With the holidays around the corner everyone is in a giving mood. Before you go out and donate to your favourite registered charity, did you know that not all donations are equal? In fact, if structured correctly, you can donate to your favourite charity and provide an increased contribution to the charity all the while maximizing the donation tax credit received personally.
This article will help you explore a few alternatives when deciding to support a registered charity that provides social benefits that achieve your philanthropic objectives.
Donating Personally
Donating personally provides you with a donation tax credit on your personal tax return. In Ontario, the donation tax credit is equal to 20.05% for the first $200 donated. For donations over $200, the donation tax credit is equal to 50.41% for individuals in the top tax bracket.
The donation tax credit is non-refundable and can be used to reduce the amount of income tax payable in the year. Any unused donation can be carried forward for up to 5 years. The maximum contribution eligible for the donation tax credit is generally limited to 75% of your net income, except in the year of death and the year before death, in which case the limit is 100% of the net income.
For individuals donating personally, it is recommended to maximize the amount of the donation that qualifies for the higher tax credit rate. For example, if you donate small amounts every year, consider carrying forward the donations made and claiming your charitable donations for a few years in the same taxation year. This will allow you to take advantage of the higher credit rate for donations more than $200. Additionally, for spouses, consider grouping the donations made by both spouses and claiming them under the spouse in the higher tax bracket to maximize the credit.
Donating Through a Corporation
For corporations, the eligible donation made will create a tax deduction that reduces the company’s taxable income. For shareholders of private corporations in the top tax bracket, it may be more beneficial to donate through a private corporation than personally. This is because the funds obtained from a corporation to donate will first be taxed at the top personal rate of 53.53%. Since the maximum personal donation credit is 50.41% in Ontario, taking funds out personally to donate will not maximize the amount of the donation. As a result, the corporation can make a higher donation directly compared to the shareholder.
Donation of Publicly Traded Securities
If you own publicly traded securities, it may be better to donate the securities directly rather than liquidating the securities and donating the cash from the proceeds.
If the securities are first sold for cash, this will give rise to a taxable capital gain, assuming the fair market value (“FMV”) is higher than cost. However, if the securities are donated to a registered charity directly, the capital gain on the securities would not be taxable to the donor. Additionally, the donor will receive a donation receipt for the FMV of the securities donated.
The following example illustrates the total donation tax credit received when donating securities worth $200,000 that have an accrued gain of $100,000 under the two alternatives:
| Description |
Selling the securities and donating cash |
Donating the Securities directly |
|
FMV of securities to be donated (A) |
$200,000 |
$200,000 |
|
Cost base of securities (B) |
$100,000 |
$100,000 |
|
Capital gain subject to tax (C) |
$100,000 |
$Nil |
|
Personal tax on capital gain (D)=(C)*(26.76%) |
$26,760 |
$Nil |
|
Value of donation made (E)=(A)-(D) |
$173,240 |
$200,000 |
|
Donation tax credit (E)*50.41% |
$87,330 |
$100,820 |
In the above example, the donor receives tax saving of $15,270 ($100,820 – $87,330) from the higher donation tax credit while providing an additional donation of $26,760 ($200,000 – $173,240) to the registered charity by donating the publicly traded securities directly.
Setting Up a Private Foundation
Alternatively, a private foundation can be an efficient vehicle for long-term charitable giving. It will allow the funding family or individual to control the foundation assets, which are invested and used in charitable activities or donated to other qualified donees, including other registered charities that the foundation supports.
As a registered charity, the private foundation will issue a donation receipt to the donor at the time of contribution. This allows for proactive planning by receiving a donation credit in the year of high income by the donor and providing flexibility to disburse the funds from the foundation over future years. In addition, the private foundation is exempt from paying income tax, which allows the foundation to make larger gifts with the accumulated tax-free income and capital growth.
It is important to note that private foundations have strict requirements in terms of value of assets that need to be disbursed on an annual basis if certain thresholds are exceeded to maintain it charitable registration. Your accountant should be involved in ensuring the disbursement quota is calculated and met annually.
GG Observations
Once you have decided on the right registered charity that is aligned with your philanthropic objectives, it is important to structure the donation correctly to maximize the benefit to the charity and yourself. Maximizing the benefit from tax incentives around charitable giving could allow you and your charity to better achieve the causes that you support.
Grewal Guyatt LLP has extensive experience in philanthropy planning. We can help you understand the tax implications on your charitable giving and help you structure the gift to maximize the tax benefits available. For more information please contact our tax team.
Authors
Mandeep Khosa, CPA, CA
Tax Partner
Contact Mandeep
Email: mandeep@grewalguyatt.ca
Direct: (905) 780-3117
