Canadians donate their time, volunteer and fundraise for charities, and make charitable donations. All of these efforts contribute to the country’s societal wellbeing. In addition to benefiting society, when planned properly, charitable giving also may benefit the donor from a tax perspective. If you are considering making donations, be sure to include these in your tax and estate planning. This article will provide more details on the taxation rules that apply to charitable donations, specifically to donations made upon the death of an individual. Although there are various types of donations to utilize in planning, this article will focus on the tax treatment of cash gifts and gifts-in-kind.
Types of Donations:
- Cash gifts are the most common type of donation. When making a cash donation, ensure that the donation receipt includes the Charity’s name, address, registration number, receipt serial number, the donor’s name, the year of donation, and the amount donated.
Gifts-in-kind occur when capital property is provided to a registered charity. It is important to note that property provided for remuneration does not qualify as a gift-in-kind. Some examples of property that may be donated include personal property, shares of private or public companies, real estate, etc. Personal property of little value, such as used clothing or furnishings, is exempt from this treatment. In addition to the requirements for a donation receipt for cash donations listed above, in-kind donation receipts must also include a description of the property, the name and address of the appraiser, the fair market value of the property, and the eligible gift amount.
Regardless of the type of donation you make, it is important to retain the supporting documentation.
General Rules for Charitable Donations:
The first $200 donated is subject to a federal donation tax credit equal to the lowest marginal tax rate, currently 15%. Donations in excess of $200 are subject to a federal donation tax credit equal to 29%. A provincial donation credit also applies to donations made by a taxpayer.
Generally, you cannot claim a donation credit for amounts that exceed 75% of your net income. However, donations in excess of this threshold are not lost. The excess amount can be carried forward and applied to future tax returns for up to five years, each of which are also subject to the 75% limitation.
The disposition of capital property generally triggers a capital gain in the hands of the taxpayer. This capital gain is eliminated if the taxpayer makes an in-kind donation of the certain capital property (e.g. shares listed on a designated stock exchange, a unit of a mutual fund trust, ecologically sensitive land, etc.) to a registered charity or qualified donee. As such, donations in-kind not only allow the donor to qualify for a donation tax credit, it also allows the donor to eliminate capital gains on the disposition of certain capital property. Given the favourable treatment towards donations in-kind, it may be more beneficial for donors to consider donating capital property directly than to donate the proceeds from the disposition of the capital property.
Special Rules for Donations Upon Death:
In the year of death, the 75% annual limit discussed above is not applicable, the individual is able to claim donations up to 100% of his/her net income for the year on their final return. Donations made in the year of death can also be carried back to the year immediately preceding the year of death. If the individual made donations in the previous five years leading up to the year of death, those donations may be claimed in the year of death provided they have not been claimed previously.
Donations made by an Estate:
For deaths that occur after 2015, qualifying estate donations are deemed to be made by the individual’s estate and, if applicable, by the individual’s Graduated Rate Estate (GRE). Typically, GRE donations include donations made by will or designation donations. Donations made by will refer to charitable bequests, cash or in-kind, made under an individual’s will. A designation donation is a donation of a direct distribution of proceeds to a qualified donee from an RRSP (including a group RRSP), RRIF, a tax-free savings account (TFSA), or life insurance policy (including a group life insurance policy) as a result of a beneficiary designation.
GRE donations can be allocated against net income among any of the following:
- the taxation year of the GRE in which the donation is made;
- an earlier taxation year of the GRE; or
- the last 2 taxation years of the deceased individual (the final return and the return for the preceding year)
An estate, whether it is a GRE or not, can claim a charitable donations tax credit for an estate donation in the year in which the donation is made or in any of the five following years. A charitable bequest does not avoid probate taxes. The legal representative must attach supporting documentation for the donations made. The type of supporting documentation you have to provide depends on when the registered charity or other qualified donees will receive the gift.
If a charity is designated as the beneficiary of an RRSP/RRIF, the funds transfer directly to the charity and probate taxes may be alleviated. If publicly traded securities held in an RRSP/RRIF are donated, they do not qualify for the elimination of the capital gain discussed earlier with respect to in-kind donations. Instead, the fair market value of the RRSP/RRIF is considered an income inclusion, not a capital gain.
Charitable donations are an effective tax and estate planning tool. Your RLB LLP advisor can help you select the most tax efficient ways to realize your charitable giving objectives while minimizing your potential tax liabilities. Contact us for more information and helpful guidance with your tax and estate planning needs.
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