Giving to causes that align with your values yields one of the best returns on investment for your money. I previously described how to give more effectively to boost your impact and satisfaction. So, giving is an essential financial skill and should be a deliberate part of your financial plan. The other aspect of donating to charity is how to do so tax efficiently. There are charity tax credits, tax deductions, and other tax-saving ways to donate.
Developing a tax-efficient donation strategy means that more money is available to give directly to the causes that you are trying to support. It could even mean more money for you, if done optimally. Yes, the Government does some good things to support our society with your tax dollars.
If you want to leave the Government a tip, then the Tax-Martyr-Blog is down the hall on the left. If you want to become a better financial steward and direct the impact of your financial power, then read on.
Is it a registered charity in Canada?
The first considerations with a donation are whether the charity aligns with your core values and how efficiently the donation translates into impact. The next question is whether it is a registered charity. That means that it is recognized by the CRA as a legitimate organization. You can do a search on the CRA site.
This is important for several reasons. To be claimed on your income tax filing, you need a receipt with the charity’s registration number on it. Importantly, a registered charity must also meet some minimum standards. Basically, they must have an organized governance that ensures that they are doing public good, acting as a charity (not a business disguised as a charity), obeying the law, and using the appropriate people to administer the funds. Essentially, it provides some piece of mind in addition to the tax benefits.
Should I give personally or from my business?
The answer depends on your income level, province, and the amount of the donation. Sometimes, there is a net benefit at low personal incomes to give personally. At higher incomes, the personal tax credits often do not offset the tax bill. In that case, it may be better to donate via your business instead – where the net tax bill is zero.
Whether you have the cash personally, or in your corporation, doesn’t really matter. If it is optimal to give personally, you could pay yourself a bonus or salary. That would be an expense for the business and shift the tax from the business income to you personally. So, you should consider which route is most tax-efficient. To do that, you must understand how personal donations and corporate donations are taxed.
Taxes & Credits for Personal Donations to Charity
When you cash donate personally, you must pay the tax on the income. However, that is counterbalanced by tax credits. So, you could donate more knowing that you will be made whole at tax time as long as you have the cash flow to buffer that in the interim. Or you could give your planned amount and pocket the eventual tax reduction. Unfortunately, tax credits may not fully offset the tax cost depending on the donation size, your income, and your province.
Tax credits are at a fixed rate that is applied against the taxes owed. That rate is set at the lowest tax bracket for the first $200 donated. So, it is like that $200 donation was made from your lowest taxed income. For donations over $200, the 29% Federal tax rate is used for the credit. That is a bonus for those with an income below ~$165K. You could pay tax in the 20% bracket and get a 29% credit. Unfortunately, the other part of the tax you pay is provincial. Some provinces are generous, and others are stingy.
Alberta is the most generous, with a credit higher than the top provincial tax rate. Manitoba, Saskatchewan, PEI, and Nova Scotia are also generous, applying the top rate to donations over $200. Quebec and BC are fair, allowing the top credit rate to be applied against income that was taxed at the top rate. Ontario, New Brunswick, and Newfoundland are stingy with tax credits below their top tax rates.
Donating appreciated stock or other securities.
If you donate appreciated securities, then there is a larger benefit. You do not pay any tax on the capital gain plus you get the full tax credit to deduct against your regular income. This could be stocks, bonds, ETFs, or mutual funds that you donate “in kind” (without selling).
Alternative Minimum Tax Changes for 2024
For really large donations in 2024 and beyond, be aware of the alternative minimum tax changes. If planning a large personal donation of appreciated stock and you have minimal regular income, then AMT could apply. You may want to consider doing it in 2023. If after 2023, then 30% of the capital gain will count as income for AMT calculations. Plus, the personal tax credit on donations when applied to AMT will be cut in half. Seems like a short-sighted punishment of philanthropy, but the Government has already spent the money.
Here are the details. It is unlikely to apply to many individuals. For example, those with a total income under $173K are excluded. Donations in the year of death are also excluded. It is also important to remember that AMT only applies to individuals. Not corporations. Another reason to donate appreciated stock from your corporation if you have that option. More on that later.
If it is likely to apply to you and you want to beat the changes but dispense the money over time rather than all now. Then, a donor-advised fund would be an option.
Charitable donation personal tax credit estimation calculator.
You can see the combined effect of donation type, size, income level, and province in the calculator below. You can change it to your province, donation, and income level to get a sense of your situation. If you have a net tax refund, then it may be best to donate personally (if giving cash). If you are giving appreciated stock, then it is great. However, if you also have appreciated stock in your corporation, there is a super-sized benefit to consider.
