As the end of the year approaches, clients may have questions for their financial advisors about making charitable donations as both a way of giving back to their community and to achieve tax savings.
“A lot of people now have a better idea of generally what their tax liability [for the year] will be,” said Jacqueline Power, assistant vice-president, tax and estate planning and distribution with Mackenzie Investments in Toronto. “Now, they are trying to figure out, ‘How much should we donate in an effort to be able to reduce that tax liability?’”
Individuals can claim a donation tax credit for donations to registered charities of up to 75% of the taxpayer’s income in a year. (In the year of a taxpayer’s death, and for the tax year before, the limit is 100%.)
The federal donation tax credit is 15% on the first $200 of donations and 29% (33% to the extent income exceeds $235,675 in 2023) on amounts above. The provinces and territories also offer donation tax credits at different rates for donations below and above the $200 threshold.
Depending on the jurisdiction, the total federal-provincial credit can represent more than half of the gift amount once total annual donations exceed $200 in a calendar year.
The deadline for making a charitable donation in order to claim a tax receipt for 2023 is December 31.
If a person donates publicly listed securities, they will receive a tax credit based on the value of the shares at that time they’re donated. In addition, any capital gain realized on the disposition of the shares will be free from tax, boosting the tax savings for the donor.
However, as a charity that receives an in-kind donation will need to arrange for the shares to be sold, clients looking to donate publicly listed securities should do so well before the end of the year.
“Sometimes people wait until the middle of December and hope that they’re going to be able to make that in-kind charitable donation and use that credit, and sometimes the timing is just a little too tight,” Power said.
In 2023, the last day to trade Canadian-listed stocks is Wednesday, Dec. 27. Trades executed on Dec. 28 and 29 will settle on Jan. 2 and 3, 2024, respectively.
Certain high-income clients looking to make a large donation might consider doing so before 2024, when the federal government’s proposed changes to the alternative minimum tax (AMT) are set to become effective, Power said.
Under the proposed revamped AMT, only half of the donation tax credit can be applied against the AMT, down from 100% under the current rules. Meanwhile, 30% of capital gains on the donation of publicly listed securities would be included in adjusted taxable income for the purposes of the AMT.
“If there are investors who are trying to decide, ‘Should I make an in-kind donation [this year], should I wait until next year?’, and AMT applies to them, it is likely better for them to make that donation in 2023,” Power said.
The federal government didn’t include proposed changes to the AMT when it tabled Bill C-59 in the House of Commons on Nov. 30. That bill included legislation to implement proposals from the 2023 federal budget and the fall economic statement.
In an email to Investment Executive, a spokesperson for the Department of Finance said the government is “committed to implementing the AMT reform” and is currently reviewing stakeholder commentary on the draft legislation to implement the changes.
Even though the government is unlikely to have legislation in place to implement the AMT by Jan. 1, it “may still have that as an effective date,” said Power in an email following the tabling of Bill C-59. Power said “it’s a guessing game” as to how the government might ultimately proceed.
“If [a client] is philanthropic and worried about the AMT changes and how they affect charitable giving, they may still want to make the donation before year end just to be on the safe side,” Power said.