This is the most wonderful time of the year—not to mention the season of giving.
That’s why many organizations and individuals are taking the opportunity to give back to their community or their favourite charities over the festive season. Recently, the trend is for organizations to involve their employees and create team events where everyone participates during working hours to help deliver a service such as serving up meals at a food bank, or some other form of hands-on donation, all to directly benefit those in need.
Canadians are known for their politeness. However, recent Statistics Canada data shows that not only are we polite, we are also quite generous, having donated nearly $9 billion to charities in 2016. Of course, that figure does not reveal the number of donors who gave back in a tax-efficient manner, which is a win-win for all parties concerned.
This is true for entrepreneurs who want to make a difference in the community, while also reducing their tax burden—especially after being hit this year by the Liberal government’s massive tax changes. Many organizations that have built their brand around corporate social responsibility and supporting the community have an even greater vested interest in making sure they spend their philanthropic funds wisely. The good news is that with a strategic approach, there can be some very positive tax implications when making a charitable donation.
The following are some of the tactics that can help turn your next philanthropic gift into a bottom-line booster:
Gifts other than cash:
The donation of property other than cash are known as gifts in kind. They include securities, artwork, real estate and life insurance (discussed below). The tax credit is usually for the fair market value of the property at the time of donation. At that point, you are deemed to have disposed of the property at fair value, which could mean a taxable capital gain to be reported on your tax return. However, in very specific cases, it’s possible for corporations and/or individuals that are donating certain capital assets to make an election to designate a value for the gift, anywhere between its cost and its fair market value. This helps avoid the capital gain resulting on the deemed disposition, or to realize a smaller one. The tax credit will be based on the value designated.
Corporations should not overlook the role of the capital dividend account (CDA) on gifts in the form of public securities. Every corporation has a CDA which is a notional account used to keep track of realized capital gains that are not subject to taxation—this is generally 50 per cent of the total gain, but in the case of a gain resulting from the gift of public securities, the amount added to the CDA is 100 per cent of the gain realized. The shareholder can withdraw this non-taxable portion of capital gains on a tax-free basis. Hence, corporations that donate securities benefit from the following:
1) Receiving a charitable tax receipt for the fair value of these securities, which can be deducted against their taxable income
2) Paying no tax on realized capital gains
3) The full capital gains realized gets added to the CDA, allowing for a larger tax-free withdrawal from the corporation by the shareholder
For individuals, the donation of publicly-traded securities, mutual funds and segregated funds of life insurance companies, are exempt from capital gains tax. As such, you pay no tax on any gain inherent in these securities.
Life Insurance with your favourite charity as a benefactor:
There are various methods by which a donor can gift life insurance to a charity.
1) A donor can make a bequest of the proceeds of a life insurance policy through his or her will
2) The charity may be named as a beneficiary under a policy owned by the donor
3) The donor can donate a newly acquired policy or an existing policy during his or her lifetime
The first two options involve a charitable donation at death. However, the third method should not be overlooked. This involves making the charity a beneficiary of the life insurance policy. Since the charity does not have an insurable interest in the donor, it must obtain the donor’s consent prior to applying for the policy, but this is a minor formality. Any premiums paid by the donor will be considered a charitable donation eligible for a charitable tax credit (for individuals) or deduction (for corporations). The donor may also get a credit or deduction for the value of the policy if an existing policy is donated. However, upon death, no further tax benefits accrue to the donor or his/ her estate.
Setting up a charitable foundation or donor-advised funds:
Many entrepreneurs or organizations look to set up foundations, especially when they donate large gifts. Foundations have benefits in that you have control as a principal contributor and are able to determine how gifts to the foundation will be invested, as well as which charities will receive gifts. This provides flexibility with respect to any changes to the contributor’s charitable objectives. At the same time, however, there are numerous administrative and compliance requirements as required by the CRA, which can be challenging.
With donor-advised funds your charitable giving is managed from one place, minimizing costs and maximizing impact, so you can focus on what you do best. Several major organizations make use of third-party operators who help them set up their own donor-advised funds. All of the administrative, legal and accounting work is managed by these operators. These funds allow for an immediate charitable tax credit receipt and also allow the donor to distribute the gifts as they choose—potentially to multiple charities over time. All of these are advantageous tactics for organizations hoping to leverage their generosity as a brand building or recruitment tool.
Carry-forward or deferral option:
The benefit of giving to charity is not lost if a credit is not used on the current year’s tax return. It can be carried forward against personal or corporate taxes for up to five years. You do not have to claim all of the donations you make in a year on your current year return. It may be more beneficial to carry credits forward and claim them for any of the next five years, or over the next 10 years for a gift of ecologically sensitive land made after February 10, 2014.
You can claim eligible amounts of gifts to a limit of 75 per cent of your net income (100 per cent if you are in Quebec). For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100 per cent of your net income. However, you have to remember that for individuals it is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don’t owe any tax, you don’t get a refund.
Whatever your preferred strategy to giving this holiday season, consult your Chartered Professional Accountant on the best ways to make a charitable donation based on your personal financial circumstances, or those of your organization.
If you are trying to make a difference in your community, why not take the opportunity to create a positive impact on your balance sheet at the same time?
Hari Krishnan, Tax Associate