Tax efficient ways to make a difference this Holiday Season!
It is the most wonderful time of the year! It is also the season of giving!
Many of the organizations and individuals give back to their community or their favorite charities over the festive season. Recently, the trend is for organizations to involve their employees and create team events where everyone participates during the working hours to help deliver a service such as serving meals at food banks, or some other form of hands-on donation, to directly benefit those in need.
Canadians are known for their “politeness”. However, the recent Statistics Canada data shows that not only are we polite, we are also fairly “generous” having donated nearly $9 billion to charities in the year 2016. Certainly, the $9 billion does not reveal the data of donors who gave back in a tax-efficient manner which is a win-win for all parties concerned.
The above is relevant for entrepreneurs who want to make a difference in the community and at the same time reduce the tax burden especially after being hit by the massive tax changes by the Liberal government in 2018. Many organizations that have built their brand around corporate social responsibility and supporting the community have an even greater vested interest in making sure they spend their philanthropic funds wisely. Good news is that with a strategic approach, there can be some very positive tax implications when making a charitable donation.
Following are some of the tactics that can help make your next philanthropic gift into a bottom-line booster:
Gifts other than Cash:
Donation of property other than cash are known as “Gifts in Kind”. They include securities, artwork, real estate and life insurance (discussed below). The tax credit is usually at their fair value at the time of donation. You are deemed to have disposed of the property at fair value which could mean a taxable capital gain to be reported on your tax return. However, in case of securities, artwork and real estate, you may make an election to designate a value for the gift, anywhere between its cost to you and its fair market value. This helps you avoid the capital gain or realize a smaller one. Your tax credit will be based on the value you designate between your cost and the assets fair market value.
If you already have other large capital gains and plan on making a donation in kind that results in additional capital gains, there could be a potential for additional taxes “Alternative minimum tax (AMT)”. Be sure to consult with your tax professional on the “gifts in kind” donation.
Life Insurance with your favorite charity as a benefactor:
There are various methods by which a donor can gift life insurance to a charity.
- A donor can make a bequest of the proceeds of a life insurance policy through his or her Will
- The charity may be named as a beneficiary under a policy owned by the donor
- The donor can donate a newly acquire policy or an existing policy during his or her lifetime
The first two involve a charitable donation at death. However, the third method should not be overlooked. This involves making your favorite charity a beneficiary of your life insurance policy. Since the charity does not have an insurance interest in the donor, the charity must obtain the donor’s consent prior to applying for the policy which is a minor formality. The premiums paid by the donors will be considered a charitable donation eligible for a charitable tax credit (for individuals) or deductions (for corporations). The donor may also get a credit or deduction for the value of the policy if an existing policy is donated. However, upon death, no further tax benefits accrue to the donor or his/ her estate.
Setting up a Charitable Foundation or Donor-Advised funds:
Many entrepreneurs or organizations look to set up foundations especially as they donate large gifts. Foundations have benefits in that you have control as a principal contributor and are able to determine how gifts to the foundation will be invested and which charities will receive gifts. This provides flexibility to the contributor to respond to changes to his charitable objectives. However, at the same time, there are lot of administrative and compliance requirements as required by the CRA which can be challenging.
With donor advised funds your charitable giving is managed from one place, minimizing costs and maximizing impact so you can focus on what you do best. Several major organization make use of third party operators who help them set up their own donor-advised funds. All of the administrative, legal and accounting work are taken care by these operators. These funds allow for immediate charitable tax credit receipt and also allow the donor to distribute the gifts as they choose- potentially to multiple charities over time. All these are advantageous tactics for organizations hoping to leverage their generosity as a brand building or recruitment tool.
Carryforward or Deferral option:
The benefit of giving back to your community or charity is not lost if it is not used on the current year tax return. It can be carried forward to minimize an outstanding personal or corporate taxes for up to 5 years. You do not have to claim all of the donations you made this year on your current year return. It may be more beneficial to carry them forward and claim them on your return for any of the next five years, or over the next ten years for a gift of ecologically sensitive land made after February 10, 2014.
You can claim eligible amounts of gifts to a limit of 75% of your net income (100% if you are in Quebec). For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income. However, you have to remember that for individuals it is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don’t owe any tax, you don’t get a refund
Whatever your preferred strategy to giving this holiday season, consult your Chartered Professional Accountant on the best ways to make a charitable donation which is based on your personal financial circumstances, or that of your organization.
If you are trying to make a difference in your community, why not take the opportunity to create a positive impact to your balance sheet!
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