World Money Show – September 21, 2019

Hi all,

Once more, I will be presenting at the World Money Show in Toronto, this time on September 21th. If you’re interested and don’t live in the GTA and don’t want to splurge for a trip to T.O., you can listen and look in using your computer.

Estate Planning – Minimizing the Mess, Stress, and Excess

For more info, click here:  Money Show 2019

The Devil is in the Taxable Details: Understanding Different Types of Investment Distributions So You Can Make your Money Go Further

When the rubber hit the road, what really matters when you sell your investments or get paid along the way, it is what is left in your back pocket after you’ve paid all fees, expenses and taxes. Although making investment decisions purely for tax reasons can be an invitation to disaster, failing to take tax into account when making investment decisions or deciding the right person or account to hold that investment can also be like driving with your eyes closed. More specifically, it can mean paying our friends in Ottawa more than their fair share, as it prevents you from taking steps to minimize your tax pain in advance or making different investment choices.

Just as importantly, it can also wreak havoc for budgeting and retirement planning purposes, particularly if you’re receiving OAS or GIS payments that are affected by your taxable income. Although retirement projections are largely educated guesses at the best of times due to the number of different variables thrown together in your retirement blender, failing to properly consider how your non-registered investments are taxed can mean the difference between making an educated guess and picking random numbers out of the air. 

The Basics

I won’t say much about interest income and other types of investment income that get taxed in largely the same way, such as pension income, RRSP or RRIF withdrawals and rental income. In a nutshell, it is 100% taxable, net of any expenses you incur to earn that income, such as mortgage interest. You might get a small tax credit for earning income from a work pension or a RRIF after age 65. Likewise, you might get credit on tax paid on foreign income, but the bottom line remains you pay the most tax per dollar on these sources of income as compared to capital gains, return of capital and eligible dividends.

On the other extreme, for many Canadians in lower tax brackets, eligible dividends are the most tax efficient way of receiving investment dollars. “Eligible dividends” are those paid from Canadian public companies or funds that own such companies. In order to make them more appealing to investors, our government provides a tax credit to recipients that can actually make them better free money for some Canadian!

Let’s say the company paying the dividend originally earned $100. It would have to pay perhaps $27 in tax on this money and would only have $73 left to pay out in eligible dividends. The government wants the shareholders earning these dividends to be about in the same position as if they’d earned the original $100 made by the corporation and had the money taxed in their hands like interest or business income. To make this happen, the $73 in actual dividends received by the investor is multiplied by 1.38 for tax purposes, which equals $100.74, and the shareholder is taxed on this amount as investment income.  This amount is fully taxed just like interest.

Sound like a bad deal rather than a good one? Well, this is where the enhanced dividend tax credit comes in. To balance the scales, the shareholder who actually only $73 but was taxed on $100 also gets a credit that essentially credits him for paying the $27 dollars paid by the company in the first place, which is deducted from their taxable income.

So how is this better than free money, you might ask? Clients in lower tax brackets would have paid less than $27 on $100 in interest earnings. For example, if Bob in Vernon (I use B.C. tax rates throughout this article) had $35,000 in other income before receiving his $73 in dividends, he is in the 20.06% tax bracket. Since the company paying the dividend had already paid 27% tax, the government has received more in tax dollar than would have paid if Bob received $100 directly.  Accordingly, lucky Bob can now claim a tax credit of $7 (or 9.6% of $73).  The only catch is that if someone doesn’t owe any additional taxes that year or their dividend tax credit exceeds their tax bill, then the rest of the credit is wasted in most circumstances. In other words, you can use the dividend tax credit to reduce your taxable income to zero but not to a negative amount.

