The Ultimate Guide To Philanthropy In Canada
When you strategize and plan your philanthropic efforts, you not only control how and when your time and resources will be allocated, but you might also be able to add real value to your overall wealth through significant tax savings, which can be allocated back towards philanthropy.
In this article, we will break down the process of formalizing your philanthropic vision, touch on how to choose which organization to give back to in Canada, and highlight one powerful philanthropy strategy with the opportunity to minimize tax.
How To Formalize Your Philanthropic Vision
Formalizing your philanthropic vision begins with a thoughtful reflection to identify what matters the most to you. This shortlisting process may bring to mind your favourite charities, hospitals at which you or your loved ones have received exceptional care, or organizations advancing important causes, to name a few.
You may wish to start out by reading about these groups online to get a sense of their work, following up directly with the individuals involved in donor relations to arrange introductory phone calls, or requesting introductory meetings to provide you with a deeper understanding of the organization’s values, priorities, and planned projects.
Throughout this research, you may also wish to reflect on how you would like to give. Contributing your time and professional service or specialization may be very valuable to some organizations, particularly those with a focus on community initiatives that may not have the funding to readily access the needed expertise on their own, and could therefore benefit greatly from your contribution.
On the other hand, if financial contributions are what you have in mind, you may wish to pay close attention to the forward-looking plans of the organization as your giving may be immediate, deferred years into the future, or a mix of the two. Having insight into what the entity is planning to accomplish and on what timeline can help you gauge their fit with you as a purposeful donor.
How To Choose Which Organization To Give Back To In Canada
In Canada, there are over 170,000 charitable and non-profit organizations. How do you choose which organization to give back to?
While this speaks to the selflessness and giving attitude of Canadians, you should note that of this group, only 85,000 are registered charities recognized by the Canada Revenue Agency (CRA). This is a critical point as the potentially powerful tax planning benefits stem from your gift qualifying as a charitable donation under the criteria of the CRA.
You may wish to research the space with caution as, among the many legitimate organizations, there are many charity scams seeking to solicit funding under the guise of being a charitable organization. They may even offer tax minimization schemes that involve providing inflated donation receipts that indicate higher amounts than the donations made.
To remedy this, you may wish to increase your knowledge on how to avoid charity scams and inappropriate schemes. Useful resources include Smartgiving.ca, a website maintained by charity law firm Blumberg Segal LLP and Charity Intelligence Canada, an entity dedicated to researching charities and providing free reports on hundreds of Canadian charities.
As a last note, if your wealth planning includes benefits that depend on receiving a charitable tax receipt, then it is important to ensure that you are giving to a registered charity. While many noble causes are shared on social media with fundraising efforts driven by crowdfunding platforms, giving on these platforms does not usually qualify as a charitable donation for tax purposes.
Getting The Most Bang From Your Philanthropic Buck
As you plan out your philanthropic giving, there are a number of powerful strategies to maximize your philanthropic impact and/or your current and future wealth.
For instance, under normal circumstances, the capital gains inclusion rate for tax purposes for gains triggered by disposing of publicly traded securities is 50%, whether by sale or deemed disposition. In-kind donation of these assets, meaning donating the assets to a charitable organization that is able to accept them, could result in an inclusion rate of 0%, thereby completely eliminating the tax on the gain.
The value of the donation is included in the calculation of your the donation tax credit, calculated at the federal level as 15% of the first $200 donated and 29% of the remainder. At the highest federal tax bracket, a portion of the credit can be at 33%, with federal credits being further supplemented by provincial credits ranging between 4%-24%, depending on the province.
Let’s put this into monetary terms. Consider a position in a security worth $100,000 with a cost base of $50,000 that you are contemplating allocating to your favourite charity. If you opt to sell the security to donate the proceeds, you would be taxed on 50% of the gain, or $25,000. Assuming you have taxable income of $150,000 and live in Ontario, you would owe roughly $12,007 in tax on the gain, while your $100,000 contribution would provide a total donation tax credit of approximately $40,120. As such, ignoring Ontario surtax for the purpose of our example, your philanthropic contribution of $100,000 would carry a net cost to you of $71,887, calculated as the wealth donated plus taxes owing on the sale of the security less the donation tax credit.
If, however, you chose to donate the security in-kind, the capital gain would not be subject to tax and the $100,000 entered into the donation tax credit calculation would result in the same donation tax credit of $40,120, resulting in a net cost of only $59,880 for a philanthropic impact of the full $100,000.
If you are a business owner, donating publicly traded securities can also provide meaningful tax planning advantages. While donated securities do not qualify for a tax credit or a reduced capital gains inclusion rate, the corporation would receive a charitable deduction to reduce its taxable income, with the non-taxable portion of the gain being credited to the Capital Dividend Account to be paid out as a tax-free dividend to shareholders.
The Bottom Line
Philanthropy can be a very rewarding and fulfilling aspect of your personal wealth planning. Consult with your professional advisors, particularly those with expertise in strategic philanthropy, so that you do not miss out on opportunities to establish the best possible legacy and/or maximize your current and future wealth.
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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