Charitable Giving: A Win-Win Situation
By: Marc Andre Castonguay CFP
Many of you have, at one point, given money to a charity. While it feels good to know you are contributing to a worthy cause, there are also fiscal benefits to being generous.
When you donate money to a registered Canadian charity, you are eligible for federal and provincial tax credits. On the first $200, the federal credit in 2006 is 15.25%, and it moves up to 29% for each additional dollar. So, if you donate $300 to a registered Canadian charity, your federal tax credit alone will be $59.50 [(15.25% x $200) + (29% x $100)]. Therefore, the total cost of your $300 donation is actually $240.50 and that's before the provincial tax credit. You may also include donations made during the last 5 years for which you have not claimed a credit yet. The bigger the amount, the bigger the tax credit! However, the government does limit the amount you can claim to 75% of your net income.
Many people will donate cash but there are other financial instruments that are eligible for the charitable donations tax credit and offer additional advantages.
Life insurance: give more, pay less
You can donate the death benefit of a life insurance policy and still benefit from the tax credit each year. To make this possible, the charitable organization is the owner and the beneficiary of the life insurance policy and you are the life insured. You will receive a tax receipt for the premiums you pay each year. Not only will you benefit from the tax credit, which reduces your cost, but you will only pay a fraction of the amount that will actually be donated to the charity.
r example, let's say a 55-year-old non-smoking man takes a $50,000 whole life policy payable in 10 years. The charitable organization of his choice is both the owner and beneficiary of the policy. If the annual premium for this policy is $1,850 and the individual claims his tax credit each year, the actual annual cost is $1,341 after claiming the federal tax credit and will drop lower after deducting the provincial tax credit, which varies by province. Therefore, over 10 years, the actual total cost will be lower than $13,410 for a donation worth $50,000.
Publicly traded stocks
If you have a portfolio of publicly traded stocks and you would like to sell them to make a cash donation to your favourite charity, there's a better way to proceed. The problem with selling those stocks is that it may result in a taxable capital gain. Since May 2nd, 2006, you may donate those stocks directly to a registered charity and the capital gains arising from this disposition are exempt from taxes. Not only will you avoid paying taxes, you will receive a tax credit for your donation. It truly is a win-win situation for you and the charitable organization!
These a just a few ways you can help your favourite charity while collecting the tax savings. Talk to your CFP professional about planned giving to see what strategy best suits you.
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