Charitable giving may not be at the top of the list of items we talk about during client meetings. But perhaps it should be, as there are several ways we can help clients by providing them with the information they need to maximize the associated tax benefits of their charitable gifts.
Let’s look at three specific areas in which we can add value in the field of charitable giving: the new first-time Donor’s “supercredit,” “tax-gain donating” and strategic pre-gifting prior to death:
First-time donor’s supercredit
Although most of your clients likely donate annually and would not be considered “first-time donors,” they may have children who have just graduated from school and have never yet made — or at least claimed — a charitable donation.
To encourage “new” donors to give to charity, this year’s federal budget introduced the temporary first-time donor’s supercredit. The supercredit takes the form of an additional 25% non-refundable tax credit for a “first-time donor” on up to $1,000 of donations.
A first-time donor is someone who hasn’t claimed a donation credit after 2007. For married or common-law partners, neither spouse nor partner could have claimed the credit in that period. Although first-time donor couples can share the supercredit in a particular year, the total amount claimed can’t exceed the maximum allowable credit.
Under the general rules, individuals can claim a non-refundable tax credit of 15% for the first $200 of annual charitable donations. That tax credit rate jumps to 29% for any donations above $200.
As a result of this supercredit, a first-time donor will be entitled to a 40% federal credit for total donations of $200 or less in a year and a 54% credit for total donations of more than $200 up to $1,000. Of course, provincial donation credits are also available. Only cash donations qualify for the supercredit as opposed to donations of property “in-kind.”
The supercredit is available for donations made on or after March 21, 2013. It can only be claimed once in either 2013 or any year until 2017.
Although you already probably devote a portion of time during your yearend client meetings discussing tax-loss selling, how many of us have discussed what I like to call “tax-gain donating?”
With this, I’m referring to the tax rule that states that if you donate appreciated publicly-traded shares, mutual funds or segregated funds “in-kind” to a registered charity or foundation, you not only get a tax receipt equal to the fair market value of the shares or funds donated, but you also avoid paying taxes on any of the accrued capital gains.
So, how does tax-gain donating work? As part of your yearend review, rather than focusing exclusively on any “losers” in your clients’ portfolios, disposing of them prior to yearend to trigger capital losses, why not also take a look at your clients’ “winners” to see if there’s a charitable opportunity waiting to be seized?
Strategic pre-gifting prior to death
Finally, many clients with substantial wealth plan to give a considerable portion of it to charity when they die. The problem with this strategy, from a tax point of view, is that very often, the donation receipt is effectively wasted as the individual doesn’t have enough income in the year of death and the prior year to soak up the donation credits associated with a large charitable gift.
For example, if your client leaves $1 million to charity upon her death, she must have at least $1 million of income in the year of death or the prior year to fully utilize the value of the donation receipt. Let’s say the client dies with most of her wealth in a non-registered account with minimal accrued capital gains and a tax-free principal residence. In that case, the income in those two final years can be minimal and a $1 million donation tax receipt is of little value.
Instead, a better strategy for such a client may be to strategically make donations of excess capital not needed for consumption and earmarked for charity over a number of years prior to death. This way, each year’s donation receipt can be used to offset taxes payable on income such as required minimum RRIF withdrawals, CPP and OAS income.