6 questions to ask yourself about charitable giving

Canadians are a generous bunch. In fact, according to the latest available data from Statistics Canada, fully 84% aged 15 and over have at one time donated to charitable and nonprofit organizations.

The average donation is about $446 per year, and in total, we give $10.6 billion every year.

Many of us do this because we deem it an important life goal. Still, charitable giving is a financial transaction. And that’s where things get complicated. What’s the best way to give? How will a bequest affect your cash flow and finances? What about taxes?

These are important questions, and the answers can make a dramatic impact on your ability to fund charitable goals.

So ask yourself these important questions before you give. Taken together, the answers will help you assess your giving goals.

What am I trying to accomplish?

Many people are spontaneous about giving—they feel motivated to give, and do so without thinking much about it. There’s nothing wrong with this approach but giving can be strategic as well, with a carefully crafted plan that accomplishes a specific charitable purpose or goal.

Ask yourself what causes you’re attracted to. Where do you want to make an impact—at home, or overseas? How would you measure the success of a donation? How exactly do you want to make the world a better place? The more you understand where your desire to give back comes from, the better able you’ll be to match charitable intentions with appropriate actions.

When is the best time to give?

There’s no right or wrong answer—it depends on your goals. Some people want to make charitable gifts while alive, so they can see the impact firsthand. Others want to ensure their quality of life isn’t diminished, so they make donations through their wills.

Both are viable options, but your decision may well affect how you structure your gift. Some giving strategies are better suited to donations made in the here-and-now; others work better after death.

What are the implications of this gift on my finances?

Nobody intends to damage their finances by giving away too much—but it can happen. So it’s worth going through a few ‘what if’ scenarios to make sure giving won’t cause unintended financial consequences.

When giving via your will, pay particular attention to how those gifts impact your heirs. More money to charity means less money for them. Perhaps that’s less of a concern if your children are older and financially self-sufficient. But it’s worth thinking about.

How much can I deduct?

One financial advantage of charitable gifts is the tax benefits from both federal and provincial governments. While such tax relief isn’t the sole reason people give, you should familiarize yourself with the rules.

The federal charitable tax credit rate is 15% on the first $200 of your donation, and 29% on anything above that – to a maximum of 75% of your net income in any given year. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.

In any one year, you can claim donations made by December 31 of the applicable tax year, as well as any unclaimed donations by you or your spouse made in the previous five years.

Starting in 2013, the federal budget introduced a temporary non-refundable tax credit to supplement the usual tax credit derived from charitable donations. This new credit adds 25% to the rates used in the calculation of the tax credit for up to $1,000 of monetary donations.

So, a first-time donor will be allowed a 40% federal credit for donations of $200 or less, and a 54% federal credit for the portion of donations over $200 but not exceeding $1,000.

While calculating tax credits on simple cash donations is fairly straightforward, some of the more complex giving strategies can affect the calculation in different ways.

What giving structure should I use?

You could simply get our your chequebook, but there are many ways to make a charitable gift. Depending on your personal circumstances, one giving strategy or structure may make more sense than another, so it’s a good idea to review your options.

One factor to consider is the size of your gift. If you only plan to give a few hundred dollars every year, then making a cash gift is a perfectly viable option. If you’re planning to make a more substantial donation, however, you’ll want to investigate more complex giving strategies — life insurance or even private foundations come to mind here.

Such strategies give you tremendous flexibility over the timing of your gift, and come with significant tax advantages.

One structure that’s becoming increasingly popular is the donor-advised fund. It offers similar flexibility to a private foundation, with much lower fees and fewer hassles. It’s a good option for people committed to more strategic giving, but who want to maintain the ability to change the size and scope of their donations going forward.

Which charity (or charities) should I give to?

With more than 85,000 registered charities in Canada, there are plenty of options. That’s not to say all of them are equally well-managed, or equally capable of achieving their charitable goals.

Before you make a donation, make sure the charity you’re considering is worthy.

Ask questions of the management. Make sure the charity is seeing tangible progress with its projects, rather than just throwing money at a problem. And always check with the federal government’s listings of registered charities to ensure the one you’re considering is legitimate.