For most people, charitable giving involves annual donations to worthy charities. Typically, these gifts are made out of income. Increasingly, however, Canadians are making gifts from assets as part of an overall financial and estate plan. These kind of exceptional gifts involve careful planning and can produce significant tax savings.
With tax incentives introduced since 1996, the federal government has given taxpayers a choice. The choice is about how individuals wish to support society and the amount of tax they wish to pay. It is now possible to eliminate the taxation on up to 75 per cent of net annual income during a person’s life and up to 100 per cent with gifts made at death.
The process of gift planning balances charitable and legacy goals with other factors such as financial, tax and family needs. Using planning tools such as wills, trusts and insurance, it is possible to create larger benefits for a charity and generate greater tax advantages for the individual.
One of the most tax-effective simple strategies involves gifts of public securities. Gifts of appreciated public stocks, bonds, mutual fund units or shares to a public charity or private foundation are eligible for an extra tax incentive on top of the regular credit. The capital gains are eliminated, rather than the regular rate of 50 per cent when sold. In addition, taxpayers receive a tax credit, which is typically equal to the highest marginal tax rate in their province of residence.
This table compares the tax consequences of donating cash proceeds of sold securities versus donating securities in-kind. The marginal tax and tax credit rates are assumed to be 45 per cent for illustration purposes.
|Sell security & Donate Cash||Donate||Security|
|Value of security/donation||$10,000||$10,000|
|Cost of security||$5,000||$5,000|
|Taxable capital gain@ 50%||$2,500||$0|
|Tax on gain @45%||$1,125||$0|
|Tax credit @45%||$4,500||$4,500|
|Net tax savings||$3,375||$5,625|
Unfortunately, some people’s public securities have depreciated because of the turmoil in capital markets over the last two years. Of course, any gift will have value to the recipient charity. When individuals donate a security with a capital loss, they can claim the capital loss on their tax return and receive a tax receipt for the gift.
Other common ways of giving include charitable bequests, gifts of annuities and insurance, designations of capital property or RRSPs and, the most straightforward gift of all, cash. Charitable gift annuities, for example, can provide significant income for life and enable donors to make a special gift.
A good financial and estate plan that includes charitable gifting can be difficult to implement. It is important to put personal and family needs at the centre of the planning process and then consider giving. Charitable gifts are irrevocable - once given, they are not returned. Also, it is sometimes hard to choose charities and commit large gifts.
A charitable gift is shaped by an individual’s values and personal priorities. Tax savings enable gifts, but they should be the servant of a person’s values and priorities. When establishing estate plans, it is therefore important for individuals to review their personal experiences and the charities that are important to them. Through consultation with legal, tax and financial advisors, an informed decision can then be made, which balances personal and family needs with philanthropic planning.
NOVEMBER 2009 SENIOR LIVING VANCOUVER ISLAND
NOVEMBER 2009 SENIOR LIVING VANCOUVER AND LOWER MAINLAND