At this ‘gift-giving’ time of year, you may feel a special urge to share your good fortune with others.  That’s terrific: charitable gifts are always worthy gifts – and the good news is you can make them worth even more when you use tax-smart gifting strategies that allow you to support your charities and ‘present’ yourself with enhanced tax benefits at the same time.

Tax-smart gifting strategies work because the federal and the provincial governments gives you tax credits as an incentive for donating to charity.  Donations of up to $200 to qualified charities generate a 16% federal tax credit; donations over $200 earn a 29% credit, worth between 42% and 47% when you factor in the additional reduction in provincial tax.  

Because charitable donations provide ‘tax credits’ (a reduction of tax owing) and not a ‘tax deduction’ (a reduction of taxable income), you’ll get the same tax reducing effect regardless of your income level.  But, the amount of your yearly donations that can be used to claim the tax credits is capped at 75% of net income (except on a tax return in the year of, or the year prior to, death when donations of up to 100% of a donor’s net income may be claimed).  Any donations you do not claim can be carried forward for up to five years.

By using tax-smart gifting strategies like these you can increase your tax benefit:

·         Consolidate your gifts.           You don’t have to claim your donations in the year they are made.  So, by combining them for up to five years, you can push the total above $200 and take full advantage of the higher federal 29% tax credit and the higher provincial credit.  

Alternatively, because either spouse can claim donations made by both spouses, you can have one spouse claim all donations, which may increase the amount that qualifies for the higher tax credit when the total donations are over $200.

·         Give gifts-in-kind. Instead of donating cash to a charity, you can choose to make a gift of ‘property’ which can include real estate, vehicles, artwork and securities, among other things.  These ‘gift-in-kind’ donations qualify for the same charitable tax credit as cash, based on the fair market value of your gift at the time it is donated.  You must also report any resulting capital gain or loss on the disposition of your ‘gift-in-kind’.  However, when you gift a publicly traded security – such as a stock, bond or mutual fund investment – your donation enjoys a special tax treatment.  You will need to report only one quarter of the taxable capital gain as opposed to the normal 50%. That means you’ll pay just half the tax that would otherwise apply when you dispose of the property, yet your charitable tax credit is based on 100% of the value of your gift and your charity will realize the full value of the gift.   

·         Give the gift of life insurance.            There are three ways you can use life insurance to enjoy tax relief and estate preservation while supporting a charity:

1.       You can take out a life insurance policy and name the charity as beneficiary.  When you die, the full amount of the policy is eligible for a donation credit on your final tax return (subject to the deduction limits that apply in the year of, and year preceding, death).

2.       You can transfer ownership of an existing policy to a charity.  This provides you with an immediate donation credit in the amount of the cash surrender value of the policy at the time the policy is transferred.  And when you continue to pay the premiums on the donated policy, you’ll receive an additional donation credit for each payment.

3.       You can name your estate as beneficiary of a life insurance policy or RRSP or RRIF and make a corresponding bequest to the charity of your choice in your will.  Your insurance policy bequest qualifies for a 100% donation credit on your final tax return or the immediately preceding year’s return.  But this could increase the probate fees payable by your estate, and could subject the gift to other fees owed by your estate. When you name a charity as the direct beneficiary of an RRSP or RRIF, this is also deemed to be a charitable gift at death but avoids probate.

There are other tax-smart gifting strategies that can deliver both immediate and longer-term tax relief and help to ensure your charitable goals are met.  To be sure your charitable gifting strategies are right for you, talk to your financial advisor.