The other major source of investment loot is from capital gains, or from growth in the value of an investment rather than from payouts along the way. Although taxpayers in the lower tax brackets would usually want eligible dividends for the reasons just discussed, capital gains are still a lot better than interest income, as only 50% of the total increase in value, net of costs is included as income. In other words, for every dollar in gains, 50 cents is always free and the other is taxed as income like interest. Moreover, if you sell investments at a loss, you can apply 50% of the loss against current and future capital gains. If you’re so inclined, you can even go back in time up to three years and apply the losses against past gains, which might be really helpful if you were in a much higher tax bracket during those years past.

As I’ll discuss below, capital gains become more and more appealing the higher your taxable income. In B.C., if your taxable income exceeds about $148,000, capital gains are taxed at a lower rate than eligible dividends for your next dollar of earnings. Moreover, for seniors earning OAS pensions, you are probably better off making your last dollar a capital gain rather than a dividend once your taxable income exceeds about $95,000. If you’re receiving other means-tested benefits, like the GIS, be careful about earning eligible dividends as well – the 138% gross up for income tax purposes can reduce these income-related benefits far more quickly that capital gains. If in this situation, then eligible dividends might become more of a foe than a friend.

The other thing that is so wonderful about capital gains is that you only pay when you sell your investment or there is a sale inside your mutual or seg fund. That means you can control when you trigger your tax bill and that there is more money left to compound along the way. I’ll have a lot more to say about capital gains and savings strategies in my next article.

Finally, don’t forget about return of capital. Some investments, like REITs and corporate class mutual funds (depending on how they are affected by the new corporate class rules) are able to pay you tax-free dollars every year regardless of your tax bracket. For tax purposes, it’s treated like you’re receiving some of your original investment dollars back rather than any of the three other types of distributions just discussed. That means you have more money to reinvest or to spend on that new set of golf clubs since no tax is deducted from these payments along the way. There is a catch, however, as every dollar you receive in return of capital is subtracted from your original purchase price for the purpose of calculating your eventual capital gain on sale. Thus, as they say, save now and pay later. Although it could mean a spike in your taxable income in the year of sale, it can often still be worth the later pain if it means years of savings until that day of reckoning finally comes, particularly if you are able to do some of the tax planning I’ll discuss next time.

Dividends, Capital Gains and the OAS Clawback

In general terms, your OAS pension is reduced by 15 cents for every dollar in which your taxable income exceeds a set amount, which is currently around $75,000. On the other hand, as discussed earlier, 138% of the eligible dividends you actually receive are included as income while only 50% of capital gains are added to the mix. Although you still get that wonderful dividend tax credit to apply against your tax bill when earning dividend income, this credit isn’t considered for clawback purposes.

Thus, every eligible dividend dollar you receive reduces your pension by 20.7 cents (15 cents x 138%) while every capital gain dollar you get when you’re in the clawback zone only reduces your pension by 7.5 cents (50% of 15 cents). This 13.2 cent spread isn’t as significant as it first appears, since you would have lost some of those 13 cents to tax anyway, so you might only have only been out of pocket between perhaps 7 to 10 cents depending on your tax rate. All the same, this can mean that capital gains become more tax efficient for some retirees as soon as their taxable income reaches about $95,000 in B.C. for as long as they’re in the clawback zone.

The Benefits of Only Including 50% of your Capital Gains

Another huge and often overlooked benefit to capital gains is that, since only 50% of your gain is included income, you can earn a lot more of them than other types of income before having to pay tax in a higher tax bracket.  For example, assume 50-year-old triplet brothers in Terrace, B.C. each earned exactly $100,000 in 2019 from all sources, one entirely in interest, one just in capital gains and the third got paid exclusively in eligible dividends. Their results would be as follows, after grossing up the eligible dividends by 138% and including the dividend tax credit, and only including 50% of the total capital gain:

Brother/Type of Income      Taxable Income       Total Tax Payable

Interest Ed                            $100,000                     $23,053

Dividend Dave                     $138,000                     $7,765

Capital Chris                         $50,000                       $8,056

Here are some key takeaway points from this comparison:

