Charitable giving in Canada: What are the benefits and how to best proceed?
Statistics Canada reported that in 2017 total donations by Canadian tax filers rose to $9.6 billion, up 7.7% from 2016. The numbers are somewhat erratic from year to year but overall, the trend in total donations since 2011 has been going up. A more concerning fact is the consistent decline in the number of donating tax filers which fell by 48,840 (-0.9%) to 5,348,220 in 2017, continuing a trend which started in 2011. This reduction is partly attributed to the age demographic shift and with whom the wealth is concentrated. Specifically, the proportion of donating Canadian tax filers age 65 and older has grown from 24% of all donors in 2007 to 30% in 2017.
Why is charitable giving so important?
Charitable giving serves two very important purposes:
It allows individuals and businesses to reduce the amount of income tax they must pay.
It helps others that are in need or causes that are close to our heart.
Not to discount the importance of tax savings, multiple studies have indicated that helping others is the main motivator for engaging in charitable giving. A study by a University of Oregon professor found that charitable giving can elicit a surge of dopamine and endorphins that can lead to happiness and fulfillment. The same sentiment of feeling happier was experienced in another the study by professors at the University of Missouri – Columbia and the University of California – Riverside.
What are the financial benefits of charitable giving?
In 2019 the federal personal charitable donations tax credit rate was 15% on the first $200 and 29% on the remaining $200, and depending on your province of residence, there is an additional amount raising the overall tax credit towards 50% of the gift. Keep in mind that total donations allowed for credit can only be up to 75% of net income, but excess donation can be carried forward.
Corporations can also participate in charitable giving. Unlike a personal donation, corporations are entitled to a tax deduction for the donation amount against their income. This has the effect of reducing the company’s taxable income and its tax liability. There is no need to claim the full donation in a particular year as donations can be carried forward for up to five years. And life for individuals, a corporation can claim a deduction for charitable donations of up to 75% of net income for the year.
For small business owners who also draw salaries from their business, deciding on whether a donation should be made personally or through their corporation would need to be analyzed based on their unique set of circumstances. Choosing personal versus a corporate donation would depend on many factors such as personal income, the corporation’s income, the type of donation (cash or securities) and a host of other variables.
Less well known to many Canadians is that in certain circumstances, a donation of securities in-kind can be made from a non-registered investment account. This would apply to both personal and corporate donations. Generally, it is much more beneficial to donate appreciated securities rather than cash because the capital appreciation will not be subject to a capital gains tax. So, in years of large capital growth a gift of securities can be worth a lot.
As the Canadian wealth distribution shifts to higher income segments of the population, we are seeing more families setting up private giving foundations. Private foundations are a way of giving back to society and building a philanthropic family legacy in a tax efficient manner. Moreover, with a private foundation, a family will have more control in funding the family’s favorite causes and can demonstrate to younger family members the values that the elders support.
How you can best proceed with charitable giving?
There are many ways in which you can give back to your community and causes that are close to your heart. Moreover, charitable giving can sometimes be complex, but this should not be a deterrent. A financial professional would be in a good position to assist you in evaluating on how best to proceed with charitable giving.