There are myriad charitable giving strategies available to your clients that will allow them to donate to their favourite charities in a tax-efficient manner. But before you can make any recommendations, it’s key that any strategies fit into each client’s larger financial and life goals.
“I think of it first and foremost as embedding charitable strategies into the financial and estate planning discussion,” says Malcolm Burrows, head of philanthropic advisory services at Scotia Private Client Group. “If an advisor knows his or her client — knows what’s important to the client — he or she will see the clues of what strategies to recommend.”
Initial discussions will usually revolve around the client’s values and the causes that are near and dear to them, charitable giving experts suggest. The next step is to determine whether the client is more inclined to make donations during his or her lifetime, or at death as part of an estate plan.
“In many cases, it’ll be a bit of both,” says Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc.
Giving to charity as part of an estate plan is very appealing to individuals who are looking for a way to minimize the anticipated tax hit to the estate.
“The terminal tax return may generate a significant tax bill, because of the deemed disposition of your assets, and because money coming out of an RRSP or RRIF is taken into income,” says Brad Offman, vice president of strategic philanthropy at Mackenzie Financial Corp. “Making a charitable gift by including a charity as a beneficiary of your will, or the beneficiary of an insurance policy, can dramatically reduce that bill.”
One of the most common and popular strategies for charitable giving is the gifting of publicly traded securities, which provides a double tax advantage. The first advantage, of course, is the donation tax credit for the value of the security. The second advantage is the elimination of any tax on the gain in the value of the security.
The strategy can still work with the donation of shares that have declined in value, because the donor receives the donation tax credit and can still claim the capital loss. That loss can be carried back, up to the three previous tax years, or carried forward indefinitely.
It is also possible to donate any shares bought through the exercise of an employee stock option, or the net cash proceeds of a stock option exercise, as long as the donation is made within 30 days of the exercise.
“The key thing here is the flexibility of either donating shares in kind or just the net cash proceeds,” Burrows says.
It is possible, as well, to use insurance policies as part of a charitable donation strategy, either as a gift during a client’s lifetime or at death, as part of an estate planning strategy.
If the policy is donated during lifetime, the donor is entitled to a tax donation credit for the cash surrender value of the policy. If the donor decides to keep paying the premiums on the donated policy, he or she will also receive a donation tax credit for those premiums.
An individual may also name a charity as a beneficiary of a policy. The donor would be entitled to a donation tax credit in the year of death equal to the amount of the proceeds of the policy.
An individual may also make a donation in kind – perhaps a delivery truck for a charity, or medical equipment for a hospital – and receive a donation tax credit in the amount of the fair market value of that object.
Of course, charities always appreciate receiving cash as a donation: “There’s no question as to its value, it doesn’t have to be liquidated, or stored anywhere. It’s pretty simple,” Cestnick says.
If an individual is expecting a big jump in income in the coming year, perhaps because of an expected bonus, but is looking to make a significant cash donation in the current year, he or she could consider borrowing the money for the donation, and getting the tax credit, then repaying the loan in the following when the bonus is received.
“People often don’t think about that, but that’s something they could do,” Cestnick says.
This is the second article in a three-part series on charitable giving.
On Friday: Understanding charitable giving structures.