The tax benefits of Charitable Giving in Canada

Insights Nov 19 2019
Charitable Donations

One of the most powerful ways to lower your taxes in Canada is to make a charitable donation to a registered charity of your choice.

Think about it all the positives in this scenario.

  • You can benefit your favourite charity and be tax-efficient at the same time.
  • It makes you feel good.
  • It saves you taxes.
  • You become a great role model for the younger generations in your family who get to learn from you about charitable giving.
  • The charity of your choice receives funding to continue the great work they do.

The great thing about making charitable donations in Canada is that our federal laws are generous to Canadians who donate to registered charities.

How charitable donations work in B.C.

For the first $200 that you donate to charity, the total Charitable Donations Tax Credit is 20.06%. That’s 15% federally and 5.06% in British Columbia.

That’s fine and dandy, but what’s really impactful is that any donation exceeding $200 produces a total tax credit of 43.7% (29% federally and 14.7% in British Columbia).

You can claim charitable donations up to 75% of your net taxable income. In case you were to exceed that 75% threshold, the remaining amount can be carried forward up to five years. For some people, it might be beneficial to pool your donations in one year, rather than to make smaller donations each year.

How could you maximize the charitable giving benefit even more? Donate securities in-kind that have a large capital gain.

Here’s a simplified example. You have a security, perhaps a stock or mutual fund you paid $10,000 for. It’s experienced incredible growth and now it’s worth $20,000.  Normally, when you sell it, you must pay taxes on your gain.

However, if you donate that security directly to the charity in-kind, then you do NOT pay the tax AND you get the tax credits as well.

To claim your credit, all you need to do is report it on your annual tax return, as long as you donate to a registered charity. The Canada Revenue Agency provides a searchable online database that allows you to confirm whether a charity is registered and eligible to issue official donation receipts.

If you have questions about making a charitable donation, make sure you speak to your Wealth Advisor or tax professional to be sure to do what is right for you.

Difference between private, community, donor-advised funds

Now that you know how charitable donations work, here’s a look at your three main avenues for making a charitable donation.

1. Private Foundation

You can start a private foundation, which tends to be a popular option for high-net-worth families. This is the most structured way of giving back, but it does include the most infrastructure and administration in terms of the setup involved. A lot of these tend to become dormant after a time because the excitement wears off and you are left with the work and cost of maintaining it. Private Foundations do tend to be more for the ultra-wealthy, with the Bill Gates Foundation being one of the most well-known private foundations in the world.

2. Community Foundation

Another popular way to leave your legacy is through a community foundation. According to the Community Foundations of Canada, there are 191 of these philanthropic organizations in our country. Here in the Lower Mainland, you can find community foundations in Surrey, Abbotsford, Richmond, Delta and more.

Community Foundations can help you leave your legacy in a number of ways, whether that’s through a specific endowment or designated fund. The minimum amount required for donating is also much lower than that of a private foundation, the maintenance and regulatory requirements are taken care of for you, and you just get to do the fun part, give money away to those who have a need!

3. Donor-advised funds

Donor-advised funds are arguably Canada’s fastest-growing charitable giving instrument. Much like the advantages of a Community Foundation (and can be offered through them as well) they are easy to set up with a growing number of providers. Check out my full explanation of donor-advised funds if you haven’t done so already.

So which form of leaving a legacy makes most sense for you? Make sure you have a discussion with your Wealth Advisor so that you can realize your best option.

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