Taxable Advantages of Charitable Donations

Q. I understand that by making a charitable donation, I can reduce my taxable income. I heard that there were some changes to the personal tax rates related to donations in the last federal budget. What are these changes and how can I use them to my advantage?

A. Although most charitable donations are motivated by philanthropic reasons and belief in the receiving charity, there are also income tax incentives for giving. It is important to understand how charitable tax credits work as careful planning can reduce or eliminate income taxes owed during your life as well as when you pass away and benefit the selected charity.

The May 2006 federal budget eliminated the capital gains inclusion rate for donations of publicly listed securities that were acquired with employee stock options and for donations of ecologically sensitive land to a registered public charity on or after May 2, 2006. This means that it is more tax effective to donate securities that have appreciated in value to a charity rather than to sell them, incur the taxable capital gains, and then donate cash to your selected charity.

For charitable donations made by Will, or in the last year of your life, they may be claimed against 100 per cent of net income on your final income tax return. Any unused tax credits can be carried backward to the year immediately preceding the death. In contrast, the contribution limit for charitable donations during your lifetime is only 75 per cent of net income.

A Will can also reduce income tax at death by enabling the executor of the will to distribute assets to the chosen charity in their original form (“in specie”). “In specie” gifts of publicly traded securities, employee stock options, and ecologically sensitive land all receive the reduced capital inclusion rate. This rate was reduced to zero in the most recent federal budget, making it very tax effective to transfer securities “in specie” rather than selling them first and transferring the sale proceeds to the charity. It is vital that the charity’s full legal name be used in the will to ensure the success of the donation.

A charitable donation during your lifetime and in a Will is shaped by your values and personal priorities as income tax incentives only support existing values and priorities. In establishing a charitable giving plan or an estate plan, it is important for you to review your personal experiences and determine whether a charity has touched you. Through consultation with legal and financial advisors, an informed decision can then be made which balances personal and family needs with philanthropic wishes.

Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod,Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).

This article is for information purposes only. It is not a substitute for tax advice. ScotiaMcLeod does offer tax advice, but working along with a Team of Experts we take a complete look at your life to provide a complete financial solution. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.