciding What to Give

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.