Maximize Your Charitable Giving: Strategic Approaches for Tax-Efficient Philanthropy

The holiday season is an especially important time for charities. Many organizations report that about 40% of their annual donations occur in November and December. While volunteering and making cash donations are two popular ways to give back, there are other ways to incorporate charitable giving into your overall wealth plan. We can help you and your family support the causes that are meaningful to you while also providing significant tax-saving benefits. Let’s take a brief look at some of the options to maximize your charitable giving efforts.

1. Donor-Advised Funds

Setting up your own foundation and maintaining it can be costly and administratively intensive. This is why community foundations and some asset managers outsource these functions through donor-advised funds (DAFs).

With DAFs, you make a significant donation and immediately claim the tax credit in the same year but can defer disbursing the funds until another year (or years). This provides flexibility to accommodate your overall philanthropic strategy, and once you provide your instructions to the organization, they’ll take care of all future disbursements and administrative tasks.

2. In-Kind Stock Donations

Donating cash to charity is good but donating publicly listed stocks (or other qualified securities, such as mutual funds, exchange-traded funds, and bonds) that have gained in value is even better. That’s because donations of publicly traded securities are exempt in Canada from the capital gains tax that would otherwise apply when selling securities at a profit.

Consider this example. Years ago, you purchased 1,000 shares of a stock at $20 per share, and the per-share value has risen to $50, which means you gained $30,000. You could sell these shares and donate the proceeds to a registered charity, but you’ll face capital gains tax. Assuming capital gains tax on 50% of your gain, $15,000 is taxable at your marginal tax rate, leaving less money from the stock sale available to charity. However, when making an in- kind stock donation, the gain isn’t subject to capital gains tax, which means the charity can access the full $50,000 and you receive a donation tax credit for the same amount.

3. Flow-through Share Donation

Flow-through shares are specially designated shares of companies engaged in mining and energy-related industries. The Canadian government offers tax incentives to promote support of these industries by allowing investors to deduct from their income certain exploration and development expenses incurred by the companies. While this incentive reduces taxable income, any sale of flow-through shares will trigger capital gains equaling the sale proceeds (i.e., the entire amount is considered a capital gain).

However, gifting shares to a registered Canadian charity as a Flow-Through Share Donation (FTSD), in accordance with Canada Revenue Agency tax rules, may meaningfully lower your after-tax donation. You register this donation as a tax shelter and, through a number of prescribed transactions – too complex to detail in this article – you can make a large share donation that will only cost you a fraction of the amount (typically between 5% to 15% of the donation value). You must be an accredited investor to qualify for FTSD, so ask your Investment Advisor and tax professional if this strategy is right for you.

4. Life Insurance

Another tax-efficient method of supporting charities is through a life insurance policy. You may wish to consider donating your policy now or in the future. To do it now, simply name the chosen charitable organization as beneficiary and owner of your existing policy. You’ll receive a donation tax receipt for the policy’s cash surrender value. You’ll need to deduct any loan amount outstanding on your policy, but to help offset that, your tax receipt amount can include dividends or interest accumulated in the policy.

To make your charitable gift later, you remain the policy owner and pay all policy premiums. The charity is named as the beneficiary and the death benefit, they receive won’t be subject to probate taxes because it will be paid outside your estate. When the policy proceeds are paid to your chosen charity after you die, the donation tax credit in your name can be used to lower the tax obligation on your terminal income tax return.

We can help you incorporate charitable giving into your overall wealth plan if this is something you might be interested in, ask us about it at your next meeting.