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The end of the year is a time when many investors start thinking more about giving back some of their earnings – either from their job or investments – and donating it to charity.
Not only does giving back feels good, but there are tax advantages too, says Mark Halpern, chief executive officer of Wealthinsurance.com Inc. in Toronto.
In fact, he says more advisors should be discussing charitable giving with their clients as part of their wealth and estate plans.
“It’s incumbent on advisors to have philanthropy as part of the holistic conversation they’re having with clients,” he says.
Globe Advisor spoke with Mr. Halpern recently about some tax-efficient donation strategies.
What are some basics of charitable giving that advisors should discuss with their clients?
Many people don’t realize that Canadians can use charitable receipts to mitigate up to 75 per cent of their net taxes payable each year, and any amount over and above 75 per cent can be carried forward for up to five years. Some also don’t realize that in the year of death, charitable donations can be used to offset up to 100 per cent of estate taxes, and you can go back the prior year as well.
Cash, cheques and credit cards are the most popular way of giving, but are not the most efficient for investors. The most efficient way is through donating non-registered appreciated securities such as stocks, exchange-traded funds and mutual funds. When you donate securities to charity, you don’t pay capital gains taxes, and you receive a charitable receipt for the market value of the donation at the time of the sale.
What other tax-efficient charitable options are available?
There are private and public foundations as well as flow-through shares, all of which provide tax benefits.
A private foundation is mostly for people with many millions of dollars who want to set up their own philanthropic organization and handle all of the administration and donations. With a public foundation – also known as donor-advised funds – the donations are managed by a foundation or financial institution. There are a growing number of donor-advised funds in Canada and what many people like about them is the donation and tax receipt can be provided in a particular year, but they can decide later which charities will receive the funds.
With flow-through shares, investors can claim tax deductions for purchasing the shares issued by Canadian resources companies. The funds these companies raise must be used for exploration and development expenditures to qualify for the deduction.
Also, most people don’t realize that life insurance policies can be donated to charity. The donor receives a charitable donation tax receipt for the fair market value of a policy, which can be claimed for the year it was donated. You can also buy a life insurance policy and transfer ownership to a charity and have the premiums you pay considered charitable donations.
What’s the takeaway for advisors and their clients?
Year-end is a great time for advisors to be talking to clients about charitable giving – and there are several strategies they can take advantage of. It requires sitting down with somebody who understands the intersection between tax, philanthropy and estate planning so they can advise you properly on how to give back to the community while also saving on taxes.
- This interview has been edited and condensed.
- Brenda Bouw, special to The Globe and Mail
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– Globe Advisor Staff