Charitable Donations and Tax Credits
Thousands of individuals and corporations in Canada donate to charities every year. Learn about the tax implications of making charitable donations from Tax lawyer, Amanda Doucette.
On today's episode: "Charitable giving is one of the last true frontiers of planning that is available from a tax perspective in this country."
Welcome to the Mind Your Money podcast brought to you by Westmount Wealth Planning. I'm your host, Mehul Gandhi, a financial professional based out of beautiful Vancouver, British Columbia. Join me as I interview Canadian wealth professionals on a variety of investment in financial planning topics with the aim to simplify the complex.
Now let's get into it. We're back! I am so excited to be back recording podcasts. It has been a long while. and perhaps in a later episode we'll get into why, I was away for so long, but the most important thing is we're back. We have a familiar face to kind of a well I miss her a ton and and be it just kind of makes me feel more at ease while I get back into the groove of things of hosting a podcast As you probably have noticed we've gone through a name change. We are now the Mind Your Money podcast, which was basically born out of a couple of suggestions from a few regular listeners So thank you for that.
But without further ado, I want to introduce our guests on our topic today my very good friend who I'm yet to meet in person, but still very good friend Amanda Doucette who is a tax lawyer as some of you know and a partner at Stevenson Hood Thornton Beaubier in Saskatchewan and she is here to talk today about charitable giving and charitable donating and obviously the tax implications around all of that.
Amanda, thank you so, so much for being my first guest on the second iteration of my podcast live. I was honored to be asked. It's so nice to see you even just on the screen. Likewise. Now we've had a bit of a chat beforehand. We've caught up, so we won't put the audience through that.
We're going to jump into things. Charitable giving, first off, seems like there's an emotional component to it. You have an affinity towards a particular cause or an organization or a group, and you want to be able to assist them. You want to be able to show your appreciation or gratitude or support for their cause by making a donation, a monetary donation. But there's also this whole side of it being effective tax planning. So there's sort of like this ancillary side benefit of donating is to take advantage of the tax side of things. And this makes sense, right? Because as a government, we want to encourage Canadians, we want to encourage citizens to donate and make it, incentivize them to do so and to support these amazing wonderful organizations. Is that kind of how you see charitable donating or charitable giving?
Yeah, absolutely. I don't think I've ever had a client that came to me and said, "Amanda, I want to donate to a charity because I want to save tax." Typically, that's not how people come to you. And I was reading an article, and now I can't remember where the article was, but there's been a number of studies across Canada about why people donate to charities and they listed the various reasons. And not surprisingly, the reasons why people donate to charity, the top reasons have nothing to do with tax. It's about wanting to benefit their communities, wanting to feel like they're giving back, all of those things. And the tax savings is usually one of the bottom things on the list.
So usually we start by, "Why do you want to do this? What charities are important to you?" And we start down that path. Makes sense. Tax accountants, tax lawyers are really savvy on ways to mitigate or reduce tax or defer tax rather. So it can't be the number one driver. One of the things that we've seen with our clients is that they have an affinity towards a particular organization because of something that organization has done. So for example, let's say it's a hospital or a hospital foundation because a loved one was in that hospital and that hospital took such good care of them, they want to support that foundation, the hospital foundation. I think all those reasons are so admirable. But today, we are going to talk about what is the practicality of it, how is it done, and then what are some of those tax benefits and how do they differ based on timing and things like that. So the first thing that we want to get into is when you do make a donation to a registered charity, which is important, has to be a registered charity, you do receive a type of tax credit.
Can you kind of school us a little bit on that?