Donating to Charity Via a Business
If the personal tax/credit balance is unfavorable, then it is better to donate directly from your business. The best way to do that is a donation of appreciated stock, if you are able. More on that later. Let’s assume that you don’t have appreciated stock or that the receiving charity isn’t set up to accept it. Then you are stuck donating cash.
The good news is that a donation to a registered charity by your business is considered an expense. That means it is deducted dollar for dollar against your business’s income and there is no tax on it. Clean and effective. Just be sure to get an official tax receipt for your accountant to use while preparing your business’s tax filing.
A comparison of donating directly from a business compared to giving a bonus and donating personally is shown below. It uses Ontario tax rates to illustrate for someone with a moderate vs high personal income.
Donation of Appreciated Stock from a Corporation
For cash, whether it is better to give directly from the business or to pay a bonus and donate personally depends on your income level and province. However, if you have appreciated stock in your corporation, then donating that usually wins. Most major charities allow you to donate publicly traded securities “in kind” (without selling them).
What is an appreciated security?
Appreciated stock could be shares in a stock or ETF that has significant unrealized capital gains. For example, if five years ago, I luckily bought shares of Apple, I would be sitting on a big capital gain. If I didn’t rely on luck, and bought a globally diversified index ETF, then I would still have a large unrealized capital gain. Most major Canadian registered charities can accept donations of publicly traded shares.
It is also possible to donate appreciated shares of a private company. However, that is more complicated because you must have the fair market value determined and the charity needs to be able to sell them to get the money.
If you have multiple securities to choose from to donate, pick the ones with the largest percentage of unrealized capital gains. That will maximize the reduction of the corporate tax liability and maximize your personal tax savings too! You don’t have to donate all of your shares of a stock. Just donate the amount that adds up to your planned generosity. For example, if I wanted to donate $10K from my sample portfolio below, I would donate 400 shares of XGRO.
Notice that I have 4 different asset allocation EFTs in the above example. Years down the road, you may have a large gain in your favorite asset allocation ETF. Perhaps, start buying a different one with the same equity:bond mix moving forward. That would give you options to strategically donate from the higher gain holding to live generously and get the triple tax benefit.
The double tax benefit to your corporation.
You get a tax receipt for the full value of the shares donated. That is directly deductible as an expense against your corporation’s income. That can be deducted against investment income (usually taxed at ~50%). The deduction can be carried forward up to five years, if you don’t have that much investment income in one year. If you still can’t use it to get a 50% tax break, you could still apply it against active corporate income (taxed at 12-29%). Either way is a major tax savings.
Plus, there is no tax on the capital gain. One less tax liability in your corporation. But wait, it gets even better!
The massive tax benefit to you. That makes for triple benefits.
The full amount of the capital gain gets credited to your corporation’s capital dividend account (CDA). Normally, when you realize a capital gain, only half goes to your CDA. Your CDA allows you to give a tax-free capital dividend. “Tax-free” is a major tax savings compared to regularly taxed income or dividends. It is the most tax-efficient way to move money out of a corporation.
To give the capital dividend, you must have your accountant file a special election. So, they may charge a fee. That is usually way less than the tax, but you would want to make sure the dividend is large enough to justify the cost. Regardless, donating appreciated stock from your corporation doubles the rate at which you’ll get there!
Giving to Non-Registered Causes
There are plenty of reasons why you may want to give to help others that are not a registered charity. It could be to help a local athlete or event. If considering doing this through your business, then the organization should be arms-length and of no personal benefit whatsoever.
It should also be public and reasonable to defend as promotion. For example, publicly supporting a local athlete or team that you don’t have any family members on might be reasonable. Particularly if health and wellness promotion is part of your practice or making connections to the community improves your business profile. Giving to your kid’s sports team or a club that you are going to use and get a break is probably not defensible. I would want to pass two tests before doing this. First, would be discussing with my accountant and the second would be how this would look as a headline in the news.
Reasonable promotion is considered a business expense. So, at least you would be helping with pre-tax money. The other way to help a non-registered cause is to provide goods or services at a discount. There is no tax-benefit to that, but again it is helping without paying tax first.
Tax Efficient Charitable Giving Decision Tree
Putting together the variables, this is the approach that I take to charitable giving. It combines the financial and non-financial factors to consider. I hope that you find this both helpful and motivating to make giving a deliberate part of your financial life. You benefit and so do causes that you value. Maximize that through good financial stewardship. Note that there is much more below than described in this post. Giving effectively is a skill that you must spend time on and practice regularly to master. Fortunately, that process is likely to yield its own dividends.