While December 31 is the tax deadline for making a charitable gift and claiming it for 2022 taxes, “there’s always lots of organizations that need amazing support 12 months of the year. It’s never too late and it’s never too early to start,” says Jennifer Button, head of Philanthropic Advisory Services at RBC Wealth Management.
“A lot of people make charitable donations based on a knee-jerk reaction,” says Christine Van Cauwenberghe, head of financial planning at IG Wealth Management.
“The most important motivation for making a charitable donation should be whether you want to benefit that cause. But people might not realize there are different ways of making the donation. And depending on how large a donation you choose to make, it can have more of a tax impact,” Van Cauwenberghe added.
“So if you were planning on making a donation, you might as well make it in a way that results in the best possible impact for the charity and for yourself personally,” she added.
“Whenever there is room to make charitable giving included, it can have incredible benefits from tax planning, estate planning, family giving, family engagement and creating a legacy,” she says.
Starting your strategic approach
The first step in kicking off a charitable giving strategy is to think hard about what you’re donating and where you’re donating to.
“You only get a charitable donation tax credit when you make a donation to a registered charity,” says Van Cauwenberghe. People can check the Canada Revenue Agency website or speak to a charity to see if it is registered or able to issue donation tax credits.
Button says your strategy should take into account “your head, your heart and your wallet.”
Depending on your financial goals, there are different options that can offer immediate or long-term tax benefits. These include direct donations of cash, a private foundation, donations of non-cash gifts such as capital property, donating publicly listed securities with accrued capital gains, or even making a gift upon death by naming a registered charity as the beneficiary of certain plans like an RRSP or TFSA.
“Make sure that it aligns with your other wealth planning goals,” Button says. “What are your charitable giving values? Who else should be part of that conversation? And then from the wallet side, think about what assets are the most tax efficient and what’s the timing of making those gifts?”
Stretching your charitable dollars
One of the most tax-effective ways to donate to a charity is to “gift a stock in-kind,” Button says.
When you donate stocks or mutual funds directly to a charity, you eliminate the capital gains tax you would normally pay when you sell securities, and you also get a tax receipt for the full market value of the donation.
“It’s great if you bought a particular stock 20 years ago and have seen significant growth,” Button says.
“If you give it directly, you get the full, fair market value of that stock on the date that you gift it and you don’t have to pay the capital gains tax. Not only do you get the benefit of gifting that stock at a higher value, but you also get the benefit of reducing what your tax bill would be if you took it out personally.”
Button says a good way to stretch charitable dollars for a cause you care about is to look for charitable matching opportunities where you can donate to a charity, and then have the government, an employer or individual donor match it.
“Matching opportunities can be a great way to incentivize and pull together a group of unconnected donors around one particular area,” Button says. “You’ll see it often when charities will do it themselves at the end of the year, but particularly around world events, like with COVID or a humanitarian crisis like Ukraine.”
Leaving a “legacy gift” or a large donation at the time of death is also a good strategy for those who feel like they don’t have the cash flow to donate large sums of money right now. By willing even a small percentage of your estate to a non-profit, you can save tax while supporting a cause you care about.
But Van Cauwenberghe cautions that people should speak to an adviser to make sure this type of donation is done in the right way.
“It could be better to make some of the donation during your lifetime and some at the time of death. But a lot of people don’t know that because it’s hard to make those calculations on your own, which is why it’s important to incorporate all of this into a financial plan that encapsulates your cash flow, your income and your tax liability.”
Ultimately, the approach you choose depends on your personal financial goals, Button says, adding that it’s important to talk through a plan with an adviser to find the best strategy.
“That’s where you’re going to see a really rich return on creating that charitable giving strategy when it’s tied into all your other financial planning goals,” she says.
This article was written by Ghada Alsharif from The Toronto Star and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.