• Ed paid almost 3 times as much tax as Chris since Ed was forced into the higher tax brackets sooner. Thus, although it is commonly thought that investors earning interest will pay only twice as much tax than those earning capital gains, this is only true if the extra taxable interest income doesn’t push poor souls like Ed into higher tax brackets. In this case, most of Chris’ income was taxed at the lowest rate while Ed was at a level where tax rates start to get really depressing. To make matters even worse, if Ed was earning his OAS pension, he would have been well into the clawback zone, thus increasing his total tax hit, while Chris would still be cashing his full OAS pension cheques.
• Although Dave would still pay less tax than Chris until they were both earning around $160,000 in their different forms of income, after that point Dave would fall behind quickly, as Chris would still be in the lower tax brackets while Dave would be inhabiting high tax country. Plus, over about $154,000, dividends are taxed at a higher rate than capital gains anyway. Thus, even if the brothers both had taxable incomes of $154,000, capital gains are taxed at a lower rate from that point onward anyway. Dave would pay 25.92 cents on his last dividend dollar if his taxable income was $154,000 and Chris would be out 22.9 cents on his last dollar of capital gain if his taxable income was the same.
• Dave only paid slightly less tax than Chris even though eligible dividends are extremely tax efficient for lower income earners. If both Dave and Chris received the maximum yearly OAS Pension of $7,217.40 as of as of June 2019 on top of their other income, Dave would have actually paid a lot more tax than Chris. Dave’s total tax hit, including the clawback, increases to $14,982 while Chris’ tax bill would only increase to $10,091. This also ignores that Chris would often have control about how much and when he realized his capital gains in order to get the best possible tax result while Dave doesn’t have that flexibility.
• It’s important to crunch the numbers for each case. I love to use the taxtips.ca website for their tax calculators, such as the following investment income calculator that also calculates the OAS clawback: https://www.taxtips.ca/calculators/invest/investment-income-tax-calculator.htm

Conclusion

At the end of the day, it’s not what you make, but what you keep that matters. Taking the time to first understand how different types of income are taxed and then applying these general rules to your specific situation can go a long way to making more informed investment decisions, reducing your tax bill and more accurately budgeting for retirement. Next time, I’ll talk about strategies you can use to when investing for capital gains to stretch those hard-won investment dollars even further.

Keeping Good Company: Charitable Donations Through Your Company

In my last article, I spoke at length about how to maximize the tax benefits of your personal charitable donations so your money goes further. Today’s offering takes this one step further – what if you’re actually better off having your company make the donation instead? Read on and see for yourself.

The Basics 

Unlike when you donate personally, corporate donations generate a tax deduction rather than a tax credit. Thus, the amount you give to good causes in any tax year is deducted from that company’s taxable income rather than generating a non-refundable tax credit, which is how things work if you give out of your own pocket rather than through the corporate coffers.

How that translates towards your bottom line depends on a bunch of things. First, if your company is an active small business taxed at the small business rate, which might be as low as 11%, then you’re only essentially getting back $11 per $100 donated. On the other hand, if your company is making money hand over fist and you are earning in excess of the small business limit ($500,000 in most provinces, although this limit may be reduced if you are earning investment income in excess of $50,000 under the new passive income rules), your deduction may climb to 27%, which is the current B.C. rate.

Finally, if you donate through a holding company instead, you might reap your biggest savings of all, as investment income is taxed at over 50% in most provinces (i.e. 50.67% in B.C. and Alberta at the date I type these words). Admittedly, a good chunk of that 50% is potentially refundable anyway if you flow out enough in taxable dividends to shareholders, but you would have still lost about 20% to the tax man all the same, plus whatever extra tax gets paid personally by the people receiving those dividends.

As an added wrinkle, the government also forgives any unrealized capital gains on publicly traded investments your company donates in-kind, just like they do if you donate those securities personally. What many people don’t realize however, is that there is an additional tax advantage your company reaps by donating appreciated securities in-kind that can vastly compound your savings.

