The (TAX) Art of Giving
THE BASIC RULES
- December 31st is the annual deadline
- The first $200 per year provides a low tax break at approximate 22% for individuals
- Annual donations in excess of $200 yield a tax break closer to 44% for individuals
- Every dollar of donations are regular tax deductions for corporations
- All taxpayers are limited in their donations to 75% of their net income
- Couples can pool their donations irrespective of whose name appears on the receipt
- You don’t have to claim the receipts each year; they can be kept for a later year
- Donations can be carried forward for five years
- Proper receipts are required; cancelled cheques and pledge forms are not accepted
- The charity must be properly registered, as evidenced by a federal number
- Qualified donations include cash, cheques and tangible assets
- Donations of services normally do NOT qualify unless the service is declared as income as well
- Donations to a charity recognized by US law are only deductible if you have US source income, which includes interest or dividends from US corporations.
- Registered Canadian charities and Canadian amateur athletic organizations
- Charitable trusts
- The United Nations and its agencies
- Canadian municipalities
- Federal or provincial governments
- Certain specified foreign universities
- Charitable organizations outside Canada to which the Canadian government has made a gift in the year or preceding year
- US charities recognized by US law (see restriction in Basic Rules)
You can verify that a charity is properly registered by locating it on the government’s website at www.ccra-adrc.gc.ca/charities.
SOME TAX PLANNING POINTS
- Donations should be pooled so that the $200 threshold must be crossed only once a year by one spouse
- If you give less than $200 per year, it may be better to claim the donations in alternate years, so that the $200 threshold is crossed only once
- The higher income spouse should claim the donations when he or she is subject to surtaxes
- Ownership of a life insurance policy can be transferred to a charity while you are alive. If the policy has a cash surrender value, you must pay tax on the accrued income but will receive a donation for the value of the cash surrender value. You will continue to receive a donation for paying the annual premiums
- You can donate a valuable asset “in kind” and receive a tax receipt. The asset needs to be appraised. The increase in value over original cost triggers capital gains tax. If the gift is a depreciable property, recapture of CCA is also taxable. However, tax law has evolved in recent years to provide significant incentive to donate in-kind.
See companion article “Charitable Donations In Kind”
DONATIONS & ESTATE PLANNING
- In the year of death, donations can be carried back one year. In both that year and the year of death, the donation limit is increased to 100% of net income.
- A charity bequest amount must be specified in the will by the testator. The testator may direct the executor to make a donation from the will without specifying specific charities, thus allowing the executor to exercise choice.
- For deaths after 1998, a charity can be a named beneficiary of an RRSP or RRIF. The value of the sheltered funds will be taxable on the final return of the deceased; however, the tax value of the concurrent donation should largely equal and offset the tax.
- Similarly, a charity can be named the beneficiary of a life insurance policy. The donation will create a large tax break but the payout of the insurance proceeds does not create taxable income. The policy premiums are deductible.
- For retired clients who are philanthropically-minded but not well off, it may be a good strategy to retain your valuable cash flow while you are living by not making any donations. Instead, you may wish to make a generous bequest from your estate.