Beyond cash: Considering alternative avenues for charitable contributions

(November 2005) According to Statistics Canada, 5.8 million Canadians made charitable contributions in 2004 to the tune of $6.9 billion, a 6.3% increase from 2003. These donations help to support in excess of 80,000 registered charities in this country, which include charitable organizations, churches, hospitals, medical research foundations and museums. Registered charities provide vital services such as disaster relief, care of the elderly, animal shelters, counseling services, environmental protection and food banks.

With contribution levels this high, and continuing to rise, chances are many of your clients are already making significant contributions to the charities and causes that are important to them. The question for you as an advisor is whether your clients — and their favorite charities — are enjoying the greatest possible benefit from these contributions?

As an incentive for individuals to make charitable contributions, federal and provincial governments provide tax credits to individual donors who make gifts to registered charities. The tax credits for charitable donations are quite generous, as the tax credit rates for annual donations in excess of $200 are equal to the highest applicable federal and provincial tax rates. This applies even if the donor’s income would not be subject to the highest marginal tax rate. For example, if an individual in British Columbia made a $500 donation to a charity, the total value of the tax credits the person would receive is $175. Thus, the after-tax cost of the $500 donation to the individual is only $325.

While charitable giving is often associated with donations made through door-to-door canvassing or telephone solicitations, financial advisors can play an important role in helping their clients evaluate the many different dimensions of charitable giving. Consider the following strategies to help your clients, and the charities they support, gain the most possible value from their charitable giving:

The Bay Street Baron: An investor who has enjoyed significant growth in their portfolio value may want to donate shares to a charity. Tax Tip: The gifting of the shares to a charity will create a tax liability related to the capital gains incurred, but it is substantially reduced relative to the usual capital gains incurred. Normally, 50% of the capital gains are taxable income, however, when the shares are donated to a charity, only 25% of the gains are taxable.

Art aficionados: Art collectors can donate their art collection to a public art gallery or to a museum. While the public will enjoy access to the once-private collection, the art collector can be confident that their cherished pieces are well looked after. Tax Tip: Normally the recipient of the gift will engage a professional art appraiser to determine the value of the artwork. The gifting of the art is a disposition for tax purposes and will create a capital gain. However, if the gift is deemed to be a “certified cultural property,” the gains are not taxable. As well, the donor can receive a tax deduction for the full value of the art.

A continuing legacy: Individuals can support a charitable organization after death by making a donation through their will. Alternatively, a charity can be named as the beneficiary of a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). Tax Tip: When an individual designates a charity as the beneficiary of an RRSP or RRIF, the value of the RRSP or RRIF is taxable to the deceased in the year of death, but the tax liability can be offset by the tax credits that are created.

Insuring success: A charity can be designated as the beneficiary of a life insurance policy. The individual pays the premiums for a life insurance policy with the charity as the designated beneficiary. Tax Tip: If the ownership of the policy is transferred to the charity, the premiums paid by the individual are considered to be charitable contributions, so donation receipts will be issued to the donor on an annual basis. The charity receives the death benefit from the policy upon the individual’s death.

Fostering higher education: Individuals may choose to create an endowment at a university that would be used to provide scholarships to deserving students. Tax Tip: The individual can donate a lump sum to the university, for which they will receive a tax deduction. Typically, the university will invest the gift on a permanent basis and use the investment income to carry out the agreed-upon mandate.

The budding politico: If your client is politically inclined, be sure they are taking advantage of the generous tax deductions for donations to political parties. Tax Tip: The federal tax credit for political donations is 75% for the first $200, 50% for the next $300, and 33.3% for the next $525.

Making a major contribution: When a substantial gift is made to a charitable organization, the donor may often be able to direct how the gift is to be used by the organization, or have access to naming opportunities associated with the charity. For clients making a substantial contribution, it may be worthwhile to explore these opportunities in recognition of their generosity.

There are many charitable giving strategies that people can pursue, many more advanced than just turning over cash. The desire among wealthy Canadians to make legacy-style donations is growing and financial advisors should recognize this as an opportunity to enhance their value to their clients.

Dave Ablett is manager, advanced financial planning support for Investors Group and he is an expert in charitable giving, taxation and retirement planning.

(11/21/05)