As the year closes, your clients may be thinking about charitable giving. Not only do charities need support, but charitable giving can be an excellent way for your clients to reduce their tax burden.
Do you have clients with investments with large capital gains? Maybe they recently sold a business and have a tax liability? Are they philanthropic and want to support charities that have been impacted by the pandemic? No matter the reason, charitable giving can be beneficial to your clients and the charities.
When a client donates, they receive a donation receipt, and the non-refundable tax credit is calculated based on the province of residence and the corresponding tax credit rate.
Donations eligible for the tax credit are limited to 75% of net income. If the donation is a testamentary donation and certain conditions are met, the donation can offset 100% of net income in the year of death or year preceding death.
Since taxpayers receive a lower donation tax credit for the first $200 donated, it generally makes sense to have spouses combine their donation receipts and have the higher-income spouse use the credit for a given year. That way, the lesser tax credit rate applies only once.
If your client can’t fully use the tax credit in the year the donation is made, it can be carried forward up to a maximum of five years.
If a client wants to reduce their tax bill, are the tax savings greater from a charitable donation or an RRSP contribution? If the client is philanthropic and their main goal is reducing tax, then a charitable donation may be the better option, depending on their tax bracket.
Consider the following hypothetical example.
Michael earns $75,000 per year and wants to know if he’d pay less tax by making an RRSP contribution of $10,000 or a charitable donation of the same amount.
Table: Tax savings from RRSP contribution versus charitable donation
|RRSP contribution (deduction)||Charitable donation (credit)|
|Income in 2021||$75,000||$75,000|
|Federal / provincial tax (2021)||($12,105)||($15,070)|
|Donation tax credit||$0||$3,976|
|Tax payable for 2021 tax year||$12,105||$11,094|
There are many benefits to making an RRSP contribution, but if Michael’s goal is to reduce tax payable, he can accomplish this with the tax credit he’ll receive through a charitable donation, despite the after-tax cost of the donation.
In addition to cash, donations can be securities and even life insurance policies. If your client decides to donate securities, they can make an in-kind donation to the charity. In that case, the taxpayer is considered to have disposed of the securities, and the capital gains inclusion rate is 0% rather than the normal 50%. In addition, the taxpayer gets a receipt for the full amount donated. They don’t have to donate all the securities; they can choose to donate enough to offset the tax liability on the accrued capital gain.
Charitable giving and estate planning
Taxpayers can also donate life insurance policies with an option of an upfront or deferred benefit.
With an upfront benefit the donor transfers ownership of the policy to the charity and receives a donation receipt for the policy’s fair market value. The client continues to pay the premiums on the policy annually and receives a donation receipt for the premiums. When the insured passes away, the death benefit is paid to the charity. No additional receipt is provided at that time since the receipt was provided when policy ownership transferred to the charity and also annually with the premium payments.
The other option is to name the charity as the policy’s beneficiary. The death benefit is paid to the charity, and the estate receives a donation receipt. Assuming the estate meets the criteria for a graduated rate estate, the executor can use the credit in the year of death, the year preceding death or up to 60 months within the estate.
Except in Quebec, clients can also name charities as the designated beneficiaries on their registered accounts. Upon death, account proceeds are paid to the charity without withholding tax, and the estate gets a donation receipt for the amount donated. This helps offset a portion (if not all) of the tax liability on the registered account upon death.
If a client wants to make a charitable donation at death other than through a beneficiary designation on a registered account or insurance policy, they can include the bequest in their will.
Your clients have many options for charitable giving. They can choose to give during their lifetimes or upon death. As the end of the year approaches, now may be a great time to start a charitable giving conversation with your clients.