9 Ways to Give to Charity and Save Tax Doing It

Charitable giving is declining in Canada. Many of you likely want to help but don't know how. There are many options you can use depending on your situation, and each has different tax benefits.

Let's look at nine ways you can help others and save tax doing it:

Tax Incentives

The Canadian tax system encourages donations. This is done through tax credits and deductions.

When giving personally, you get a federal tax credit for:

• 15% on the first $200
• 29% up to the top tax bracket
• 33% for the top tax bracket

You get provincial credits too.

When giving through a corporation or holding company, the corporation gets a tax deduction. This differs from a tax credit because it reduces the income on which taxes are calculated. A tax credit reduces your taxes owing.

To choose a charity, ask yourself:

• What do you talk about at the dinner table?
• What do you worry about?
• Any experiences you've had that you want to help others avoid?
• Is there a specific group you want to help?
• What do you want to improve in your community?

CanadaHelps has a great tool to help you narrow down your choices: https://www.canadahelps.org/en/

Don't hesitate to contact charities directly to learn more about their programs, strategy, management, and sustainability.

Okay, let's get into it.

1. Giving Cash

• The simplest and most common way
• Can give lump sums or set up automatic donations from your bank account or payroll
• No minimums, though some charities will only issue tax receipts over a certain amount

Giving Cash is an excellent solution if you want to give small amounts, give often, and value simplicity.

2. Securities w/ Unrealized Capital Gains

Have investments with unrealized gains? Donate the investments in kind.

• Can gift most types of investments
• The transfer is simple and quick and is processed by your advisor or the institution that holds your investments

You don't pay tax on the gain, and the tax credit is based on market value.

Particularly useful for corporations since there is no tax on the capital gain, but the total capital gain is credited to the CDA. That amount can then be paid to shareholders tax-free.

3. Donor Advised Funds (DAFs)

This is like setting up an investment account to donate regularly.

• Low-cost and simpler than setting up your own foundation
• Each contribution gets you a tax credit
• The funds are invested tax-free and must distribute at least 3.5% of the value annually to charity
• You can choose to donate anonymously
• You can name family members as successors, an excellent option for teaching your family and children about philanthropy.

A public foundation runs the DAF. They charge a fee but are usually cheaper and simpler than creating your own foundation.

If you want to:

• Donate a large amount
• Benefit multiple charities
• Not spend significant time and energy overseeing things

A DAF might be for you.

4. Private Foundations (PFs)

Private foundations are more complex and best used for large contributions as an alternative to a DAF.

• Requires a significant amount of capital, in the millions of dollars
• Needs tax + legal advisors, portfolio managers, and directors/trustees
• Costs and administrative work are high, and reporting is detailed and time-consuming
• Open to public scrutiny since details are shared on CRA's website

A PF might be right for you if:

• You wish to make a significant and lasting donation
• You have the time, expertise, network, and resources to create and implement a PF
• You want substantial control over the assets and distributions of your gift

5. Donate a Life Insurance Policy

Insurance is a very common way to donate.

• Whole life/UL is best since term insurance may expire
• The tax credit is based on the market value of the policy, which could be much more than cash value (need it professionally valued)
• You get ongoing tax credits for premiums you pay.

Have a policy you don't need? Consider donating instead.

6. Charity as Beneficiary

• Can name for RRSPs, TFSA, insurance, or through a will
• Tax credit on death, received by your estate
• Can be carried back to the final return or the year prior or forward by the estate

Good if you're unsure how much you can afford to give without impacting your own retirement needs or if you're the last survivor in your relationship.

7. Charitable Annuity

Annuities get a lot of hate - a discussion for another thread.

It could work for you if you need guaranteed income and have charitable wishes.

The donation is split between the charity and an annuity. Credit is received immediately and can be used over the next five years.

Annuities are tax-effective since the payments are a combination of your principal plus interest. However, if you buy an annuity in your RRSP/RRIF, the entire annuity payment is taxed each year.

8. Charitable Remainder Trust

• Less useful in Canada, other options are more compelling
• Transfer assets to the trust & receive a tax credit for net present value, which could be considerably less than the market value
• You get the income from the trust during your lifetime, the charity receives the capital on your death.
• If transferring assets with an unrealized capital gain, that gain is taxable, unlike donating securities or using a DAF or PF

DAFs are usually better.

9. Insured Share Redemption

Usable if you have a corporation that owns a life insurance policy. Here are the steps:

1. Donate shares to charity in your will

2. Insurance payout creates a CDA credit

3. Insurance proceeds buy back the shares from charity

4. CDA preserved for other shareholders

It's somewhat complex and is often used in conjunction with an estate freeze. You can make a large donation and save significant tax on your shares.

Spend thousands to (potentially) save millions.

That's it! I hope you found this helpful. If you have questions, let me know, and if you enjoyed this, please share.