As current Canadian governments continue to place a greater priority on fiscal responsibility, universities, charities, and other non-profit causes are made to suffer. Yet, our social safety net is one of the very reasons that Canada is considered one of the best places in the world to live.
How do we balance social responsibility with fiscal responsibility? My objective in this article is not to get into a political debate over these issues, but rather to emphasize that we all have responsibilities to our social well-being and collective culture.
The good news is that Canadians have a high donation rate. According to the Rogers Group in BC, about 78% of all Canadians give to charity. Yet, as household income increases, the percentage devoted to charitable giving decreases -almost proportionally. Basically, the average household earning $60,000 gives the same amount as the household earning $20,000.
In the last 10 years, the government has drastically decreased funding to charities. Looking to the future, this trend will likely continue towards providing several tax measures to try and offset government funding and make it more appealing to taxpayers to give to the causes they find worthy. The rest of this piece will deal with the different mechanisms by which to donate to charity.
This is an area with which many people are familiar. We can make direct cash donations to charitable organizations through causes like walk-a-thons, telethons, golf tournaments, etc. Most contributions qualify for a tax receipt.
Pick a few charities that are important to you and make a regular effort to support these meaningful causes. Many charities have monthly or yearly giving plans available to facilitate your schedule. Planning your donation ahead of time might prove to be more gratifying. Personally, by taking a few minutes to select the charities that are meaningful to me, this allows me to deal with the multitude of telephone solicitors by saying, “I've supported my charities already, thanks.”
Your first $200 of charitable donations qualify for a 17% federal tax credit (23.4% federal/provincial combined). After $200, you will get a credit of 29% (36% federal/provincial combined).
So, if you are not interested in donating for altruistic reasons, then keep in mind that charitable contributions offer you some significant tax saving benefits (especially after your first $200). Individuals are limited to claim donations of 75% of income, except in the year of death (and the preceding year) where the limit is 100% of income.
Giving “in kind”
New tax laws allow for reduced capital gains taxes for gifts of appreciated assets to a charity. For example, let's say you have a particular stock or mutual fund with an adjusted cost base (ACB -basically, the total purchase price) of $20,000 and a market value of $60,000.
According to Jim Stokoe, Senior Principal KPMG Edmonton, “if you sell the investment and pay tax, you might be left with only about $48,000 to give to the charity. On the other hand, you decide to give the investment “in kind” – by changing ownership title – and pay half the taxes, leaving $54,000 for charity.” A simple administrative procedure means an extra $6,000 for your favourite charity!
Charitable gift annuity
One of the common tools to provide for charities is the life annuity. You can use annuities in a number of different ways to provide charitable gifts while you are living or after you pass away. The annuity can provide you with a steady stream of income while you designate part of the capital (or income), today or upon death, to the designated charity. In this case, the goal is to provide for a charity without giving up the ability to produce income. The downside is that there is the relinquishment of control over the capital; however, future income is guaranteed for life by the annuity.
Gifting after death – Charitable life insurance
Let's say your wish is to leave a legacy of $100,000 for a chosen cause foundation, or educational institution, but you don't want to give up that kind of money now, as it will impact your standard of living or ability to produce income through retirement.
You can put a life insurance policy in place that will pay $100,000 to the chosen charity by naming it the beneficiary of the proceeds. You can then claim the annual cost of the insurance policy as a charitable donation, even though the money is only gifted upon your death.
What if your goals are the same but you don't need charitable credits today? Rather than claim the annual premiums of the life insurance, your estate could make better use of the credits, due to a large pending tax liability (RRSP/RRIF, pending capital gains on an appreciated asset, etc.).
In this case, you might name your estate as beneficiary on the life insurance policy (instead of the charity), and then name the charitable institution in your will as a beneficiary of your estate in the amount of $100,000.
Your estate, then, claims a total of $100,000 in charitable donations for the year of death (and can carry back any unused portion to the pre-ceding year by having the executor re-file) and reduces any tax liability caused by your death.
It is tempting to blame the government when we hear about hospitals, schools and charities struggling due to cutbacks. However, we each bear some level of responsibility for giving back to our communities and our country. While charitable giving can have significant tax consequences, I think the personal satisfaction far outweigh the financial benefits.