For those of you who have survived my previous articles on small business taxation (see my website at colinsritchie.com if you’re a glutton for punishment or are one of those people like me who are strangely obsessed with all things taxation), you might remember something called the “capital dividend account” or the “CDA” if you have a thing for acronyms. The CDA is a notional account tracked by the government (and hopefully your accountant) that tells you how much money your company can pay out to you as tax-free capital dividends.  In the normal course of things, 50% of any capital gains realized inside your company can be paid out to you directly through the CDA minus any capital losses from that year.  If you donate an appreciated security to the Save the Large Mammals Fund or a similar charitable entity instead, however, 100% of the gain goes into the CDA instead, rather than just 50%!In other words, if donating a $25,000. security with $10,000 in unrealized gains, you get:

• a $25,000 charitable donation deduction that could reduce your holdco’s tax bill by perhaps $12,500 or more;
• forgiveness of $10,000 in capital gains, which might represent a further savings of about $2,500, minus any portion that is later refunded to the company if it pays out enough taxable dividends to others, although those people will also need to pay tax on those dividends;
• the right to pay out $10,000 rather than just $5,000 from your company to yourself or other shareholders as a tax-free capital dividend, which could potentially offer further tax savings of almost 45% of this additional $5,000 in B.C. or $2,232 if the person getting this payment would otherwise be in the highest tax bracket.

Crunching the numbers, this translates into about $17,200 in upfront combined personal and corporate tax savings. Moreover, donating corporately also reduces the potential tax bill on death for your holding company (or your active business as well, for that matter) and allows you to use more of your personal money for other things or perhaps means that you don’t have to flow out as much in dividends or salary in order to fund a personal donation.

There are some limits to what you can donate corporately, however. In particular, your company cannot deduct more than 75% of its income for that year, although any unused contributions can be carried forward and deducted over any of the ensuing 5 tax years. Accordingly, if you have your heart set on a large donation in one particular year inside your holdco but don’t have the taxable income to write it all off, you might consider triggering a bunch of additional capital gains inside the company that year if possible. This can create the additional taxable income you need to claim a larger deduction asap and, as an added bonus, you can pay out 50% of the extra gains you trigger tax-free as a capital dividend. As the cherry on top, this also helps reduce your eventual corporate tax bill at death by decreasing what’s left inside your company at death by taking out extra money now.

As a final thought, for those of you who haven’t read my previous article on personal donations, check out organizations like CHIMP or ask your stock broker if they have any donor-advised funds they offer. Both allow investors to donate in-kind to a new investment account and receive a donation receipt at the time the money is transferred into the account. Once inside this new account, the donors can make cash donations to their charities of choice when the time is right. Donors still get credit for their donation based on the value at the time of transfer into the new account, plus forgiveness of the unrealized capital gains. This may be particularly useful for donors who plan on making numerous gifts over the course of a year to several different charities for either smaller amounts or to charities that don’t have the infrastructure to handle in-kind donations!

Corporate vs. Personal Donations – Which is Better?

Should you donate personally or corporately? Ultimately, as us lawyers and financial types like to say, it depends. If you are personally in a relatively low tax bracket, particularly if you don’t have a lot of corporate assets, you are likely still better off donating personally. That’s because 45.8% donation credit you get personally in B.C. on all but the first $200 of your donation is probably more than the tax rate you pay on your last dollar of income that year. Thus, even if you have to flow out more salary or dividends in order to come up with the cash for your donation, the extra tax you pay on the additional withdrawals will be lower than your charitable donation credit. In other words, claiming a 11% or 27% deduction in your operating company instead getting  a 45.8% donation credit personally makes donating corporately not such a wonderful thing in that scenario.

