How to get the joy of charitable giving while saving taxes
Canada’s tax system provides special incentives to encourage Canadians to donate to charities. Giving back speaks volumes about your personality and shows the values you hold dear. It always feels better to give than receive, especially when that giving results in tax savings.
In this article, I provide an overview of such incentives and discuss ways of planning your gifts to make the most out of the available tax benefits.
It is the method used to calculate the eligible amount of a gift for receipting purposes when the donor has received an advantage (consideration) in return for his or her donation. The amount on the donation receipt is reduced by the value of the benefit provided to the donor. For example, if a charity concert ticket costs $ 150, however, the value of the meal and entertainment provided is $50, the charity can only issue a donation receipt for $100.
The only exception occurs when the advantage is less than $75 or 10% of the donation, whichever is less. In that case, a receipt can be issued for the full value of the donation, i.e. no reduction is required.
When the FMV of an advantage received for a gift is more than 80% of the FMV of the gift itself, the Canada Revenue Agency (CRA) generally considers that there is no true intention to make a gift. Therefore, a charity cannot issue a receipt.
Tax Credits for Charitable Donations
Before claiming the charitable tax credit, it’s vital to make sure you have donated to a registered charity as you must have official receipts that show the recipient organization’s charitable registration number. For the Canada Revenue Agency (CRA ) approved charity list: please use the ensuing link:CRA list of Charities.
Charitable donations entitle you to a three-tier credit. The first $200 donations for the year (total to all charities) gives you a 15% tax credit, donations above that level, qualify you for a higher rate of 29% federal tax credit. If your income is above about $203000, you will get a 33% federal tax credit, for the portion of your donation above $200 that equals your income over $203000.
Example of first two tiers- If you donate $200, you receive a tax credit worth $30 (15 percent of $200). However, if you donate $400, you receive the same $30 tax credit, plus a tax credit worth $58 on the amount above $200 ($400 – $200 = $200 x 29 percent = $58), for a total tax credit of $88. This tax credit helps to lower your taxes payable.
The maximum amount of donations you can claim in a year is 75% of your net income. To the extent, you have receipts for more than this amount, or if you choose not to claim the donation for any other reason, you can save the receipts and claim the credit in any of the following five years.
You can claim donations made on or before Dec. 31 in the same tax year.
You can also claim any donation amounts not claimed by you or your spouse or common-law partner in the past five years. However, the 33% federal donation tax credit applies for 2016 and future years. Also, it should be noted that the unused donations carried forward from 2015 or earlier years are not eligible for this higher credit rate.
First -Time donor’s super credit
If you are donating for the very first time, you might be able to claim the first-time donor’s super credit which is available for donations made after March 20, 2013, and before 2018. If neither you nor your spouse or common law partner has claimed a charitable donation tax credit in any year after 2007, you may be able to claim an extra federal tax credit of 25 percent on up to $1,000 of donations. This super credit entitles you to a 40 percent federal credit upto first $200 in donations, and 54 percent on amounts above $200.
If you donate only small amounts over a year, consider combining two or more years of donations (up to five years) into one year to put yourself over the $200 threshold which will enable you to claim the higher tax credit.
Once you are over $200 level, consider making extra contributions in December rather than early in the New Year. Your tax saving through the donations credit will come one year earlier. If you and your spouse donate individually, you should combine your receipts and claim them all on one return to avoid having to get the low credit on $200 twice.
If your province levies a high-income surtax on federal and provincial taxes, the higher-income partner should claim the charitable donations tax credit.
Donations made by one spouse can also be split between two spouses in whatever portion they choose. Morover, spouses can claim each other’s unused charitable donation carryforwards from a prior year.
If you want to make a substantial gift, you should consider breaking up your gift over many years. This would allow you to extend the income tax benefits of your gift beyond the year of your gift plus the general five-year carry-forward period.
Instead of donating cash, you should consider the potential benefits of donating property such as real estate, artwork, employee stock option shares, publicly traded securities.
Example – Say you want to donate $1000 to a favorite cause and you have publicly traded securities that initially cost $500 and are now worth $1000. You are thinking of either selling the securities for $1000 from your portfolio to generate the cash or avoid the hassle and directly donate the securities. Assuming that your income is taxed at the top marginal rate of about 50% and you have already given $200 in the year, the tax effect of both choices are as follows:
If you sell securities worth $500, but you originally paid $250 for it, you have a capital gain of $125 (50 per cent of which is subject to tax which equals $125).
Rather than liquidating the securities yourself and paying the tax, if you donate them, the charity will get the full $500 value of the shares and will issue a donation receipt for $500. Hence, the taxable portion of the $250 capital gain will be zero, and you will get the same tax credit for the donation, this way the charity gets more, you get a higher donation receipt and tax credits, and the best part is that you dont need to pay any tax on the donation too.
Employee Stock Option Shares
If you exercise an employee stock option and donate the shares, provided that the shares qualify for employee stock option deduction and meet the criteria for donations of publicly listed securities and are donated within 30 days of being exercised, you do not need to include any amount of the resulting employee benefit in your income. The capital gains are exempt and you get a donation receipt for the security.
Other Gifts in Kind
A gift in kind is valued at its fair market value. For purposes of determining the tax credit for your donation, it will be the same as a gift of cash. At the time of the disposition of the asset (gift in kind), you are deemed to have disposed of the property at fair market value -thereby triggering a capital gain or income that would apply, had you sold the property for that price. For items whose fair market value cannot be determined (Example-baked goods), the only receipt that can be issued is for the materials, and not for the item itself or the person’s time making it.
Gift of services –such as carpenter who builds office furniture for a local charity, may only be awarded a receipt for the cost of materials, not the labor.
