In addition to the satisfaction gained from directly supporting the causes and organizations important to you; charitable donations can also help improve your personal tax situation.
If your income is above $220,000, you can receive the maximum 33% non-refundable federal tax credit (plus the applicable provincial or territorial tax credit*) on eligible donations above $200. If your income is less than $220,000, you can receive a federal donation tax credit between 15 – 29.32%. Regardless of your income, there is only a 15% federal tax credit plus the applicable provincial or territorial tax credit* on your first $200 in donations.
Remember: if you want to claim a donation tax credit on your 2021 tax return, ensure that you make your donations to qualified Canadian charities and private foundations by December 31, 2021.
*Note: the current Ontario Provincial Tax Credit is 5.05% on donations up to $200, then 11.16% on any amounts over $200.
Your tax savings will depend on the type of donations you make.
Donating “gifts in kind” (such as securities, artwork or real estate) instead of cash may increase your tax benefit—as the tax credit for a “gift in kind” donation is generally valued at its fair market value at the time the donation is made. That said, the property will also be considered to be disposed of at fair market value at the time of donation, and you will need to recognize and pay tax on any resulting capital gain, just as you would if you had sold the property.
There is a tax exemption when you donate eligible securities.
Donations of eligible securities (such as publicly-traded shares and mutual funds) to a registered charity are exempt from the capital gains tax. This makes it a better tax choice to donate securities with an accrued capital gain directly to a charity, versus selling the securities and donating the proceeds.
For example, let’s say you have eligible shares that you plan to donate to charity in 2021. The shares originally cost you $2,000 and are now worth $3,000. Should you sell the shares and donate the proceeds? Or donate the shares directly to the charity? Let’s assume you live in Ontario, have already donated $200 in 2021, and your income is taxed at the highest marginal rate of 53.53%:
If you sell the shares and donate the before-tax proceeds, you will realize a $1,000 capital gain on the sale and have to pay $267.65 in tax on the taxable portion of the gain (50% of $1,000 × 53.53%). Your $3,000 donation will give you a tax credit of $1,324.80 (44.16% [33%+11.16%]× $3,000) and the donation will result in a net tax savings of $1,057.15 ($1,324.80 tax credit – $267.65 capital gains tax).
If you donate the shares directly, the charity will still receive the full $3,000 value, but the taxable portion of the $1,000 capital gain will be tax-exempt to you. You will still get a tax credit of $1,324.80 (44.16% of $3,000), and your tax savings from your donation will be $1,324.80, or $267.65 more than if you had sold the shares and donated the before-tax proceeds.
Note: If you already have large tax deductions or capital gains from other dispositions, a gift in kind donation that results in additional capital gains may result in a liability for alternative minimum tax (AMT). Be sure to contact your tax adviser to ensure that AMT does not arise.
It might be a good idea for your company to make the donation.
If you’re a business owner, you may want to consider making certain donations through your corporation, as a corporation can deduct donations in determining its taxable income. Assuming you have a private corporation that donates securities or other capital property, the non-taxable portion of the capital gain will increase the corporation’s capital dividend account, which can be paid out to shareholders tax-free. On the other hand, lower corporate tax rates may result in it being more beneficial to make certain donations as an individual. It’s important to crunch the numbers and speak with your financial advisor or accountant.
It may be beneficial to set up a Donor Advised Fund.
We have helped many clients set up Donor Advised Funds (DAF), which is simpler—and more tax-efficient—than creating a private foundation or charity.
A DAF can offer the same tax benefits as a private foundation or charity, without the operating and overhead costs. A DAF enables you to make charitable contributions without specifying up front which charities will benefit from your gift, and the funds can grow tax-free. You receive an immediate tax deduction for any contribution and can make grants from the fund to your preferred organizations and causes over time. Not only can a DAF result in less administrative responsibilities, but more funds are directly available to benefit the causes you support and care about. In many cases, a DAF can be set up with as little as $10,000.
S+C Partners is committed to helping you
If you are considering making a sizable charitable donation or establishing an ongoing philanthropic legacy, we recommend that you first consult with a professional advisor. Our dedicated team is here to support you. Please call us at 905-821-9215 or email us at info@scpllp.com if you have any questions or require any assistance.