A charitable donation is an exceptionally constructive approach to reducing the income tax you pay. Your donation supports a worthy cause, and you receive federal and provincial or territorial non-refundable tax credits. This advantageous tax treatment also applies to the tax owed by the estate of a deceased person. There are a number of other tax rules that favour charitable giving in the context of estate planning.
Keep in mind that true charitable intent is key in pursuing the tax benefits of charitable giving. Even with the tax breaks, you will be giving away money.
There is much to consider before making an actual charitable donation. Begin by fleshing out your philanthropic objectives. What causes do you want to focus on? Which charities are you interested in supporting?
You will need to understand the various options for giving to charity. A wills and estates lawyer or a tax accountant can advise you on options that make sense for your particular circumstances. If you have a specific charity in mind, note that major charities typically have gift-planning departments with staff who will provide advice at no cost.
Your charitable giving must fit with your overall estate plan. How much will you be able to give, and meet your other estate-planning objectives? Estimating your donation budget requires consideration of:
- your total financial resources.
- your anticipated financial needs for the rest of your life.
- any personal obligations that your estate must satisfy.
- your intended beneficiaries, and how much each should receive.
There are numerous and at times complex rules that determine the tax benefits of a particular charitable gift. These rules are summarized in Canada Revenue Agency's Gifts and Income Tax.
The value of the non-refundable tax credit issued for a charitable donation depends on where a taxpayer lives, and her income in the year the donation is claimed. A donation amount of up to 75% of net income can be claimed in the year of donation, or carried forward up to five years (up to 10 years for ecologically sensitive land gifts). Donations can normally be claimed by either spouse. Use the CRA charitable-donation tax-credit calculator to estimate the value of a donation.
To claim the tax credit, a donation must be made to a charity or other beneficiary that is registered with the Government of Canada and can issue official donation receipts. These organizations include charities, amateur athletic associations, arts organizations, municipalities and low-cost housing corporations for the aged, as well as the United Nations and certain foreign universities and charities. To check the registration status of an organization to which you wish to donate, consult the government's List of charities and other qualified donees.
Charitable donations that may qualify for advantageous tax treatment include not only cash, but also securities, employee stock options, debt obligations, mutual funds, real property, life insurance, RRSPs, RRIFs and even objects of cultural value.
Donations of real estate generally require a current assessment of fair market value at the time of donation. This may mean additional cost for the estate to obtain an up-to-date valuation.
If shares of specified publicly traded companies are donated directly to charity, the donor will receive a tax credit for their fair market value at the time of the share transfer. As well, the inclusion rate is reduced from 50% to zero on any capital gains realized on such gifts. This favourable tax treatment can provide significant tax relief.
A gift of Canadian cultural property of "outstanding significance and national importance" such as works of art and archival material may qualify for preferential tax treatment. The process for certifying cultural property for income-tax purposes is set out in a federal application guide.
Donations of ecologically sensitive land for purposes of preservation could be eligible for tax credits and a capital-gains inclusion rate of zero. Unlike other charitable gifts, there is no limit to the gift amount eligible for the deduction or credit in a given year. The Canadian Ecological Gifts Program Handbook sets out program details.
A life-insurance policy donated to charity will provide an immediate tax credit for the net cash-surrender value of the policy. Alternatively, a charity could be named the beneficiary of the policy, and the estate would claim the tax credit.
In 2016, the federal government revised the laws regarding charitable donations made by an estate. Now, if an estate qualifies as a graduated rate estate, an entity which can exist for 36 months after death, the donation claim limit is 100% of net income in the year of death and the previous year. As well, the executor has more flexibility regarding the year in which a donation tax credit is claimed.
"A review of your estate plan is essential if it predates the 2016 changes to estate donations on death," says Margaret O'Sullivan, of the Toronto-based boutique trust and estate-law firm, O'Sullivan Estate Lawyers LLP. "Among the many changes to the law are significant revisions to the tax treatment of charitable donations on death."
Other estate-planning strategies that involve charitable giving include charitable insured annuities, charitable remainder trusts and donations through a community foundation. Setting up a private foundation for charitable giving is another possibility that suits larger donations ($500,000 or more). Before pursuing any of these strategies, seek the advice of an appropriately qualified professional.
When planning your estate, there is much to consider. With thorough research, careful consideration and the right professional advice, your estate plan can achieve all your estate-planning objectives, including philanthropy and tax benefits.
