As we move toward the end of the year, we approach the season of giving. Many Canadians increase their charitable giving during this period. However, not everyone is maximizing their giving in the most tax-efficient way. Whether it’s a continuation of donations made throughout the year, or an initial donation, there are several strategies to consider when donating prior to the end of the year.
Maximize the value of donation tax credits
The first $200 of donations you claim on your tax return receive a lower donation tax credit rate than donations claimed above $200 (except in Alberta). To limit donations subject to the lower $200 credit rate outside Alberta, consider bringing forward donations planned early in the new year and make them prior to December 31st in order to combine them onto this year’s tax return. You can also maximize the amount above $200 by combining onto a single tax return donations made by you and your spouse or common-law partner, and carry forward unclaimed donations made in any of the prior five years. For Alberta residents, spouses and common-law partners should split donations in order to maximize the amount each claim under $200.
The federal donation tax credit is enhanced if your income is in the top tax bracket. Rules vary by province, but there may also be an increase to the provincial donation tax credit based on your income. If this is a high-income year, consider donating prior to the end of the year to take advantage of the potentially higher donation tax credit available to you.
Review your investment portfolio and donation opportunities
An additional tax incentive is available where publicly traded securities, such as stocks and mutual funds, are donated “in-kind” to charity. When the security is donated “in-kind”; any accrued capital gain is realized, however, the taxable portion of the capital gain is reduced from 50% to zero. Consider donating securities with large accrued capital gains, as opposed to cash, to enhance tax efficiency. You benefit from both the donation tax credit for the value of the security donated and eliminate the capital gains tax.
You may hold securities that are in a loss position, and you may wish to realize these capital losses for tax planning purposes to offset any capital gains you may have realized in the year. Donating the security to charity will realize the capital loss and generate a donation tax receipt, providing multiple benefits for your year-end tax planning.
If you have employee stock options for publicly traded securities, special tax provisions can exempt the taxable benefit resulting from the exercise of the option if the shares are subsequently donated to charity. After exercising the options, the shares, or the cash proceeds, must be donated within specified time limits to qualify for additional tax incentives. Planning, in collaboration with your IG Consultant, should be completed well in advance of the exercise of the options and any donation. The custodian of the options should be contacted to help coordinate the donation to your chosen charity. The applicable tax provisions are complex, and there may be limitations. Obtain tax advice specific to your circumstances. If you wish to donate securities before the end of the year, don’t wait until the last minute as additional time may be required for the financial institution and charity to process the request.
Note that significant changes to the alternative minimum tax (AMT) system will come into effect on January 1, 2024. These include increasing the capital gains and stock option benefit inclusion rates along with a decrease in the charitable donation credit in the AMT calculation. Although these changes will affect individuals in higher tax brackets, they should be considered when making decisions related to realizing significant capital gains, realizing stock option benefits, or making larger charitable donations. You should discuss the AMT changes with your IG Consultant and your tax advisor when considering these strategies.
Time TFSA withdrawals used to make donations before year-end to restore contribution room quickly
You may wish to withdraw funds from your TFSA to fund a charitable donation. A TFSA withdrawal is tax free, however, contribution room will not be restored until January 1st of the year following the withdrawal. Plan to make your TFSA withdrawal prior to the end of the year so that your TFSA contribution room is restored on January 1st of the following year. This gives you the extra flexibility to re-contribute amounts to your TFSA in the new year and utilize donation tax credits on this year’s tax return.
Keep track of donation receipts
Often donation receipts are received immediately rather than being distributed in the new year. These receipts may be issued physically or by email. As you receive your donation receipts throughout the year, keep a record and file them. This will make it easier to locate these receipts when it’s time to file your tax return.
Establish a donor-advised fund
A donor-advised fund can be beneficial in any charitable giving strategy. You can setup an account, name it as you so wish, and receive the tax benefits from donations. Assets can grow on a tax-exempt basis; and you retain control by recommending investments, grant amounts, and recipient charities.
You may wish to give to charity before year-end but have not yet decided which causes to support, and a donor-advised fund may provide an appealing solution.
Consider setting up a donor-advised fund with the IG Wealth Management Charitable Giving Program - a partnership between IG Wealth Management and the Strategic Charitable Giving Foundation. The program can help you create a lasting legacy by facilitating grants over an extended period or in perpetuity to the charities you choose. If desired, your family members can assume responsibility for recommendations on the account after your death or incapacity, establishing a multi-generational tradition of philanthropy. Discuss with your IG Consultant how you and your family may benefit from creating a donor-advised fund.
As you can see, there are many considerations when deciding to give to charity. It is important to seek advice to help navigate these issues and maximize benefits both for you and the causes you care about. For more information on charitable giving and how it fits into your plan, speak to your IG Consultant.