Insights & Resources

As we near the end of 2021, many of us may be considering whether we will be making a charitable gift to causes that we care most about. While there are several charitable gifting options, there are a number of strategies to help you make the right decision for your situation.

In order to promote and encourage charitable giving, the Income Tax Act of Canada (the Act) allows a tax credit to be claimed for eligible charitable gifts made by an individual either during a taxation year (and in the five preceding years if not previously claimed), by will or beneficiary designation, or by the individual’s estate after the individual’s death. This federal tax credit is added to the other non-refundable personal credits, and the total is then deducted from the taxes otherwise payable by the individual or estate, resulting in a lower income tax liability. 

The Act also allows a tax deduction to be claimed for eligible charitable gifts made by a corporation, which can be used to deduct taxes otherwise payable by the corporation, resulting in a lower income tax liability for the corporation. Generally, the tax credit available for charitable gifts does not fully offset the amount donated to charity, so there clearly must be a charitable motive underlying the gift. However, once a decision to give to charity is made, the gift may be structured to maximize the resulting tax benefits. 

This reference guide outlines some of the important tax rules regarding charitable giving, as well as some of the various giving options available.

1. Gifting with Cash

Some people like to make one-time donations to a charity of their choice using cash. In exchange, they may receive a donation tax credit.

2. Gifting through your Will

One may wish to leave all or part of their estate to a favourite charity. This can be accomplished through naming a Charity Beneficiary through their Will.

3. Gifting of Securities

As opposed to gifting cash, some individuals choose to gift securities, such as stocks or mutual funds. Special tax rules apply to these types of donations, and there is no tax on capital gains on the donations of qualifying securities to an eligible charity, including a public or private foundation.

4, Gifting an insurance policy

Another way to donate to charity is to transfer the ownership of a permanent life insurance policy, and name the charity as the beneficiary. The donor may also choose to continue paying the premiums or may have the charity make the payments. 

For tax purposes there is an immediate tax credit for the amount of the cash surrender value of the donated policy plus any accumulated interest and dividends that are also assigned (less any outstanding policy loan). Furthermore, if the donor continues to pay the annual premiums on the policy or contributes the funds to the charity so that the charity can pay the premiums, the premium payments will be treated as additional charitable gifts. This would enable the donor to claim an annual donation tax credit for the amount of the premiums. 

5. Gifting through Private Foundations

Wealthy individuals and their families who intend to make significant charitable contributions into the future may wish to establish a private foundation as a vehicle for their charitable giving. A private foundation is a corporation or trust registered with the CRA that is organized and operated exclusively for charitable purposes. Once established as a registered charity, donations made by the individual or family members to a private foundation, either during their lifetime or by will, qualify for the charitable donation tax credit. 

The use of a private foundation gives the individuals and their family members the opportunity to be involved in deciding how and where the foundation’s funds are disbursed. As discussed above, the favourable tax rules relating to gifts of publicly traded securities to a registered charity also apply where the charity is a private foundation.

 6. Gifting through Public Foundations

A public foundation is a registered charity that receives most of its funds from many contributors, rather than from a single individual or family group, as with a private foundation. Typically, a public foundation provides an opportunity for donors to leave perpetual legacies for the benefit of a particular community.

7. Gifting through Donor Advised Funds

A special type of account, available through certain public foundations, that enable individuals and their families to make planned donations. A common donor-advised fund held by Assante clients is established through the public foundation, BenefAction. Similar to a private foundation, BenefAction allows an individual to make a charitable gift and enjoy an immediate tax benefit of the charitable donation tax credit. Holders of donor-advised funds can advise on where to direct funds, however, the administrative requirements and costs are far less burdensome than a private foundation, making donor-advised funds a popular alternative. Donations to a donor-advised fund can often be used for strategic tax purposes. An individual may have a tax year that will be unusually high amount of income, such as at the time of a sale of a business or other capital asset. The donor may make a substantial donation to a donor advised fund in that same tax year to offset some of their tax liability. In the years that follow, the donor can advise how they would like the funds used, sometimes in the same manner as if they had made smaller annual donations. The intention is to match the year of tax liability with the charitable donation tax credit but maintain the flexibility of donations in the future in amounts and to charitable purposes determined by the donor at the time. Unused tax credits can also be carried forward five years to offset future income as well. For more information on this program, click here.

In Summary

With the wide variety of charitable giving options available, and the detailed tax rules that apply, we encourage charitable-minded individuals and corporations to speak with us to help plan and implement their charitable giving, to ensure they maximize the impact of their charitable donations.