Tax Planning for the gift of services
As per Lorn Stanners (CPA,CMA), -service providers should consider invoicing the charity and then trading cheques. The charity can issue a receipt for the cash. As the donation credits are greater than the tax on the income it is a win-win.
Tax planning for the donation of gifts in kind
You can file an election in your tax return to use a lower amount than the fair market value, for determining both your proceeds of dispositions of the property and the value of your donation. You can elect any amount between the adjusted cost base and the actual fair market value. If you choose the adjusted cost base, then you can avoid the tax on capital gains.
Since only 50 % of the capital gains are taxable, if you have significant capital gains in the year from other dispositions, gifts that trigger substantial gains could result in a liability for alternate minimum tax. Before you make such a donation, we advise that you run the numbers to ensure that alternative minimum tax does not result due to such donation.
Gift of Life Insurance
If you have a “permanent” life insurance policy, such as whole life or universal life, you can donate it to charity by designating a charity as the beneficiary of a life-insurance policy. For tax purpose, the value of your donation will be the policy’s fair market value, minus any policy loan outstanding. However, to the extent the value exceeds the tax cost of the policy to you, you must recognize the excess as
Once you have donated the policy to the charity, if you continue to pay the annual premiums on the policy, the premiums can be considered as charitable givings, meaning you can receive a tax credit each year.
If you make the charity a beneficiary of a life insurance policy that you continue to own, the payment of the death benefit to the charity is considered as a donation made by your estate. The donation can be claimed on your final tax return or on your return for the prior year or on the estate’s tax return.
Tax Planning for donating through life insurance
You can determine the amount of donation credit that will be needed to offset the tax bill at death, and make an informed decision to fund a policy that creates the required death benefit. As the charitable donation offsets the tax bill at death, the rest of the estate will be available for the family beneficiaries.
Using a trust to donate
Personal trust is a relationship that arises when a settlor transfers property to a trustee to hold and administer for the exclusive benefit of the beneficiary. This relationship is shown below.
The trust can be set up in one’s lifetime (inter-vivos trust) or upon death (testamentary trust). Designated trustees have the flexibility to distribute capital or income up to the maximum federal or provincial tax credits available; the added benefit is that they can control the timing of the donations and also decide whether the donation should be lump sum or part of an income stream.
Using a Foundation to donate :
Foundations are registered charities. These foundations can be Private or Public depending upon their structure, source of funding and operation.
· Public foundation: Generally gives more than 50% of its income to qualified donees (usually other charities) and receives funds from arms-length donors
· Private foundation: May carry on its own activities and give some of its income to qualified donees (usually other charities); is directed by and receives funds from non-arms-length individuals (e.g. family)
The foundations work with individuals, corporations and charitable agencies to earn income by investing your capital while donating to the cause which you chose to donate to, which can range from social services to medical research groups, to organizations devoted to various sectors such as arts and culture, environment, education, children and families, youth, and animal welfare .
One significant difference between private foundations and other registered charities (such as public foundations and charitable organisations) is that private foundations are prohibited from conducting business activities. Private foundations, just like other charities, can use any name as long as it is not confusing and does not violate certain prescribed rules. While some private foundations have a family’s name attached to it, many private foundations use a name that focuses on its mission. CRA requires that all Canadian registered charities complete a Form T3010 – Registered Charity Information Return on an annual basis. Most information contained in the T3010 and its schedules (which includes financial information of the charity) is publicly available on the CRA’s web site. Private foundations are not exempt from this transparency requirement.
Using Company to donate
The expenditures that qualify as a deduction for charitable donations from a corporation are identical to those entitling an individual to a donation tax credit. Individuals receive a tax credit for charitable donations, while corporations can deduct charitable donations from net income for tax purposes in the determination of taxable income.
The annual deduction is limited to 75% of the corporation’s net income for tax purposes for the year. Any charitable donations that are not used in a year — either because they exceed the 75% limit or because the corporation chooses not to claim them — may be carried forward and used in any of the following five years, subject to the limit of 75% of net income for tax purposes in those years. The oldest donations are claimed first. Note that political contributions are not deductible in the case of corporations. It is advisable that you donate directly through the corporation if you expect to have more than $206,000 of taxable income personally in 2018, if not then the donation should be made individually.
By donating appreciated publicly traded securities through your private corporation, you may be able to receive three tax benefits. These are zero capital gains tax on the securities donated, getting a tax deduction for the fair market value of the securities donated and increasing the Capital dividend account balance by the non-taxable portion of the capital gain, which allows you to withdraw funds from your corporation as tax-free dividends.
As per Lorn Stanners (CPA,CMA) -“For a Private corporation- consider having the shareholder(s) take a dividend and donate personally. As the personal tax treatment of donations provides for higher tax credits they can receive the dividend at a lower rate and come out ahead on their personal taxes. Many do this and increase the donation amounts because of the extra savings”
Careful planning together with a CPA can help you meet your philanthropic goals while maximising the tax benefits when you need them the most.
Split Receipting – Canada.ca. (n.d.). Retrieved from https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/issuing-receipts/split-receipting.html
16 September 2011 External T.i. 2010-0360451e5 – Vacation … (n.d.). Retrieved from https://taxinterpretations.com/cra/severed-letters/2010-0360451e5
Top Fallacies About Private Foundations In Canada1. (n.d.). Retrieved from https://www.globalphilanthropy.ca/images/uploads/Fallacies_about_Canadian_Private_foundations.pdf
This article is being provided as general information only and is not meant as legal opinion or advice. Cloudiverse CPAs Inc cannot accept any liability for the tax consequences that may result from acting based on the information contained therein. Each situation is unique and should be reviewed on its own with the proper attention and care it deserves. Please contact any member of our team if we can be of further assistance in this regard.