Canadians planning on making large charitable donations should consider all of their options this holiday season if they are looking to maximize the bang for their buck, experts say.
Prashant Patel, a vice-president at RBC Wealth Management who works with wealthy clients, says the larger the donation, the more options available to donors.
And he said, whether it is a payout from the sale of a business, big gains on stock options set to expire or an unexpected bonus, a charitable donation can reduce the size of your tax bill in April.
“It is definitely part of our checklist when we’re talking to clients about year-end tax planning,” Mr. Patel said.
Cash, securities or insurance can all be donated to charities.
Martin Sampson, senior director of strategic giving at the United Way in Ottawa, said it is important for donors to work with a financial planner to ensure they are getting the most out of their donation dollars.
“You can give a lot more for the same net amount of giving if you do it through a gift of securities,” he said.
Mr. Sampson, who tries to work with those considering large donations to find something they’re passionate about, said as the baby boomers get older, planned giving, or donating after you die is also a growing area.
“It is a tough conversation obviously because to be talking about a planned gift, a bequest left in somebody’s will, the subject of death is on the table,” he said.
Mr. Patel said donating the payout from an insurance policy could also may be a way to “supercharge” your donations.
He said there are two ways to donate the proceeds of a life insurance policy — the charity can be both the owner of the beneficiary of the policy or the donor can remain the owner, while the charity is the beneficiary.
The first allows the donor to receive a credit for the premiums paid on the policy as a donation on their income tax return, while the latter allows the donor to claim the amount that is paid by the policy when they die to offset their final tax return.
“Typically, insurance premiums are not tax deductible. This is a way where you can actually convert your premium to be a tax deduction during your lifetime,” he said of the method where the charity owns the policy.
Mr. Patel said another way to avoid a large tax bill after you die could be to name a charity as the beneficiary of your RRSP or RRIF.
“At death, you’re deemed to have deregistered your RRSP or RRIF and that’s fully taxable as income, so at death that could be a very large tax bill,” he said.
“By naming the charity as the beneficiary, not only do you avoid the probate process, but you basically get pretty well a dollar for dollar offset in donation tax credits against the income inclusion.”
Mr. Patel noted there are limits to how much you can claim as a donation on your income tax return in any one year. The rules limit charitable donation claims to 75 per cent of your net income for the year.
“But if you exceed that in any one year then you can carry forward the excess for five years, so that’s always one thing to think about,” he said.
“You want to be able to make sure that you can claim the donation for tax purposes.”
And Mr. Patel reminds potential donors that making big charitable donations doesn’t mean more money for you.
“You will be out of pocket, even though you’re saving tax. You will be out of pocket compared with someone that didn’t make any donations and paid all the tax, but nonetheless there is that mind set of ‘I’d rather have some of my money go to a charity than to CRA.’ ”