Five Tax-Smart Strategies for Charitable Giving in Canada: Maximizing Your Impact While Minimizing Taxes
In a world where inflation, rising interest rates, and economic uncertainty challenge even the most generous Canadians, it’s important to recognize that charitable giving not only helps the causes we care about but also offers tax advantages. In addition to the tax benefits, charitable giving can also play a crucial role in financial planning, helping donors leave a lasting legacy. By integrating philanthropy into long-term wealth management strategies, individuals can ensure that their values and financial goals work hand-in-hand. Whether through establishing charitable foundations, gifting publicly traded securities, or creating donor-advised funds, there are numerous ways to make your charitable contributions more impactful.
According to a recent CIBC/Maru poll, most Canadians contribute to charities, yet many are unaware of the tax benefits that come with their donations. This is especially true for high-net-worth individuals and entrepreneurs who can employ various strategies to optimize their charitable giving.
At WealthCo, we help Canadian entrepreneurs and high-net-worth individuals align their philanthropic efforts with effective tax planning strategies. By taking advantage of these strategies, you can maximize the impact of your giving while minimizing your tax liability. Let’s explore five key ways to make the most of your charitable donations.
1. Understand the Tax Benefits of Donations
When you donate to a registered charity in Canada, you’re eligible to receive both federal and provincial tax credits. For federal tax purposes, you can claim 15% on the first $200 of your annual donations. Once your donations exceed $200, the credit jumps to 29%, and for those in the top tax bracket (income over $246,752 in 2024), the credit can go as high as 33%. Provincial tax credits vary, but most Canadians can expect to receive a combined tax credit of at least 40% for donations over $200.
This means that for every $1,000 you donate beyond the first $200, you could receive $400 or more in tax savings, depending on your province. Simply put, charitable giving offers a tangible financial benefit in the form of tax credits, in addition to the social and personal satisfaction of supporting the causes you care about.
2. Donate Appreciated Securities In-Kind
For high-net-worth individuals, donating appreciated securities, such as publicly traded shares, mutual funds, or segregated funds, is one of the most tax-efficient ways to give. When you donate securities in-kind (i.e., without selling them first), you receive a tax receipt for the full market value of the securities at the time of donation. What’s more, you completely avoid paying capital gains tax on any appreciation in the value of the securities. This can provide a significant tax benefit, particularly if you have investments that have grown substantially over time.
For example, if you purchased shares for $10,000 that are now worth $20,000, donating them in-kind allows you to avoid paying tax on the $10,000 capital gain. You still receive a tax receipt for the full $20,000, providing a substantial tax credit while supporting your charity of choice.
Additionally, if you exercise employee stock options, donating the acquired securities within 30 days of exercise (and in the same calendar year) allows you to avoid tax on the stock option benefit.
3. Consider Donating Depreciated Securities
Not all investments appreciate in value. If you hold securities that have decreased in value, you can still leverage them for charitable purposes through tax-loss selling. By selling depreciated securities and donating the proceeds, you not only trigger a capital loss that can be used to offset other capital gains but also receive a tax receipt for the full value of the donation.
If you’ve realized significant capital gains earlier in the year, this strategy allows you to reduce your taxable income while supporting a charitable cause. Any unused capital losses can be carried back up to three years or carried forward indefinitely, giving you flexibility in managing your tax situation over time.
4. Donate RRSP or RRIF Withdrawals
For those in retirement, donations can be made directly from your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). Withdrawals from these accounts are taxable at your marginal rate, but if you donate the withdrawn funds to charity, the donation tax credit can offset the tax liability.
This strategy can be particularly beneficial for high-income retirees who face substantial tax on their RRSP or RRIF withdrawals. For example, if you withdraw $50,000 from your RRIF and donate it to a charity, the tax credits from the donation may reduce or eliminate the tax liability on the withdrawal, freeing up additional funds for other uses. Given the complexity of RRSP/RRIF withdrawals and donations, consulting with a tax advisor is highly recommended to ensure optimal tax planning.
5. Consider a Donor-Advised Fund (DAF)
For individuals looking for a more structured approach to philanthropy without the complexity of establishing a private foundation, a donor-advised fund (DAF) offers an excellent solution. A DAF is a charitable giving account that allows you to donate cash or appreciated securities, receive an immediate tax receipt, and then recommend how the funds are distributed over time to various charities.
With a DAF, your funds can grow tax-free, allowing you to support your chosen causes over several years. Typically, a minimum of 5% of the average fair market value of the fund must be distributed annually to registered charities. The key advantage of a DAF is that it allows for tax-efficient giving without the administrative burden of managing a private foundation. It also provides confidentiality, as the details of your individual fund are not publicly available.
This makes a DAF an ideal vehicle for entrepreneurs and high-net-worth individuals who wish to manage their charitable giving in a tax-efficient and flexible way while maintaining privacy.
Bonus: Keep an Eye on Alternative Minimum Tax (AMT) Changes
For high-income individuals, recent changes to Canada’s alternative minimum tax (AMT) system could impact charitable giving strategies. Starting in 2024, only 50% of charitable donations can be deducted when calculating AMT. Additionally, when donating securities in-kind, 30% of the capital gain will now be included in the AMT calculation (up from 0% previously).
These changes mean that individuals with taxable income over $173,205 need to be more strategic in their charitable giving to ensure they aren’t negatively impacted by the AMT. Working with a tax advisor can help you navigate these changes and maximize your tax savings.
Final Thoughts
Charitable giving is not only a way to make a difference in the world but also a powerful tool for managing your tax liabilities. For Canadian entrepreneurs and high-net-worth individuals, strategies like donating appreciated securities, leveraging RRSP/RRIF withdrawals, and establishing donor-advised funds can offer significant tax advantages.
At WealthCo, we’re committed to helping our clients achieve their philanthropic goals in the most tax-efficient way possible. Whether you’re looking to make a large donation this year or establish a long-term giving strategy, our team of experts can help you navigate the complexities of charitable tax planning and ensure your donations make the greatest possible impact. Reach out today to learn how we can help integrate charitable giving into your broader financial strategy.
