Advisor Articles
Charitable Giving by Terry McBride
Do you want to share your good fortune with those less fortunate? Do you want to help support good projects that benefit everyone in our community?
Whatever the reason for donating to charity, saving tax is not usually the primary motivation. However, donating in a tax-efficient manner can make it possible for you to donate many more dollars to your favourite charity.
Tax credits
The federal government and the provincial government use a two-tiered tax credit system for charitable donations.
For example, making gifts totaling $1,000 can save you $404 of federal and provincial income tax (using Saskatchewan tax rates) no matter what tax bracket you are in. The tax savings are 26 per cent for the first $200 plus 44 per cent for the rest of your donations.
Because tax credits are non-refundable, you can only save tax if your income is high enough to be taxable. If your gift is so large that you cannot use all the credits for the year of your donation, the unused tax credits can be carried forward for up to 5 years.
Pooling donation receipts
Normally a couple would maximize the household's overall donation tax credits by claiming all donation receipts on one spouse's return. Pooling the donation credits would save the couple about $36 more tax than when receipts are divided between two tax returns.
Pension splitting
When pensioners are married or living common-law, the higher income spouse
(Hi) can allocate up to half of "eligible pension income" to the lower income spouse (Lo) to take advantage of Lo's lower tax brackets.
But what if Hi makes a rather large donation that reduces Hi's tax bill nearly to zero? Suppose Hi tries to use pension splitting to allocate pension income to Lo. They may be frustrated by the need to keep Hi's taxable income high enough to fully use up charitable tax credits. Rather than carrying surplus donation credits forward to a future year, Hi and Lo may consider dividing (rather than pooling) their donation receipts in combination with pension splitting.
Transfer Shares
Transferring shares to charity can be better than selling shares and writing a cheque to donate the sales proceeds. That is because the capital gain triggered by making a gift of appreciated shares would be tax-free.
Life insurance
An easy way to pre-arrange a gift of life insurance when you die is to designate a charity as beneficiary of your policy. After you die, your executor would obtain the donation receipt for the value of the life insurance death benefit and claim the tax credits on your final tax return.
Alternatively, while you are alive, you can transfer complete ownership of your insurance policy to the charity. You'd receive an immediate donation receipt for the policy's cash value but no charitable receipt for the death benefit when you die. Note that further premium payments give you ongoing donation receipts.
Make sure you get a proper valuation of the life insurance policy you donate. If your health is poor, for example, the fair market value may be much higher than simply the cash surrender value.
Donate RRSP or Pension
Consider designating your favourite charity as the beneficiary of your RRSP or your pension savings. When you die, the charity would issue a donation receipt that equals the amount of the income that your executor must report on your final tax returns. The tax credits should eliminate most of the big tax bill triggered upon death.
Avoid scams
Note that Canada Revenue Agency (CRA) has recently revoked the charitable status of several organizations involved in tax-shelter schemes. If you suspect that the tax savings being promoted seem too good to be true, get a second opinion from a professional. After a charity's registration number has been revoked, your claim for tax credits would also come under close scrutiny by CRA.
Terry McBride, a member of Advocis, works with Raymond James Ltd. (RFJ). The views of the author do not necessarily reflect those of RJL. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund (CIPF). Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a member of the CIPF.