Now that Halloween is officially behind us and the department stores are decked out with Christmas decor, it is safe to say that we are approaching the holiday season! Some people might complain it's a little quick to start gearing up for the holidays, but it's never too early to start thinking about charitable giving.
Christmas is also a time when a lot of organizations make their big push to raise funds; we are all familiar with the Salvation Army's iconic Christmas Kettle Campaign, Timmy's Christmas Telethon and the North Shore's own Harvest Project.
For many investors there is an opportunity to incorporate philanthropy into efficient tax planning. An understanding of the different options can help you capitalize on the benefits that your charity of choice could receive. As a portfolio manager, I always set out to maximize the return on investment for our clients as well as advise charitable givers to take advantage of the tax benefits available.
Most people simply write cheques to support their favourite cause, which is a great start; however, if you are able and willing to make cash contributions that total more than $200 the combined tax credits will reduce the net cost by approximately 40 per cent. So donating $1,000 really only costs you $600 - a good deal for you and for your charity.
Another great strategy for giving to your favourite charity is to donate stocks, bonds or mutual funds from your investment portfolio. The advantages in this case are definitely worth considering. By donating even a portion of your investments you can avoid paying tax on the capital gains, as well as receive a tax receipt for the donation. For example, suppose you hold $20,000 worth of stock that you paid $10,000 for. If you sell the stock to raise cash for a donation you will end up paying capital gains tax. But instead you could donate the $20,000 of stock and avoid the capital gains tax altogether. In this case it actually costs you less to donate more! Remember, any contributions made before Dec. 31 of this year can be deducted from your 2013 tax return. Furthermore, donation tax credits can be carried forward for up to five years to help offset future taxes.
When it comes to selecting a cause it's also very important to learn as much as you can about the charity, particularly how your money will be used. Sadly, we do hear about the occasional case of mismanagement; therefore I suggest doing some proper background research. Check out Money Sense magazine. They rate the top charities in Canada each year based on fundraising efficiency, governing and transparency.
On another note, many clients have inquired about charitable tax shelter arrangements whereby you get a donation receipt that is more than the amount you donated. There are risks involved with this that investors should be aware of which include having your entire tax refund delayed for up to two years. For example, leveraged cash donations or “buy-low donate-high arrangements” can be very misleading, and as I always say “if it sounds too good to be true, well then it probably is.” CRA has audited a lot of these tax sheltered gifting arrangements over the past year or so, and in many cases, such as the Berkshire Program or the Global Learning Gifting Initiative, some investors have been denied the tax credit of the gift entirely or have had it greatly reduced. If approached with one of these opportunities I strongly recommend getting a second opinion.
In conclusion, if you're looking to make a larger donation, speak with your investment team to see about maximizing the benefit for yourself and your charity of choice. It would also be wise to meet with your accountant in making the most tax-efficient plans. As mentioned, it's important that people do their homework and ensure they're giving to reputable organizations and watch out for donation schemes that seem too good to be true.
With more than 80,000 charities in Canada, there's no reason to limit your generosity to one cause. Spreading the love between a couple of deserving charities is a fantastic idea for this holiday season!
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
