It has been said that " the true measure of success is using one's accumulated fruits of a lifetime to look out for the well-being of the generation that follows, so they can grow up to make the world a better place". An important part of sharing in our society is the support we give to charities, so they can continue to serve the needs of our society. While Canadians have been generous supporters of charity, a recent study has revealed that Canadian charities have, over the past several years, seen a decline in the donations received from individuals. This has left many charities financially vulnerable at a time when a growing population needs their services the most.
In Canada the government (at both the federal and provincial level) assists in the funding of charities by sharing the cost of the donation. Since1988, contributions made to registered charities, have been eligible for a non-refundable tax credit (i.e. if you don't owe any tax the credit will not generate a refund). Depending on the donation amount, this credit will result in a direct tax reduction for the donor. It is important to note that unlike tax deductions, tax credits are worth the same to every taxpayer, regardless of their income.
In an effort to reverse declining donations, the government has (over the past several years) made significant improvements to the charitable giving tax rules, resulting in greater than ever tax savings for donors. Most recently, to encourage non-donors to develop the habit of giving, the federal government (in its 2013 budget) introduced the "First-Time Donor's Super Credit". This credit provides "first-time "donors" (defined as "those who have not claimed any charitable donations after the 2007 tax year") with an extra 25% in federal tax credits (over and above the standard federal tax credit of 15 per cent on the first $200 and 29 per cent on donations above $200) for cash donations made between March 21, 2013, and December 31, 2017 (up to a maximum of $1,000). For example, in Manitoba, a $1,000 donation that qualifies for the First-Time Donor's Super Credit would result in a (combined federal and provincial) tax credit of $673, which is an additional $250 in taxes saved (over the regular tax credit of $423). When the tax savings under the Super Credit are factored in, the actual cost of making the $1,000 donation is only $327.
As an incentive for those considering a larger donation to charity, the government has also increased charitable deduction limits which currently allow an individual who makes a significant gift to charity, to use their donation tax credits to write off up to 75 per cent of their net taxable income in any given year. This deduction limit rises to 100 per cent of net taxable income in the year of death.
The increase in deduction limits now makes it possible (depending on the size of the donation) for an individual to eliminate the taxes paid upon death (note: gifts to charity are typically not affected by the alternative minimum tax rules). Most importantly, through the strategic use of the generous charitable giving tax rules, an individual has greater control over who receives their assets (i.e. their loved ones and the charities they wish to support) and those who do not (specifically the Canada Revenue Agency).
One of the most beneficial tax rule changes over the past decade has been the 2006 federal budget's elimination of capital gains tax on the donation of publicly listed securities that have appreciated in value. The resulting tax savings makes the donation of securities preferable to the donation of cash and makes it possible to donate a significantly larger amount (when tax savings are factored in) then was previously possible.
When donating assets to charity, the general rule of thumb (to maximize tax savings) is to donate the asset(s) that have the greatest tax bill attached to them. As RRSPs and RRIF's are typically taxed at the highest rate (upon their disposition), they are often ideal to fund charitable bequests, as the proceeds (upon death) can pass to a charity on a tax free basis while giving the donor full use and control of their retirement funds during their lifetime.
The increase in the charitable giving contribution limit also requires a re-thinking of the practise of using life insurance proceeds to replenish an estate for the taxes paid on the death of an individual (or of their surviving spouse). For those wishing to leave a larger and more lasting gift to charity, consideration should be given to designating a charity as a primary or contingent beneficiary on a life insurance policy. The advantage of this strategy is that a sizable donation can be made without reducing the value of the assets in the estate. In addition, a charitable tax receipt will be issued for the full amount of the donation which can offset or even eliminate the taxes otherwise due (effectively paying for the cost of the insurance policy), leaving more to family and less to Canada Revenue.
For those who wish to support charity without giving up control of their assets (or the income produced by those assets), giving strategies such as charitable gift annuities, charitable remainder trusts, or gifts of residual interests may be used.
By carefully structuring a future gift, a donor can both leave more of their estate for their loved ones while at the same time supporting a cause that is close to their heart. The assistance of tax and legal professionals is recommended.
Darryl Prociuk CFP, R.F.P., CLU,TEP is a Registered Financial Planner (fee only) and may be contacted at dprociuk@,mymts.net
