By Simon Diotte
If you’re aged 50 or older, there are strategies that can optimize the value of your donations—and of your tax credits
Health, research, the environment, education, poverty, and more…the needs are many, while resources are limited. It’s no wonder that charities ask for our help. Yet, thanks to the effects of inflation, donations plum- meted by 40 per cent in Canada in 2023, according to a recent Deloitte survey. That means our contribu- tions are more important than ever.
Before making a major donation, however, you need to find the right way to do it, as some methods are more advantageous than others when it comes to supporting a charitable
organization. At the same time, you need to make sure that you have the financial means to give without negatively affecting your retirement. “If you want to make a major gift, first talk to your financial planner,” says Charles Rioux Rousseau, an adviser in Development and Quality of Practice at the Institute of Financial Planning.
Another useful thing to know: the older you get, the more generous the tax rules are to donors. “Tax rules are designed to encourage philanthropy,” says Yannick Lemay, a tax expert at H&R Block.
Here are four strategies to explore when it comes to charitable giving.
1. Life Insurance
When you buy life insurance, you can give money to a charitable organiza- tion in two ways. The first is to name the charity of your choice as the bene- ficiary. After you die, the organization will receive the death benefit and pro- vide a tax receipt for this contribution, a credit that will benefit the estate.
The second, more advantageous approach is to transfer the life insurance policy to a charity while also naming it the beneficiary. This approach turns your insurance premiums into donations, which gives you tax credits. “However, you need to be aware that transferring a life insurance policy to a registered charity is irrevocable,” Lemay warns. “You can’t change your mind along the way, as you will no longer be the policy owner.”
2. Life Anuity
If you have substantial excess capital that’s not in a registered plan, you can make a major gift to a charity in exchange for a life annuity. The beauty of this is that it gives the donor a fixed annual income that’s guaranteed for life. “For this type of gift, organizations generally require a contribution of at least 20 per cent of the annuity principal,” Lemay explains. For example, let’s say you give $500,000 to the charity of your choice. Of this amount, $100,000 (20 per cent) is a donation, and the rest buys the life annuity.
This kind of donation has several advantages. First, it allows you to receive a tax credit for your contribu- tion. Second, part of your income from this annuity will be partially or completely tax-free, depending on your age. As a general rule, the older you are, the less tax you’ll have to pay. “Third, you will no longer have to worry about managing your investments because you will have a stable, guaranteed income,” Lemay says. Just remember: as with transferring a life insurance policy, a charitable annuity is irrevocable.
3. Charitable Remainder Trust
This legal instrument allows you to give a charity not only money but also other types of goods, such as property and mutual funds. In return, the donor gets the income from the trust for as long as they live. When they die, the trust ceases to exist and the charity acquires all the assets.
A trust is set up by a notary or lawyer, which involves significant costs. It provides tax credits in your lifetime related to your gift, even though it will be made in the future. An actuary assesses the fair market value of your gift based on several factors to determine the tax credit to which you’re entitled. “Generally speaking, the older you are, the larger the tax credit,” Lemay says. Here again, you can’t change your mind once the trust is set up.
4. Stocks
If you have publicly traded securities, mutual funds, or bonds that you no longer need, it’s better to wait before selling them. “You can give them directly to a charitable organization,” Rioux Rousseau says. This strategy has three major advantages. First, you won’t pay tax on any capital gains, which are taxable at 50 per cent. Second, you can make a larger gift than if you had given the proceeds of your securities minus the capital gains tax paid. Third, you’ll get a tax credit equivalent to the fair market value of the assets, maximizing your tax savings.
Keep in Mind…
To be eligible for tax credits, you must donate to charities that can issue official receipts. To find them, see “List of charities and other qualified donees” at canada.ca; the list is updated regularly by the Canada Revenue Agency. The federal and provincial/territorial governments of Canada aren’t on the list because they’re automatically recognized.
