What Gives?! Talking Charity with Your Clients

Giving to charity is a terrific opportunity to make a real difference, not to mention it can make great tax sense for your clients! Let’s talk about some of the high-level ins and outs when it comes to giving.

Whether it be the festive spirit or the prudent taxpayer looking for that extra credit before the end of the year, there is more giving that happens in December than any other time of year (source; CanadaHelps). 

Giving to charity is a terrific opportunity to make a real difference, not to mention it can make great tax sense for your clients! Let’s talk about some of the high-level ins and outs when it comes to giving.  

It’s Personal: The Donation Tax Credit

Charitable donations attract both federal and provincial non-refundable tax credits on your client’s personal tax return. On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200. New Brunswick has a similar credit in that you get a 9.68% credit on the first $200 and then 17.95% on the cumulative amount above the $200. There is a higher 33% credit available to taxpayers at the very top tax bracket (income over $205,842).

So, if you make less than 205,842 in 2018 and you donated $1,000 to a registered charity, your client can expect a tax credit of $425, meaning the $1,000 donation only cost $575.  

But the client will need to donate to a registered charity and will need to have their receipts to get the tax credit. Donating online has grown considerably in the last 5 years, faster than any other method of donating according to CanadaHelps. 

This can help make it easier for you or your clients to keep track of receipts. One thing I like to tell clients is to keep a separate email account to use for all donations, that way receipts cannot get lost or accidentally deleted.   Another option is to take advantage of the fact that many employers offer the deduction of donations directly from paychecks. 

The employer then provides the amount for the employee’s taxes directly on the T4 slip at tax time. It is worth checking with your client to see whether this option is available to them. The benefit in this context is that the client can quickly get themselves above the $200 threshold without there being a significant impact on their cash flow.

Personal vs. Corporate Donations

For those who own a business or have a client who owns a business you have either asked or have been asked, “Is it better to donate personally or corporately?”

For corporations, donations also result in tax savings, albeit in the form of a deduction from income, rather than a credit. Like individuals, unused charitable contributions may be carried forward for up to five years. The charitable donation deduction will reduce corporate taxes by 12.50% on donations made when taxable income is less than $500,000 in the corporation.

Let’s look at an example. Your client Michael, operates a shoe shining business under a corporation and he has had a great year (people have come to realize how important it is to have shiny shoes) and he wants to share an extra $1,000 of his good fortune with a worthy cause. 

If Michael donates the $1,000 through his business, there will be zero net corporate tax because, generally, the corporation gets to deduct the donation like any other legitimate company expense.

However, if Michael cuts the cheque from his own personal bank account, he will need to consider the personal taxes on withdrawing the money from his corporation. 

Table A shows the results between the two options for Michael if he is at the top personal marginal rate in New Brunswick.

So, there is a net tax of $76 if Michael donates personally versus corporately in this scenario.

However, if Michael’s tax rate is lower than the top marginal rate, say 35% (salary income of approximately $70,000 to $75,000 depending on other items affecting taxable income) we can see in table B that our conclusion changes from the one we reached above.  

In the above case, Michael is ahead $75 by donating personally versus corporately. The general rule of thumb is, if your client is not in the top marginal tax bracket it likely makes the most sense to donate personally. 

More specifically, if the client’s personal rate is lower than the effective rate they could achieve using the personal donation tax credit (see “It’s Personal – The Donation Tax Credit” above), you will likely be telling your client to donate personally. You should always run the numbers for your clients before they make their donation because every scenario is different. 

Other considerations you should discuss with clients include whether there is strategic value to having the corporation make the donation. Many corporations will donate to causes that align well with their business or their client base and this could be worth more than the tax savings of donating personally. 

For particularly large donation considerations, it is good to ensure there will be enough income to use the donation.  This can be especially important for donations directed by a client’s will or trust indenture.    

Donating Public Shares

Cash may be king, but when it comes to giving there may be other more tax-advantageous options for your clients. Donating publicly-traded securities (stocks, bonds, etc.) that have appreciated in value can be a great tax move. By donating certain types of capital property to a registered charity or other qualified donees, clients may be eligible for an inclusion rate of zero on any capital gain realized on those gifts. 

The tax receipt will be for the fair market value of the donated securities at the time that these securities are received by the charity less any advantage received by the donor.  Make sure the client knows they should confirm that the charity they are considering donating to, can and would like to, receive securities in kind versus cash.

Donating securities can also be an effective way to clean up your client’s portfolio if they are overweight in a sector or to reduce some of their concentration risk if they have a lot of stocks from their employer, i.e. stock options. And lastly, it can be a way to reduce the client’s tax burden on death. 

Accountants, financial advisors, and lawyers should work together for their collective client if this is something they would like to consider.  

Watch out for Scams!

Unfortunately, advisors and accountants see this all the time. There are those who will take advantage of people’s good intentions to line their own pockets. 

Charity scams are nothing new to Canadians, in fact just this year, Global News’ Erica Alini reported in April about fake charities that would promise to boost the original amount of a client’s donation so that they may receive a bigger tax receipt than the actual gift.  It is not surprising that CRA will disallow any tax credit based on such a receipt and it was reported that the agency has had to review the returns of over 200,000 Canadians for this type of scam alone. 

Clients not only lose the tax break they thought they were entitled to, but also face interest and penalties and potential professional fees if they need help sorting everything out.  

There are countless fraudulent charities asking Canadians for gifts every year. You should ensure that when talking to your clients you do your best to make them aware of the scams that are currently going on. It is always best to take a proactive versus reactive approach with your clients by sharing good habits with them that may help them protect themselves. 

Researching the charities before giving, checking with CRA online to confirm the charity has a proper registration number, researching the specific type of work done by the charity, and confirming the total percentage of funds that are retained in the organization to cover administrative costs are all good habits here. 

Relevant information should be easy to confirm if the organization is legitimate.  

Donations generally have been decreasing in recent years (CanadaHelps) which means less resources are available for those in our society that need it most.  Being able to help your clients with their questions about donations and philanthropy will help increase their confidence and comfort and could even lead to more giving by Canadians.    

This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice, if you are not sure how to proceed with a request for further information seek help from a professional accountant. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.

About the Author

Jared Burns, CPA, CA

Manager, Tax and Estate Planning
Jared Burns holds a bachelor’s degree in commerce from Mount Allison University. He obtained his chartered accountant (CA) designation in 2012 and has completed all three parts of the CPA Indepth Taxation curriculum. At Louisbourg Investments, he is the Manager of Tax and Estate Planning where he works with their investment team, clients and other professional service providers to identify tax and estate planning opportunities custom to their unique circumstances and needs. Jared oversees the firm's compliance function and ensures that we consistently abide by the highest industry standards in our regulatory responsibilities helping to ensure maximum investor confidence.