Giving With a Warm Hand and a Cold One - Part Two.

A gift to charity provides a tax credit of about 45% of the gift. The credit is lower on the first $250 donated each year, and higher if it’s your first time ever claiming a donation. But for most significant gifts, use the figure of 45%.

This means that a $1,000 gift to charity reduces your combined federal and provincial income taxes by about $450, whether you give now or through your estate.

In both cases, however, you may be able to increase your benefit by reducing taxes that would otherwise be paid. This is by giving a gift “in-kind” of “appreciated securities” instead of cash.

In plain language, this means you direct your investment advisor to transfer shares, mutual funds, ETF’s, or other publicly traded investments directly from your investment account to a charity. This makes the otherwise taxable capital gain tax free, while giving you the tax credit on the full amount transferred.

Example? Let’s say you bought 100 shares of a bank for $40 each five years ago (or in the depths of the pandemic 18 months ago) and those shares are now trading for $100 each. The total value is $10,000 versus your $4,000 cost. If you sold the shares for a profit of $6,000, half of that would be taxable under the current rules.

Depending on your tax bracket, you might pay between $1,000 or as much as $1,500 in taxes on the gain. You could then donate what’s left to charity and get a 45% tax credit on that amount.

However, if you transfer the $10,000 of shares directly to a charity, the capital gain becomes tax-free, and you get a 45% tax credit on the $10,000.

Your net benefit is $4,500, compared to your original investment of $4,000. Talk to your investment advisor about which opportunities currently exist in your portfolio.

This tax treatment is also available to your estate, but your Will needs to specify that your executors can use their discretion to satisfy your charitable gifts “in-kind”, through share transfers.

The approach is different when giving gifts to family. It usually makes sense to instead use surplus savings, where no capital gain will be incurred on the gift. These days, those savings aren’t paying much, so very little investment income will be lost.

If you can afford it, giving to both family and charity while you’re alive can be very satisfying, and gifting to charity in your Will can be very tax effective. You don’t have to choose one or the other.

When the second member of a married couple passes away, taxes will be payable on the full amount of any registered accounts (RRSP or RRIF, etc.), plus half the amount of capital gains on investments, second properties, or businesses.

Properly worded bequests to charity can significantly reduce that tax, while preserving a higher percentage of the estate for your beneficiaries. Think about it and get some good advice.