Reduce Your Taxes By Charitable Donations And Bequests
Most of us give to causes that we deeply care about and usually the tax incentives are not top of mind when we donate to a charity. However, by having a strategic approach to your philanthropy you can substantially reduce taxes on your income and the estate taxes payable after your death.
Gifts of cash, securities and life insurance during your lifetime can generate charitable donation tax credits for you that help reduce your taxes. If you cannot afford to donate a substantial sum to your favourite charity during your lifetime, you can leave a bequest in your will and this will not only create a lasting legacy and a gift that keeps on giving after you are gone, but can also help reduce taxes payable by your estate.
CHARITABLE DONATION TAX CREDIT
Donations made to charities in Canada are eligible for a charitable donation tax credit. The first $200 of your donations is eligible for a tax credit equivalent to 15% of the donation amount. If your donations exceed $200, then you will receive a 29% federal tax credit and in Ontario you will be eligible for a provincial tax credit of 6.05% on donation amounts up to $200 and then 11.16% on the remainder. Therefore, on donations of over $200 you will receive a combined federal and provincial tax credit of 40.16% if your income is under $200,000.
The December 7, 2015 legislative proposals announced by the Liberal government included an amendment to the federal donation tax credit rate for donations over $200 so that the rate will be 33% to the extent that an individual has taxable income that will be taxed at 33%. For instance, if an individual has taxable income of $220,000 in 2016 and future years and makes a donation of $25,200, the tax credit will be calculated as 15% x $200 plus $20,000 x 33% plus $5,000 x 29%. This applies only to donations made after 2015. Donations made in 2015 and claimed in 2016 or a later year will not be eligible for the 33% tax rate.
If you cannot use your tax credits in the year of your donation, you can carry forward your donations for five years. While during your lifetime, you can claim charitable donations up to 75% of your net income, the tax credits are more generous after your death. In the year of your death, your estate can claim donations of up to 100% of your net income and can carry back any excess donations to offset 100% of your income in the preceding year. If you make a donation through your will it can be treated as if it was made immediately before your death and can be deducted on your final return. Plus you will have the ability to carry back any excess donations to offset 100% of your previous year’s income as well.
FIRST-TIME DONOR’S SUPER CREDIT
The 2013 federal budget proposed a temporary one-time credit for first-time donors on up to $1,000 of monetary donations, in an attempt to encourage charitable giving by new donors. If a donor, or his/her spouse or common-law partner, did not claim a charitable donation tax credit or this new credit in any taxation year after 2007, the donor would be considered a first-time donor and would be eligible for this new tax credit.
The new 25% super credit will be added to the existing charitable donation tax credit, resulting in a tax credit rate of 40% on the first $200 of donations and 54% on the next $800. The new credit applies to donations made after March 21, 2013 and before 2018. The maximum limit of $1,000 applies to both individuals and couples, so that there is no doubling of the credit for couples.
To maximize the tax credit, donors may want to carry forward and not claim smaller donations until the $1,000 threshold is reached as this is a one-time credit. 2017 is the last year for first-time donors to take advantage of this super credit.
BEQUESTS IN YOUR WILL AND DONATION OF SECURITIES IN-KIND
Leaving a cash bequest to a charity of your choice in your will is one of the most frequently used vehicles for leaving a bequest. However, if you own stocks and bonds and other publicly listed securities with significant accrued capital gains, you should consider gifting them to a charity in your lifetime or in your will as the favourable tax treatment can shave thousands of dollars off the tax bill for your estate.
If you transfer publicly listed securities or mutual funds to a registered charity or registered private foundation, the capital gains on those securities will not be subject to tax. You will still be eligible for receiving a charitable donation tax credit based on the fair market value of the securities at the time of transfer to the charity.
If you acquire stocks with your employee stock options you can also donate them to a charity and not only will the capital gains not be taxable, but your employment benefit that is included in your taxable income is eliminated as well.
You should note that if you acquired flow-through shares on or after March 22, 2011, a capital gain will be realized when donating them to a charity and the above rules will not apply.
Gifting a life insurance policy is another common strategy used for leaving a bequest. This can be done in several ways. You can purchase a policy on your own life and name the charity as owner and beneficiary. You can also donate an existing life insurance policy to a charity and name the charity as the owner and beneficiary of the policy. Alternatively, you can simply name the charity as the beneficiary of the policy.
Yet another alternative is to name your estate as the beneficiary of the policy and make a bequest of the proceeds of the policy to the charity in your will. Generally, you will be able to carry back the tax credit and offset 100% of your net income in the prior year. However, if the executor is given discretion in the amount that can be donated to charity then the CRA may consider this to be a donation by the estate and disallow the carry back.
Each of these methods of donating making a gift of life insurance to a charity has different tax implications. Therefore, it is important that you consider the tax consequences of each method and your desired outcome and discuss it with your financial advisor, tax advisor and estate planning lawyer to make sure that it is a good fit for your estate plan.
GIFTING YOUR RRSP OR RRIF
If you have more than enough sources of income for your retirement and do not need the income from your RRIF, then you may consider donating your RRSPs or the income from your RRIF to a charity of your choice and can receive a charitable donation tax credit for this donation. You can also designate the charity as the beneficiary of your RRSP or RRIF. This designation can be made on the plan or through your will. At death, the value of your RRSP or RRIF will be included in your income in your final tax return and will be fully subject to tax. Therefore, if you have a spouse, it is best to name him/her as the beneficiary of the RRSP or RRIF and let the proceeds rollover to your spouse free of tax.
By exploring different strategies for leaving a bequest and discussing them with your financial advisor, tax advisor and lawyer, you can ensure that you are getting the maximum tax benefit from your philanthropy while helping the causes that you care for dearly.
Tina Tehranchian, MA, CFP, CLU, CHFC, is a senior financial planner and branch manager at Assante Capital Management Ltd. in Richmond Hill Ontario and can be reached at (905) 707-5220 or through her website at www.tinatehranchian.com. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. Insurance products and services are provided through Assante Estate and Insurance Services Inc.