Sure. So I guess, first of all, it's important that when you're donating to something, if you're intending to donate because you're expecting to get a charitable tax receipt, you can only get that from an actual registered charity. And if you're curious whether a charity is a registered charity, there is a free online website on CRA's website that says, here, you can click here, you can type in the name of the charity. You can see if they're still registered. You can see all their past financial statements and just see if they're legitimate. Oftentimes, like municipalities or community organizations, those will not be registered charities. The other time I find people get a bit confused is if they're buying 50/50 tickets or they're purchasing homes to support one of the lottery associations. Those are not charitable donations. There's a different benefit with those. So you're not going to get a receipt. So when you make your donation to a registered charity, you're going to receive back a piece of paper and that's your receipt. And I know a lot of people don't keep receipts, but this is an important receipt to keep. So you want to scan it or save it with your tax materials. And on that receipt, there's going to be a number. It'll say a charitable registration number. That's the legitimate number that shows that your charity is allowed to give that receipt. The receipt is going to be for the amount that you actually donate it. And if anyone's listening to this, they might remember some of the charitable donation schemes that happened over the last 20 years where someone would donate $10,000 and they'd get a receipt for $30,000. If that happens, something strange is going on. And that would mean it's not going to be a legitimate donation and you're going to have some issues. So your receipt is going to be for the amount that you donated. And then you can use that receipt to offset tax that you're otherwise owing on your income tax return. And there's a calculation depending on the amount of your income and you can offset up to 75% of your income. And so you'll notice when you're filing your tax return, there's a little section where you can declare you have to provide your proof in your receipts, but it can help to reduce the taxable income that you have in a given year.
Now, because of that 75% cap, if you do make a donation and the credit exceeds to 75% of your income, is that rest of it lost or can that be carried forward?
So great question. You can absolutely carry it forward. And you'll notice when you're doing your calculation as well that depending on how much you've donated, you get a little more bang for your buck if you sometimes hold a number of your receipts together and do a larger lump sum claim versus $200 one year and $200 the next year. You do have the ability to hold your receipts together and do one larger claim in a later year. If you have extra, you can hold that to the next year to make sure that you get the maximum use.
Great point. There's two main ways, when it comes to timing, there's two main ways to donate. you can donate while you're alive, or you can create something where you can make a donation upon your death. How does that differ, how is that treated differently from a tax perspective? - Well, from a tax perspective, I mean, if you donate while you're alive, and if you're an individual, you're gonna receive one of those receipts and you have that available to use against your income right now. If you donate on your death, you're not going to have that available until you pass away, but it can still be used on a carry back and carry forward basis against your estate return. So if you have large gains or a large tax bill on your death, you can use it to offset that. So there are still some options. So it really depends on when you need it. If you don't need it now, you might choose not to do the donation now, and you might choose to wait until death when it's more needed. - Okay, but upon death, that 75% limit gets extended up all the way up to 300%, which is why you're saying that if you've already kind of exceeded, sorry, again, you've kind of received the credit for 100% of that income upon death, you can actually carry back to a previous tax year so that you don't lose any of that tax credit. That seems to make sense, it seems to be fair. Again, you're incentivizing individuals make these donations to these groups, to these charitable entities.
Now, you mentioned right there, personal, if you make it personally. So I guess you can either do this personally, as most of us are going to make personal donations, but if you have a corporation, if you're incorporated, you have a corporation, you're a shareholder in a corporation that has assets in it or cash in it, and that corporation wants to make a charitable donation, That's possible as well. That is correct. A corporation can make a donation at any time. A corporation is not going to die like an individual, but a corporation can make a donation at any time and they receive a deduction. It's a little different than the charitable receipt that an individual would give, but there's still paperwork that comes back showing the charitable registration number and it's a deduction to offset income for the corporation. It's a deduction versus credit.