If you donated from your holdco rather than an active business instead, you still might be better off donating personally if you’re personally in the lower tax brackets. Although there is that 50.67% investment tax rate on interest income and the 50% taxable portion of capital gains, along with a 38.67% tax on investment dividends in B.C., all but about 20% of the 50.67% is refundable, along with 100% of the 38.67% provided that enough taxable income is paid out to shareholders that year. Noting that shareholders do get credit for the investment tax paid corporately through both the small business and enhanced dividend tax credits, at the end of the day, the total tax bill paid corporately and personally on the investment income earned inside the company is designed to be about the same or slightly more than if the shareholder earned that income directly and was taxed on it accordingly. As a result, if the 45.8%  personal donate credit is higher than your marginal tax rate for interest or salary (not dividends) after you’ve withdrawn enough corporate dollars to fund your gift, then you are often better donating personally.

When trying to figure out what’s best for you, here are some of the key factors to consider:

• Is the combined tax rate you and your company pay on the income it needs to pay you to make the gift less than the 45.8% charitable donation rate (or whatever is the going rate in your province) you can claim if donating personally. If you are in the highest bracket in at least some provinces, your personal donation rate climbs to 49.8% on the amount of your income that would be taxed at this high rate. If you are over 65, you will also need to determine how much of your OAS pension you might lose if you need to increase your income to fund the gift;
• Do you have substantial unrealized gains in your company or personally? Which of your investments have the highest percentage gains, as those investments will often be the ones that you can save the most by donating? All the same, you would still need to compare your personal and corporate tax rates at that time and also take into account the extra money you can pull out from your company tax-free through the CDA when donating corporately when making this decision;
• How much do you have in your holding company and are you expecting a big capital gains bill on your company shares at death? If so, you might wish to donate corporately when planning ahead, particularly if you donate investments with large gains in-kind so you can withdraw additional tax-free capital dividends as a result of your donation;
• Would reducing the size of your corporate investment portfolio help any active business you still own get more of its income taxed at the small business rate (i.e. perhaps 11% instead of 27% for B.C.)? Now that any investment income exceeding $50,000 will reduce how much active income gets taxed at the small business rate as a result of the Liberal’s new passive income rules, donating corporate securities producing a lot of taxable investment income or which would otherwise be subject to a big capital gains bill when you sell might have the added benefit of saving your active business some extra dollars either in the following tax year or further down the road.
• Do you have enough income personally or corporately to allow you to deduct your planned gift that year? Whether if personally or corporately, you can only get credit for donations up to 75% of the taxable income of the person or corporation making the donation. Of course, it is possible to donate a bit from both sources if necessary. Just be careful about pushing yourself into a higher personal tax bracket in order to be able to deduct your gift asap, as that often is a mistake;
• What are your general plans for your money going forward? I also view personal money as more valuable than corporate dollars, as it is more flexible and can be accessed and gifted far more easily and with less tax consequences a lot of the time.

Conclusion 

At the end of the day, charitable gifting is far more about helping those in need than in saving money. Ultimately, regardless of how you structure your gift, you will still be out of pocket as a result of your generosity. If someone presents you with a fancy brochure that says otherwise, run for the nearest exit! All the same, gifting intelligently can help you to give more or reduce the financial toll of your good deeds. A few extra moments now can have a huge impact on you and your charities’ bottom line, both now and for years to come.

Selected Charitable Donation Ideas: Making Your Gifts Count for More

I began writing this article several thousand feet above the ground while jetting home to see my family in Ontario stuffed full to the brim with Christmas spirit, although it’s taken me another few months and another plane trip to finish things off. I always applaud those of you with the means and inclination to donate your hard-earned cash to whatever charitable organizations resonate within you. To help in this pursuit, I am writing this article to either put more cash back in your pocket or to allow you to gift even more by explaining some tax-advantaged ways of best helping those in need.

