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Charitable giving is a critical component of any balanced financial plan. In the simplest terms, financial planning means save some money, spend some money and give some money. Like a three-legged stool, if one leg comes up short, the result is a fall. In other words, a financial plan is out of balance.
Proposed changes to the alternative minimum tax (AMT) set to take effect in 2024 have brought up how the move will affect high-net-worth Canadians’ financial plans and charities.
These measures include raising the AMT rate to 20.5 per cent from 15 per cent, increasing the income threshold below which the AMT doesn’t apply to about $173,000 (indexed to inflation annually) from $40,000, and altering the inclusion rates for different types of income and deductions.
In the case of charitable giving, only 50 per cent of non-refundable tax credits an individual would receive from donating to registered charities will be included in the AMT calculation, down from 100 per cent today. Furthermore, 30 per cent of capital gains from donations of publicly listed securities will be included in the calculation instead of being excluded under the current rules.
The intended purpose is to target higher-income individuals. The challenge is that higher-income earners are often the more prominent charitable donors.
This change begs the question – will large donors alter their charitable contributions if they’re no longer taxed as favourably? Perhaps not.
Sizeable donations have rarely been given for the tax-saving benefit. Over the years, many high-income individuals who give back have done so because they have a vision, want to make an impact, or want to change a system. There are many reasons ahead of the tax benefit.
Do taxes matter? Of course, but they aren’t the driving factor. Individuals who gift sizeable donations often focus on a bigger picture – a legacy much more remarkable than the tax benefits could ever be.
However, the upcoming changes won’t take effect until next year. So, there’s time to be tax savvy. Here are three moves that can be done now to maximize a client’s charitable impact:
1. Using donor-advised funds
Consider bundling smaller donations into a donor-advised fund (DAF) before the end of the year. The benefit is that the client is locking in donations to the current tax rules.
That can be accomplished by setting up a DAF at a financial institution, making smaller donations while at the same time creating a flexible option to give to the charity of the client’s choice at their convenience, resulting in maximizing both the tax advantage and the charitable contribution.
2. Selling assets before year-end
If a client is considering selling assets such as stocks or real estate, they could consider doing so before the end of the year.
This move will generate additional income that can then be used to offset more significant donations strategically. In other words, reducing their overall tax liability.
3. Using a corporation to donate
If the client owns a business, they could consider donating through it because corporations are not subject to the AMT.
This offers a tax advantage by allowing them to deduct the total donation amount from their corporate taxable income while simultaneously demonstrating how their company’s values align with the charitable organization. Once again, it shows a positive impact beyond the tax benefits.
Charities need financial support
The reality is people can’t give to every cause, and funding gaps are growing in periods of higher interest rates and inflation. In turn, smaller charities are being hurt.
As the year draws to a close, Canadians want to help and give to charities aligned with their values. Yes, there will be frustration with the diminished tax benefits for high-income individuals, but this frustration will give way to the importance of the cause they can impact.
Given the rising cost of living, among 20 per cent of Canadians are currently using charitable services to meet essential needs, according to a recent CanadaHelps poll conducted by Ipsos. More than two-thirds (69 per cent) said it was the first time they have needed access to charitable services for necessities such as food and shelter.
The needs are genuine, and charities need financial support.
Overall, the attractive tax incentives for most Canadians are still in place, and once again, it isn’t the primary reason we give. We give because we care, and we want to make a difference.
Pattie Lovett-Reid is a certified financial planner and brand ambassador at CanadaHelps in Toronto.