When it comes to charitable giving, you have a number of different options that can help you achieve your philanthropic goals, while at the same time providing you with some tax relief.
Donating securities – The federal government has introduced several new tax incentives in recent years to encourage charitable giving by Canadians, including the elimination of capital gains tax when you donate publicly listed securities to qualified charities. Not only do you receive a tax break, you also receive a donation receipt equal to the fair market value of the donated security.
For example, due to the donation tax credit, your out-of-pocket cost for making an in-kind donation of a security worth $100,000 with a cost, of say, $40,000 is about $55,000. However, if you sold the security first and then donated the cash, your out-of-pocket donation cost would be $70,000 due to paying about $15,000 in capital gains tax.
Charitable foundation – Another tax-effective charitable giving strategy is setting up your own charitable foundation. A private foundation gives you a high level of control and flexibility with respect to charitable giving, and enables you to create an enduring charitable legacy.
You can make donations to your own foundation, and you will receive a donation tax receipt like any other donation. However, to maintain its charitable status, your foundation must meet its annual disbursement quota – 3.5 per cent of the foundation’s assets, must be spent on charitable activities, or on gifts to qualified donees.
While providing control and flexibility, a private foundation also involves certain costs and administrative requirements that must be considered. An alternative to a private foundation is making tax-deductible donations to a public foundation. Public foundations are very similar to private foundations in many respects, but involve less cost and administration.
Although you do not have outright control now, you can still recommend to the public foundation’s directors which charities should receive grants. Similar to private foundations, in-kind donations of publicly listed securities to a public foundation are eligible for the zero capital gains inclusion rate. Depending on your age and needs, there are other creative charitable giving strategies, especially those using life insurance, to reduce taxes and significantly increase your charitable contribution after death to your favorite charity.
Kirbey Lockart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.