The Basics

To begin, here is a hopefully brief overview of the tax relief you get when you make personal tax donations to your charity of choice. In a Christmas-coloured nutshell, if you donate in B.C., you get 20.06% of your money back as a non-refundable tax credit on the first $200 you gift per year and 45.8% on the rest of your donation unless your income in the year of the gift (line 260 of your tax return) puts you in the highest federal tax bracket (about $210,000 for 2019). In that case, you get a 49.8% credit equal to the amount your taxable income exceeds that threshold. In plain speak, say you donated $50,000 in a year that your net taxable income was otherwise $250,000. You’d get a 20.06% credit on the first $200, a 45.8% credit for the next $9,800 and a 49.8% credit on the last $40,000 (i.e. $250,000 – $40,000) for total tax savings of about $24,486.

There are other rules that apply for donating at death or beyond the grave that have been covered by others that I won’t get into today, other than to say that the donation limit goes up to 100% of your income in the year of death, which can also be applied to your previous year’s tax return if necessary. You are also able to carry forward unused donations for up to an additional 5 years in some cases.

When looking at when to give, it’s important to remember that  the deadline for personal donations is the calendar year end if you want to claim your refund as soon as possible. Thus, even though you have a few additional months each year to make RRSP contributions each year as December glides to an end, you have to get your act together by New Year’s Eve if you’re hoping to get your tax refund for new charitable donations around the same time as you have to pay for this year’s spring break.

With no further ado, here are some tips if you are looking to make donations personally during your lifetime. I’ll write another article (hopefully well before the next major holiday) talking about how things work if you donate corporately and some things to consider when debating between personal and corporate donations:

• As the charitable donation credit is, well, a credit, there is often no benefit to having the wealthier spouse claim the relief afforded by their combined largesse in most cases, as tax credits produce the same refund for either spouse, regardless of tax bracket if neither is in the top tax bracket. Thus, assuming the lower income spouse has enough taxable income to use up the tax credit (as this credit can only be used to reduce your tax bill to $0 rather than getting additional funds back beyond this point) and the total family donations that year weren’t more than 75% of the lower-income spouse’s income, it often makes sense for the lower income spouse to claim the tax reward if the plan is to reinvest. This is because any earnings on the invested refund will be taxed at a lower rate in that spouse’s hands. Thus, charitable donations can also be a tool for income splitting if the gifts are large enough. This is not a universal rule, however. For example, if having the higher income spouse make the donations would allow him or her to increase RRSP or Spousal RRSP contributions and get a bigger tax refund since (s)he is in a higher tax bracket, then the spouse with the bigger paycheque might want to claim the credit instead in some cases. Likewise, if the wealthier spouse is in the highest tax bracket and the other is not, then you might want the spouse with the higher income to claim at least as much of their combined donations that generate an extra 4% in tax savings.
• If you don’t need the credit to get your taxable income to $0 that year, don’t claim any more than you need to get to that point, as any excess amount donated will be squandered just like an unused holiday gift card.

• If you aren’t usually in the top federal tax bracket but are in 2019 or down the road, you’ll get an extra 4% in tax savings if you give in that year on whatever is less – the total amount of your donation that year above $200 or the amount your taxable income exceeds $210,000 (or whatever that number happens to be going forward) above $200 in that year. Thus consider making really big donations at that time, which for some of us might be death. Likewise, if you want to donate now when you’re not in the highest tax bracket but should be next year, consider not claiming all your donations until then if your income for next year minus any additional donations you plan on making then would still leave you in the highest tax bracket.

• Continuing with my gift card analogy, if you don’t have enough taxable income to use up your full donation credit that year without triggering additional taxes, such as by making extra RRSP withdrawals, it could save you more in the long run if you carry the credit forward instead of triggering extra income this year at a really high rate. A charitable donation credit is like a gift card for a flat amount – if you use both strategically, you can maximize your savings. Just like you can perhaps have enough of a $500 gift card left over to purchase an extra sweater set or leopard-print boxer shorts if you shop during a Christmas blowout, you can often stretch the value of your charitable donation credit if you use it strategically rather than just creating extra income asap just to use it up. Think of $50,000 in charitable donations as the right to get back about $24,486 in taxes using the example I provided earlier for a Vancouver donor. By using up the credit while in lower tax brackets, you may be able to ultimately pull out more money from your RRSP, RRIF, corporation etc. tax-free even though you might have to wait a bit longer to get your savings.  On the other hand, if you can trigger extra capital gains, pull out more RRSP/RRIF money or get extra salary or dividends from your company without going into a significantly higher tax bracket than you expect to see over the next few years, then go for it so you have more to reinvest as soon as possible.