Correct. Awesome. Now, when I think about donating, in simplest terms, I think about donating cash. I was approached a few months ago by a group, a charitable organization, and asked to make a donation. I felt strongly about what they were doing. I thought that would be a great cause to support. And so I donated cash for my checking account and that was it, simple. But there are instances where an individual might want to donate assets. So not liquidate an asset or not have the cash, whether that's a portfolio, an investment portfolio, whether that's, I don't know, some real estate, whether that's land, something like that. How does that work? in the personal sense. Do you receive a credit for the value of that particular asset? Does that have to be value evaluated? Like who determines that? - Well, I guess the answer, the lawyer answer is it depends. (both laughing) So if we think about the types of things that can be donated, I find oftentimes the reason why we look to something other than cash tends to be a tax reason. And that just tends to be what happens. So for example, if you have publicly traded stock and your stock's done really well and it's really increased in value, well, if you were to die tomorrow, that stock would be deemed to be sold under the income tax rules. And the gain on that investment would all be taxed in your estate, which is not great. We have to then find money to pay for that. And so we often will see people that have these stocks that have really gone up in value that they don't actually need for their retirement or for their daily living. And they said, well, we could wait and donate them later, but why don't we donate them now? And one of the big perks about donating publicly traded stock to a charity now, provided all the rules are met, is that that gain inclusion is 0% to you. The charity can receive the stock and then can do whatever they wish with it. They might want to liquidate it, but that's their choice. And you receive a charitable receipt for the full value of the stock. There is some proposed rules that came in in the recent budget where there might be a small amount of tax that is now going to have to be paid called an alternative minimum tax, which we won't get into here. It's a refundable tax. It's payable over a period of time. But for the large part, it's a very, very minimal tax burden if you're to donate those publicly traded shares now. So that's one option. Another option we've seen before is the donation of like ecological land. So if you have certain land that maybe is like wetlands or it has endangered species on it, or it's very valuable lakefront property, if it fits under certain qualifications, that land can also be donated and you get a receipt for the full value of that land. And of course, I know, I mean, you're working in the insurance area, so I'm sure you can provide some commentary on the options of using insurance policies, which I think we often forget about. In particular, those insurance policies where I find the client says, "Well, I've been paying on it for years, but I don't really need it anymore. I'm just going to let it lapse." So I'm sure you can provide some commentary about that. Yeah, it's an interesting topic to talk about. I'll go through it briefly. I might do a whole separate episode on donating insurance and what that's about. But let's start off with your example there of, "Hey, I've got this insurance policy. I'm going to let it lapse." Maybe it was a term insurance policy, so we know that term insurance protects you for a specific period of time at a given cost or premium. And then after that time or that term, if you're still able to be covered under that policy, the premium jumps up significantly in some cases. So let's say we're getting to this point where the premiums are going to jump up. You don't really need it anymore. You certainly don't want to pay the higher premiums for the next term. So you're thinking, "I'm just going to leave it and just let it lapse." Well, there are certain charities out there that would love to take over that policy. They have the ability to fund it. They have the cash, so to speak, to fund it, especially if the rates were really good, meaning you're healthy and you're getting really good standard or preferred rates for the insurance. They might look at either renewing that term or converting it to something more permanent and taking over that policy. And so now you've got a situation where if there was no real value to that policy, meaning it wasn't a cash value policy. There won't be any real tax credit on shifting that to the charity. But if you do make them the beneficiary and they're going to pay for it, you never change them as the beneficiary going forward, upon your death, your state will receive this donation for whatever the debt benefit amount is. And you can, of course, have multiple beneficiaries. So you may choose to have a charitable organization as 50% as an irrevocable beneficiary, one you can't change, and maybe a spouse or even your state as the other beneficiary, so to speak. So there's some flexibility there. So that's one example. The other example is your cash value, whole life insurance, as we call it here in Canada, that has this cash value that grows every year or that could potentially grow every year. And so this is treated like an asset. So if you were to give that to a charitable organization, you could choose to realize that donation tax credit in the year that you've donated it or given it to that charity equal to the value of whatever that policy is. And I won't get into fair market value versus cash surrender value and things like that. That's a different episode, but there is some flexibility there. Charitable organizations really appreciate that because the one thing about permanent insurance is, well, we're all going to die at some point. There isn't really too much risk there. If you donate a portfolio of stocks and bonds or marketable securities, they decide to keep it and not liquidate it, there's a chance that the markets can capitulate, can drop, and the value of that donation goes down. So this is great because it's guaranteed, meaning they can plan for the future with it. They know, "Okay, we