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How can Individuals and Business Owners Benefit by Doing Good through Philanthropy?

Philanthropy is a manifestation of a deep personal desire to help others. We can participate through donations of both tangible (wealth or assets) and intangible (time) resources to organizations and causes that support, among others, humanitarian, medical and social needs.

For those who feel the pull towards philanthropy, there are impactful wealth planning strategies to consider.

While giving back evokes happiness and fulfillment, and is a great reminder to be grateful for what we have, it can provide a number of wealth building and planning opportunities too—anyone can do well by doing good through philanthropy in Canada.

In this article, we explore how being philanthropic can add real value to your wealth plan as an individual and as a business owner.

Do Well by Doing Good through Philanthropy as an Individual

Among the most common financial traits in high-net-worth individuals are elevated tax liabilities due to high incomes or the nature of assets held and managed.

If this strikes a personal chord with you, long-term tax minimization is likely a cornerstone of your wealth planning efforts.

While being philanthropic certainly adds personal value in its own right, being strategic in your philanthropy can be a powerful wealth preservation and wealth building tool.

As part of managing your total wealth, you are likely making allocations among your own priorities, your family members, legacy and philanthropy.

The Canadian tax system lends itself very favorably to philanthropic efforts, providing a donation tax credit on amounts of cash or assets gifted to registered charities, while also applying a capital gains inclusion rate of zero on gifts of certain assets, such as appreciated publicly traded securities.

With these tools, you could decide to gift your more tax-onerous assets to charity rather than triggering the gain personally or through gifts, and save the more tax efficient assets to use personally or to form part of your legacy.

In doing so you would pay no tax on the disposition of the asset, while also receiving a credit calculated first at the federal level of 15% of the first $200 donated, and 29% of the remainder.

At the highest federal tax bracket, the credit can even reach 33%, with federal credits being further supplemented by provincial credits ranging between 4% and 24% depending on the province, making this credit even more favourable for individuals in higher tax brackets, allowing the tax payer to claim up to 75% of their income.

Do Well by Doing Good through Philanthropy as a Business Owner

At the corporate level, donations and gifts of assets do not qualify for a tax credit or a reduced capital gains inclusion rate; however, the business would receive a charitable deduction, allowing the business to reduce its taxable income and hence its tax liability.

For higher earning enterprises, such as those with income in excess of the $500,000 threshold for the Small Business Deduction, the benefit of charitable deductions provided by philanthropic donations scales up by amount, reducing taxable income otherwise subjected to higher rates.

It is also noteworthy that the non-taxable portion of the capital gain on a qualifying appreciated security donated will credit the notional Capital Dividend Account, allowing for a tax-free dividend to be paid out to shareholders.

While significant wealth within your business may be looked to as a source of legacy and financial continuity for your family and the next generation, the philanthropic opportunities outlined here can in fact be used to both attain the fulfillment you look for personally, without sacrificing the future wealth of your beneficiaries.

For instance, you could make regular philanthropic donations through your corporation, using the resulting tax reduction to fund the premiums of a life insurance policy that would pay out upon your passing. The insurance proceeds will replace this wealth for your future legacy and can even provide a means of passing this wealth on to your beneficiaries via tax-free dividends through the Capital Dividend Account.

Although these strategies can be complex and you should consult with your trusted advisors, the wealth planning benefits of philanthropy can be very meaningful, often scaling up with the magnitude of your wealth, while also giving you the sense of fulfillment and purpose you are looking for.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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