• Donate in-kind rather than in cash. Many generous investor types already know that the government forgives the unrealized capital gains bill when you donate publicly traded securities from non-registered accounts rather sending money to your charity instead. Moreover, you’re still credited with a donation equal to the fair market value of your donated security on the date it is gifted. Accordingly, even if you love everything in your portfolio, consider donating shares with high unrealized capital gains to your charity of choice rather than stroking a cheque. You can always use the cash you would have otherwise gifted instead to buy back that cool junior mining stock your brother told you about. When the dust settles, your charity would still have funds equal to the value of your shares upon donation minus perhaps some admin fees, you’d have a tax receipt for that same value as if you’d paid cash. Even better, if you have repurchased your mining shares with the cash you would have otherwise given, these shares no longer have any unsightly unrealized capital gains attached to them. This strategy works particularly well for any shares you may have received “for free” for an insurance company when it demutualized, since the entire value of the shares might otherwise be taxed exclusively as a capital gain.

• If gifting over the long term, consider making deferred capital gain investments now to be donated down the road. If you’re looking to take the donate in-kind strategy one step further, consider buying investments like REITs and corporate class mutual funds that pay mostly return of capital. Return of capital or (“ROC”), which is treated like a refund of some of your original investment for tax purposes and is tax-free until you’ve received back all of your original investment.  Thus, you can keep all or almost all of any payments you receive along the way but also avoid that day of reckoning that often comes with these investments later by donating them once you’ve gotten back most of your original investment. In the normal course of things, investments that pay ROC usually have big capital gains looming at sale, even if they haven’t really increased significantly in value, as each ROC payment along the way is subtracted from the original purchase price for determining the capital gain upon sale or disposition. As a result, a $10,000 investment that pays $600 in ROC each year and doesn’t increase in value would otherwise be subject to a $6,000 capital gain in 10 years ($10,000  value at purchase minus 10 years of $600 payments or an adjusted cost base of $4,000). Donating these shares or units instead could mean making a 6% yearly profit for a decade without ever paying a penny in tax, since the capital gain is forgiven at donation!

• Consider donating through organizations like CHIMP, through a donor-advised fund or similar entities. Although donating in-kind directly to your charity of choice sounds good in theory, it might not always work so well in practice if your charity doesn’t have the infrastructure to sell your donated shares or if your donation strategy focuses on gifting smaller amounts to many organizations rather than writing larger cheques thus making the “hassle factor” of making many donations in-kind becomes larger than the benefits. By the same token, investors donating in-kind can miss out when their charity needs money now but the stock they were planning to gift has suddenly decreased in value by 20%.

Organizations like CHIMP or donor-advised funds can help solve these problems.  They act as “middlemen” – instead of gifting directly to charities, donors give their stocks to these organizations instead and they provide donors with the immediate charitable receipt equal to the investment’s value at that time, and capital gains relief.  The gifted securities donated go into a new account the donor manages through CHIMP and can either be immediately be converted to cash and forwarded to your charity or charities of choice, or it can stay invested. You might like this second option if:

• the market is at a high and you feel like now is the best time to maximize the size of your donation by disposing of the stock now even if you aren’t sure how you wish to distribute the money. Once inside an organization like CHIMP, you could also rebalance into something less volatile as well in order to protect your gains. In other words, if worried about a correction, you could rebalance this part of your portfolio after it is in the middleman’s hands so that this can be done capital gains free but so the capital is still protected from a stock plunge;

