Strategies and Tips

Besides the satisfaction you'll get from seeing your charitable donations put to good use, your donations can also help trim your tax bill. But not all donations are created equal. Ensure that your donation provides maximum benefit for both your selected charity, and your own tax situation. There are also different strategies to consider, depending on whether your donation is made during your lifetime or as part of your estate.

Limits

Believe it or not, Canada Customs and Revenue Agency (CCRA) allows you to claim a tax credit on donations of up to 75% of your net income, plus 25% of most taxable gains arising from gifts of securities or property. Certain gifts 'in kind' (such as capital or depreciable property, ecologically sensitive lands, or certified cultural property) allow the limit to be increased to 100% of net income.

Gifts in Cash or Kind

A cash gift is probably the most common form of charitable giving. It can be something as simple as dropping a few coins in a box, or writing a cheque to a foundation. On the positive side, it is easy to measure the value of your donation and the tax effect it will have. It also gives the charity maximum flexibility - they can choose to invest your donation, or spend it immediately. Unfortunately, it is usually the least tax-efficient way to donate. When you make a receipted cash gift to a charity, you receive a tax credit for 50% of the value of your donation after the first $200 of donations.

A gift 'in kind' is a non-cash gift, like publicly traded securities. Note that for tax purposes, your gift is recorded at fair market value. If your gift has appreciated in value, you are considered to have divested it. Fortunately, if you are giving the publicly traded securities to a charity and the gift is made after February 18, 1997, and before January 1, 2002, your capital gain is cut in half. Instead of being taxed on 50% of the gain, you will only be taxed on 25%. This can result in a significant tax saving. For gifts made between February 28, 2000 and October 17, 2000, the percentages are 66 2/3% and 33 1/3% respectively. For gifts prior to February 28, 2000, the percentages are 75% and 37 1/2% respectively. This article assumes transactions take place subsequent to October 17, 2000.

John has decided to make a donation to a local hospital foundation of $5,000. John is in a 50% tax bracket, and has already made donations of $200 to other charities.

John chooses to donate securities valued at $5,000 in lieu of cash. The shares originally cost him $3,000, and his donation triggers a capital gain of $2,000. If John sells the shares and donates cash to the charity, he is required to pay $500 in tax (50% of $2,000 x 50%tax rate). The donation generates a credit of $2,500 (50% of $5,000), generating a net tax savings of $2,000 ($2,500 tax credit -$500 tax on capital gains).

If instead he donates the securities directly to the charity, the taxable portion of the capital gain is cut in half to 25%, resulting in tax of $250 (25% of $2,000 x 50% tax rate). In this case, John generates a net tax savings of $2,250 ($2,500 tax credit - $250 tax on capital gains)!

Life Insurance

Make sure you have enough insurance to preserve your estate

Donating money to charity through life insurance is a useful estate planning tool. Basically, this involves transferring the ownership of your life insurance policy (such as a whole or universal life policy) to the charity, as well as making the charity the beneficiary. It is the cash surrender value (if any) of the insurance policy that is eligible for credit as a charitable donation. Once the policy has been donated, any additional premiums paid to the insurance company for the policy by the donor are considered a charitable donation, earning you further tax credits. (Note that you must donate the policy itself: just making the charity a beneficiary does not provide any tax benefits.) When giving insurance, you should first consider the needs of your heirs. Make sure you have enough insurance to allow them to preserve your estate before considering a policy donation to charity.

Charitable Remainder Trusts

If you own an income-generating property (such as real estate), you can set up a charitable remainder trust. This is a trust that gives the property to the charity, but ensures that you continue to receive the property's income for the rest of your life. The gift is recorded at fair market value (which means you might trigger a capital gain, as if you were donating a security and recaptured depreciation, if any) giving you an immediate tax credit while ensuring you receive an income during your lifetime. The valuation of the gift can be quite complicated if no reasonable value can be ascertained, then the donation will be ineligible for a tax credit. The downsides are the professional fees required to set up such a trust, and the need for the trust to fill out a tax return each year. The benefits to the charity are that it receives the property immediately, and need not worry about a will being contested. Revenue Canada is currently reviewing the policy on these trusts.