From the Thursday, November 1, 2007, Wealth Management, Retirement, Giving, section of the Toronto Star, page U4, is the following article on options on how to donate money to charity:
Charity
THE JOYS OF PAYING IT FORWARD
Donating money can reduce your tax burden while putting your investment to good use
Naomi Carniol
Special to the Star
Wealth management is often about how to grow your money. So this may seem counter-intuitive, but experts say giving money away can help boost your bottom line.
Donating to a charity can cut the amount of income tax you owe. The size of the reduction depends on how strategic you are when it comes to giving. An important part of wealth management is figuring out how much to give, when to give it and what kinds of donations to make, experts say.
In Canada, there are at least three ways to donate to charities. Each has its own benefits.
The most obvious route is to write a cheque to a charity. A registered Canadian charity should then issue a receipt to you stating the amount you donated. You can use that receipt to receive a credit towards your income tax.
The credit won’t be for “the full amount but for an amount equal to your marginal tax rate,” says Anthony Maiorino, vice-president of wealth management services at RBC Dominion Securities.
He gives an example. “If you are in a high marginal tax bracket, then a $100,000 donation might translate into a $47,000 tax credit.” Depending on your income, a $100,000 donation may not eliminate all of your income tax, but it could be used to eliminate up to 75 per cent. In certain cases, it may eliminate all of your income tax.
He explains further: “You are generally permitted to claim donations equal to 75 per cent of your net income. At lower income levels, a donation of 75 per cent of your income will eliminate all your taxes owing for that year. However, as your income increases, a donation of 75 per cent of your income may not eliminate all your taxes owing.”
Donations you don’t claim in the current year can be claimed on a return for any of the next five years, he adds.
Instead of writing a cheque to the charity, you could give the charity appreciated shares. In May 2006, the federal government stopped taxing capital gains on publicly listed securities donated to public charities. Last March, the government extended the exemption to shares donated to private foundations.
The change has encouraged some Canadians to be even more generous than before. “Most people are giving larger amounts because it’s so tax-effective to do that,” says Marvi Ricker, vice-president and managing director of philanthropic services at BMO Harris Private Banking.
Here’s how it works. Let’s say you want to donate $100,000 to a charity. Twenty years ago you bought 1,000 shares of a company at $50 each. Today those shares are worth $100 a piece. If you sold the shares, you’d have to pay taxes on the $50,000 difference. After taxes, you’d no longer have the full $100,000 to donate.
Today there’s another option. Instead of selling the shares, donate them directly to the charity. The charity receives the full $100,000 donation. You don’t pay taxes on the shares’ capital gains. On top of that, you get a receipt for your donation that can lower your income tax. “It’s really a win-win-win,” says Maiorino.
Aside from writing cheques or donating shares directly to an established charity, there’s another route available. Set up your own foundation.
Like a registered charity, a foundation can accept donations in cash or appreciated shares. It can also help lower your taxes.
When you open a foundation, you’ll receive a receipt for those initial donation upfront. If it’s a year when you’ve come into a substantial amount of money, the receipt can help cut the income tax you owe. Donate shares and you decrease the tax you pay on capital gains and your income tax.
Both Royal Tank and BMO Harris Private Banking help clients establish their own private foundations. They also provide clients the opportunity to contribute to large public foundations.
For example, at RBC Dominion Securities, clients can open their own foundations set up under the larger foundation of Charitable Gift Funds Canada Foundation. Clients can give their foundation a unique name. They can contribute cash or securities to their foundation, which is administered by the larger public foundation.
RBC Dominion Securities provides investment management and account administration for each client’s foundation. “We’ve had a lot of clients in the last year who have opened these purely for tax purposes,” Maiorino says.
Starting up a foundation or donating to an already established charity can both result in tax savings. But there is at least one key difference – the level of a donor’s involvement.
When a donor writes a cheque to a charity, “that’s the end of the relationship,” Ricker says.
With a foundation, the donor can be more involved in shaping exactly where his or her money goes, she says. It’s “a more focused and ongoing activity.”
Ricker speaks to clients about their values, experiences, interests and goals. These conversations form the basis of a mission statement for the foundation. That’s the first step in helping a foundation develop a strategy, she says.
While the word foundation is often associated with last names like Ivey or Rockefeller, foundations aren’t only for the wealthy – especially if you’re setting up your own foundation under a larger public foundation. In that case, if you donate $5,000 to different charities each year, it might make financial sense to setup a foundation and plunk five years worth of donations into a foundation. “That is going to help reduce the amount of tax you pay this year,” Maiorino says.
Canadians are already a generous people. In 2005, they donated more than $7.9 billion, according to research by Imagine Canada.
Asked why they donated, 89 per cent of donors interviewed said they gave because they felt compassion towards those in need.
Eighty-six per cent said they gave because they wanted to help a cause in which they personally believed.
Wanting to help those in need is admirable, but there’s no reason why you can’t be generous and tax savvy at the same time, Maiorino says.
It’s just about looking at giving “from a different perspective.”
An accountant or investment adviser helps ensure your generosity not only helps make the world a better place, but also reduces the sting of the taxman’s bite.
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