• you want a large tax credit this year but would rather pay the money to charities in chunks over perhaps the next 5 years. Accordingly, rather than converting the donated investment to cash, you may want your investment to keep growing going forward so that there is more to donate when it is finally time to give; and

• You want the convenience of perhaps making a single in-kind donation once a year but having a ready supply of tax-advantaged assets you can quickly liquidate and use to gift to multiple smaller charities when appropriate while still having your money generate income and gains for your charities along the way;

It is important to realize that there will likely be (usually minor) transaction costs for transferring the asset through an organization like CHIMP. Moreover, you do not receive any more tax credits for any income or gains earned by investments once they are in the middleman’s hands – you only get credit for the value at the time of donation, but the benefits of both being able to donate in-kind rather than cash and the ability to get your tax credit perhaps years sooner than when your charity actually gets the full value of your gift can usually easily offset these drawbacks.

• Consider buying a life insurance policy for your charity of choice and donating it to them at death. This strategy doesn’t get you any write-off now but does provide a heck of a refund when the death benefit is paid out at your passing, as the full amount paid gets tax relief. This strategy keeps your options open should you want to change charities down the road, if you want to leave the money in full or in part to family instead or need it for other purposes.  For many of us, the biggest tax bill will come at our death or the death of our spouse, if later.  As  I explained in laborious detail earlier, you might get an extra 4% deduction at that time if you aren’t otherwise someone who is in the highest tax bracket, noting that many of us visit this unhappy place only during the year of death.  Our biggest tax bills usually come in the year of our death or, if we have a spouse, when the last of us dies. Accordingly, arranging to have a humungous tax credit at the same time as when faced with a gigantic tax bill can be a wonderful thing, particularly if it provides you with an extra 4% in tax savings. Some people target having enough insurance to wipe the truly daunting tax bill that can also go along with large RRIF balances at death.

• Donate old and unnecessary life insurance policies during your lifetime. Have a policy taken out decades ago to protect your spouse and family that is no longer necessary and / or too expensive?  Want to fund a large gift to your charity later but get tax relief now? Consider donating it a new or existing life insurance policy to a charity. You will get a charitable receipt equal to its fair market value today, which could be a lot more than its cash value, if donating a policy that has been around for a long time, particularly if you are in poor health. Think of it this way – if a stranger has a life policy that pays $1,000,000 at death, a $40,000 cash value, and that poor soul will likely only live for 3 years, what would you pay to buy that policy as an investment, knowing that a million dollars tax-free would be coming your way likely within the next 36 months? I strongly suspect a lot more than just the $40,000 you’d receive if the policy was cashed in early. In any event, at the time of donation, the donor gets a tax receipt for the policy’s fair market value but only pays tax on the taxable portion of the $40,000 cash surrender value, using the $1,000,000 policy from my example. The taxable portion will vary from policy to policy and determined by your life insurance company. Just keep in mind that once you’ve donated the policy, it’s no longer in your control.

If our fictional policy had a fair market value of $600,000, then the donor could potentially use the credit to withdraw the rest of his RRIF tax-free and perhaps better enjoy the remainder of his retirement and his charity would still get $1,000,000 tax-free at his death, although it would need to either pay any remaining premiums owing on the policy unless the donor continued to do so directly, and getting an additional tax credit for doing so, or perhaps using some of the existing cash value of the policy to keep the policy in force even if this reduced the eventual payout at death. Although this donor wouldn’t get as big of a tax credit than if he gifted at death, perhaps a smaller tax credit now would be more useful for him, assuming he didn’t just cancel the policy for the $40,000 cash surrender value instead!

Conclusion

Ultimately, we don’t donate for tax reasons but because we want to make a difference in the world around us. Accordingly, many of us do not take tax considerations into account when giving, let alone taking the time to understand the tax nuances. It is my hope that this article helps fill in a few of the blanks, whether you ultimately give a little more because you can do so more tax-efficiently or whether you use the money saved for your own family.