Once a client decides to make a charitable donation, they should first confirm that the organization is able to accept the gift and issue a valid tax receipt. Without it, they may lose the opportunity to claim non-refundable tax credits.
Next, determine what to donate. While cash is the simplest option, clients may have other assets that could make a meaningful impact. Above all, donations should align with their financial goals – both short- and long-term – including retirement and estate planning.
Clients can consider donating publicly traded securities, including stocks, mutual funds and ETFs. When donated, any accrued capital gain on the security is realized and the inclusion rate on the taxable portion of the capital gain is reduced to zero. Donors can benefit from the donation tax credit for the fair market value of the security donated and eliminate the capital gains tax.
To maximize the tax benefits available after making a more immediate charitable donation, advisors should consider their clients’ financial situation. If clients had a year with higher income, they should consider increasing their donations to take advantage of a higher donation tax credit, if available. Clients with a spouse or common-law partner can also claim their donations on a single tax return, and should consider doing so on the tax return of the partner with higher income levels to maximize the credit rate.
For clients looking to leave a legacy that extends beyond traditional donations of cash and securities, there are several strategic giving options worth considering. One approach is to donate a life insurance policy. By naming a charity as the direct beneficiary, the donor’s estate may receive a donation tax credit, resulting in substantial tax savings upon death. Alternatively, transferring ownership of a life insurance policy to a charity during one’s lifetime allows the donor to receive tax benefits over a longer period of time instead of at death, offering a more immediate financial advantage.
