Five ways to take advantage of tax benefits when donating to charity

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Most Canadians have contributed to a charity or not-for-profit organization this year despite a challenging economic environment, high inflation and rising interest rates.

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Indeed, 71 per cent say they have contributed, primarily by giving money (51 per cent) or making a physical donation, such as clothing, household items or food (48 per cent), according to a new Canadian Imperial Bank of Commerce poll conducted by Maru Public Opinion. The top reason given by those who didn’t donate was that they couldn’t afford it (60 per cent), while only 22 per cent cited distrust in how charities used financial contributions.

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Most donors prefer to support local causes and actively seek out charities where they think their donations will make a difference. Social-service (33 per cent) and health organizations (30 per cent) top the list, followed by animal welfare and wildlife preservation charities (21 per cent), child and youth support (18 per cent), local and international reduction of poverty charities (18 per cent), and religious organizations (18 per cent).

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But of highest relevance to this columnist is that the poll found most Canadians lack a solid understanding of the tax benefits associated with charitable contributions, particularly those related to donating publicly traded securities.

The survey found that just 42 per cent have a strong understanding of the tax benefits associated with making charitable donations, yet 51 per cent said the ability to receive a tax credit increases the likelihood they will donate.

Only 31 per cent said they are aware of the tax advantage in donating publicly traded securities “in-kind,” and just seven per cent have made this type of donation. Perhaps not surprisingly, higher-income Canadians were almost twice as likely (12 per cent) to make donations of appreciated securities.

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With this poll data in mind, here are five things to consider before Dec. 31 to make the most, tax-wise, of your charitable donations in 2022.

Understand the tax benefits of donations

Giving cash, either by cheques, credit card or online payment, is straightforward and, as with any type of donation, allows you to receive a tax receipt to claim both federal and provincial non-refundable tax credits.

On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The credit rate jumps to 29 per cent for cumulative donations above $200 (or 33 per cent if you have income subject to the top 33-per-cent federal rate, which is income of more than $221,708 in 2022). Parallel provincial credits work similarly, providing most Canadians with a minimum combined federal/provincial tax credit worth at least 40 per cent for donations above $200 annually.

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Donate appreciated securities in-kind

In-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity give you a tax receipt equal to the fair market value (FMV) of the securities or funds being donated, and allow you to avoid paying capital gains tax on any accrued gain.

A similar rule applies to the donation of securities obtained through the exercise of employee stock options. You may be able to avoid paying tax on employee stock option benefits by donating the obtained securities in-kind to a charity within 30 days of exercise.

Donate depreciated securities

To date, 2022 has not been kind to equities, making December the ideal time for tax-loss selling. An alternative may be to consider donating those securities with accrued capital losses to charity. You’ll get a receipt for the FMV of the shares being donated, and you can use the capital loss triggered on the donation to offset any other capital gains realized in 2022.

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Keep in mind that unlike appreciated securities, you don’t actually have to donate your loss securities in-kind to use the loss. You can sell them and then donate the cash.

Any unused net capital loss in 2022 can also be carried back up to three years (or carried forward indefinitely) to be applied against taxable capital gains in those years. Perhaps it’s worth taking one last look at your 2019 tax return to see if you reported any capital gains that year, since 2022 is your last chance to carry back a loss to that year to recover taxes paid on those gains.

Donate RRSP/RRIF withdrawals

Any funds withdrawn from your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) are taxable in the year of withdrawal at your marginal tax rate. Depending on your province and tax bracket, donating your RRSP/RRIF withdrawal to charity can often result in a donation receipt worth more in tax credits than the tax you will face on that withdrawal, which may reduce tax on other income.

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Consider a donor-advised fund

Finally, consider establishing a donor-advised fund (DAF) as an alternative to setting up your own private foundation. DAFs are useful if you’re not quite sure where to donate this year, but still want to claim a charitable tax credit for 2022.

DAFs are offered through some public foundations, such as community foundations or those affiliated with major financial institutions or investment management firms. They allow a donor to set up a fund within the larger, public foundation.

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The donor opens their fund by making a gift of cash (or appreciated securities) to the DAF and gets an immediate donation receipt. The funds can grow inside the DAF tax free, and each year the donor can recommend distributions (typically a minimum of five per cent of the average FMV of their fund each year) to be made from the DAF to any of the 86,023 registered charities or qualified donees in Canada.

The biggest advantage of a DAF is that the donor doesn’t have to worry about the administrative details of running a private foundation, or any record keeping. The foundation will process all donation requests and transfer the funds to the charities chosen, as well as track the DAF and provide regular updates on the fund’s performance.

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A DAF also provides confidentiality. Whereas you can look up all the details and financial information of any private foundation on Canada Revenue Agency’s website, if you establish a DAF, your individual fund information, including that you even have a DAF, is kept private and is not searchable by the general public.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

Note: The CIBC survey was conducted by Maru Public Opinion, using its sample and data collection experts at Maru/Blue, on Nov. 28-29, 2022, among a random selection of 1,515 Canadian adults who are Maru Voice Canada online panelists. The data was weighted to match the population Census data. For comparison purposes, a probability sample of this size has an estimated margin of error of +/-2.5 per cent, 19 times out of 20.

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