have X amount of insurance policies on that our donors have donated to us. This is when they should essentially pay out, depending on the age of the insured individuals, and we can plan to be using this money going forward with a certain margin of error. It's so well appreciated by these charitable organizations that certain insurance companies down in Canada are creating products specifically suited for charitable giving. I won't name the companies because we are pretty insistent on remaining product or company agnostic here on the podcast. But there are products out there where, let's say an individual already this year knows they want to make a, let's call it $100,000 donation, whether it's personally or through a corporation to a charity. They have a charity in mind. Maybe they had done it for years in a row. Every year they donate a set amount. Let's call it $100,000. But what they can do instead is just make a lump sum payment and purchase an insurance with one premium payment, $100,000 one time. And we know that when you purchase insurance, the cost that you're purchasing it for is much less than what the benefit is. That's a sort of point of insurance. So $100,000 might buy you $300,000, $400,000, $500,000 of life insurance, depending on your age and a whole bunch of other factors. And typically, you're going to see charitable organizations who don't need money right away. These can be foundations that are more established. They're really trying trying to sort of create this planned giving program where there's money coming in later. They have the money right now, but they're always thinking about the future. It's a great way to do that. From a tax perspective for the real tax nerds out there, you might be thinking, you know, paying a policy in one year, would that make the policy non-exempt? Meaning, basically meaning that CRA doesn't like those kinds of policies and the tax treatment of them. Correct. They are non-exempt, but because it's owned by a charity and charities get preferable tax treatment, it's not a concern. So these insurance companies are pretty smart. They have the resources to come up with products like this and create them. And I think it's pretty cool because it's a win-win, right? It's really something that the charity is going to receive an enhanced gift than what they would have normally received from that donor. And then of course, the individual's estate will receive the benefit or the tax credit upon, oh, sorry, the individual receives that tax credit right away when they make that premium payment of, say in my example, $100,000. And it's great. The charity owns it, it's done, it's one payment, it's out of the way, and everyone kind of wins. So the insurance and charitable giving world, that intersection is quite interesting. We talked a little bit about not making a donation from the tax perspective, really doing it for the right reasons. I suspect that you have run into this a few times, but we can't ignore the tax benefits of this, especially here in Canada. I want to conclude our interview today just by saying, first off, thank you for giving us all this information, which I think we've kept it pretty easy to understand. But there's a lot of people out there that have these organizations, these charitable organizations that they have an affinity towards that they feel special about. And a great way to support them is to make these donations. I'm a big proponent of donating money, of course, donating time as well, but a lot of these organizations can do a lot of good with the donations they receive. So even if you think you're not in a position to do so or it needs to be this massive donation, all of it helps and it all adds up. And speak with your accountant, speak with your financial planner, your insurance advisor, speak with your advisors to really explore if there are different ways that you might be able to donate to organizations that you want to support. - Yeah, I agree. I think opening up the dialogue is so important 'cause often we think, oh, I don't have enough money. So I'm not even gonna ask the question. I think that charitable giving is one of the last true frontiers of planning that is available from a tax perspective in this country. And there's a really broad set of options that are available to you because everyone wants to encourage the donation to a charitable organization. So you might be surprised at what options are actually available to you that you didn't think were. And so I think the starting point is to have a conversation with your advisory team about it. Your lawyer, your financial advisor, your insurance advisor, your accountant, start asking some questions. What are my options? And I really like this charity. I want to know what I can do. They can work with you to give you some of the options available and determine whether it's better to do something now, whether it's better to wait until you've passed, or maybe combination of the two. But I think you'll be surprised at what options are available that you might not have realized. Absolutely. It's not about getting your name on a wing or being an ultra-height networked individual with a tax problem. We can all give in our own ways, in our own amounts, and really support the individuals that are working so hard in these organizations and pushing forward these great causes.
Amanda, I really want to thank you for talking about this topic. It is an important one. I really loved how you said it is one of the last frontiers when it comes to planning, but it is so, so much more. And I think as people understand better how the tax side of donating works in this country, it might just encourage people to do so more often. It's always a pleasure to see you. And you definitely made the first episode back much smoother for me by just being as awesome as you always are. Thank you so much for having me. This was a great topic. I always love talking about charitable giving. Thank you so much.
This information has been prepared by Mehul Gandhi, CFP®, CLU®, TEP who is a Senior Insurance Advisor and Managing Director for Westmount Wealth Planning Inc. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario.
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