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Your financial advisor can help you decide which ones are best for you, and we recommend consulting a tax professional before proceeding. But here are five tax-smart strategies to consider.

Charitable-donation tax credits

Before we get to our five strategies, let’s review the tax implications of any charitable donation made by a BC resident.

For starters, your total yearly donations generally cannot exceed 75% of your net income. Second, the first $200 of your donation nets you a 15% federal tax credit, plus a 5.06% credit from the province of British Columbia.

All donations above $200 get you larger credits, at 29% federally and 14.7% provincially. (Note that some of your donations above $200 can be credited at a 33% rate if your income is over $216,511 in 2021.) Donations can also be carried forward for up to five years.

1. Donate assets “as is” whenever possible

When donating investments such as stocks and mutual funds, it almost always pays to donate shares rather than cash. This is known as donating an asset “in kind”.

Donating shares lets you skip the capital gains tax that would be triggered upon the sale of a security held in a non-registered account.

Let’s say you donated an asset you purchased for $50,000, plus brokerage commissions (which we’ll leave out for the sake of this simplified example), and it doubled in value. If you donated the asset in kind, you’d get a tax receipt for its full $100,000 value. That’s it.

Now let’s look at what would happen if you sold the asset first. In the year of sale, you’d have to pay capital gains tax on 50% of the $50,000 gain – so $25,000 would be taxable in our example – at your highest marginal rate. This would be done by simply adding $25,000 to your income in the tax year in which you sold the asset.

If you’re in the highest tax bracket, your marginal rate is 53.5% (including federal and BC tax rates), so you’d owe $13,375. You’d still get a charitable-donation receipt for the full $100,000 cash value of the donation, but you’d be liable for the capital gains tax, too.

2. Get a tax credit on your property now – and use it for life 

What if you want to donate property, such as your home or cottage? One option could be to set up a gift of residual interest, in which you donate the property prior to your death and get a tax receipt for its value at the time of donation. (As with any large donation, you can carry portions of this value forward for five years if it exceeds 75% of your yearly net income.)

You then continue to use the property, either for life or a set period of time, after which the charity takes full control of it.

This approach also has the benefit of avoiding probate, as your home would be the charity’s property at the time of your death, so it wouldn’t be included in your estate.

This strategy doesn’t just work for homes and cottages – you can use what’s known as a charitable remainder trust as a way to donate income-generating assets such as annuities, a stock portfolio or rental property and get a tax receipt in the year of donation. You’d then enjoy the income from these assets until your death, as if you still owned them yourself.

3. Use life insurance to cut your tax bill – now and after your death

Another tax-smart strategy is to donate life insurance – either by making the charity of your choice a beneficiary of your policy, which will result in the policy’s payout being sent to them upon your death, or by transferring ownership of a current policy to the charity while you’re still alive.

How you go about this depends on a few factors, including whether you hold a term life insurance policy (which has no cash value but pays out a specific benefit upon your death, tax-free) or a permanent policy (which builds a cash value that grows over time, in addition to paying your beneficiaries a tax-free payout after your death).

Your decision also hinges on whether you require the charitable donation receipt to offset taxes in the near term (in which case you’d donate your permanent policy and receive a tax receipt for its current cash value) or if you want to minimize taxes on your estate.

In the latter case, you’d be better served by making the charity your beneficiary, no matter if you hold term or permanent insurance. Upon your death, the charity would receive the policy’s payout and issue a tax receipt to your estate for its full value.

Also important to note here is that in the year of your death, you can donate up to 100% of your net income to charity, up from the 75% limit mentioned earlier, and any residual donation above 100% can be applied to up to 100% of the previous year’s net income.

In the case of donating a permanent policy, it’s also important to remember that your estate won’t get a tax receipt on the policy’s payout upon your death. As you’ve transferred ownership of the policy to the charity, it would get these funds instead.

4. Use a corporate estate transfer to donate (and cut your estate’s tax bill)

If you’re the owner of an incorporated business, you may have collected a significant sum of money within the corporation as surplus earnings you haven’t needed to fund your operations. When you extract this money, it will be taxed. But there’s a way you can use life insurance to minimize your estate’s tax payable after your death.

It’s known as an estate bond strategy or a corporate estate transfer strategy, and you execute it by setting up a permanent life insurance policy of which the corporation is the owner, and the life insured is that of the owner of the company.

Over time, the corporation contributes to the policy, and these funds grow inside it. Upon death, the corporation gets the proceeds from the life insurance and the growth of the cash portion without paying tax. These funds then pass through the corporate dividend account (where the 50% of all capital gains that are not taxed reside), in most cases, 100% tax-free to your estate. You’d then leave instructions for your executor to donate these funds to charity. That would then generate a receipt your executor can use to offset your estate’s taxes.

Group of people helping others

5. Donor advised funds: Charitable foundations without the costs

Finally, let’s look at donor advised funds (DAFs), which you can think of as a way to piggyback on an established charitable foundation, thereby saving you the cost and legwork of setting up and managing a foundation yourself. You simply set up an account with the DAF from which you donate funds to your chosen charities, which you can change at any time.

You get a tax receipt every time you add money to your account – you can then disburse these funds to your chosen charities on an ongoing or a one-time basis, such as after your death.

The foundation that manages the DAF handles all the administration, including disbursing funds to charities, conducting research on charities (and following up on disbursed funds) and establishing the fair market value of any securities you donate to your DAF account.

Let your advisor help you set up the right donor plan for you

A financial advisor is well-versed in all these strategies and can help you set up one or more of them to maximize the impact of your donation and enhance your tax savings, too. Depending on your circumstances and your gift, tax planning can be complicated – you may need the expertise of a tax professional for such matters. An advisor can work with your tax specialist or connect you with one if needed. Ask today to get started on a legacy of giving for you and your family.

Financial Advisor, Kimberly Lamoureux

Kimberly Lamoureux

Financial Advisor

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The information contained in this article/video was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal tax advice. We recommend that you seek independent advice from a tax accounting professional.