As discussed in the previous post, most people donate by simply transferring money from their bank account to a charity of their choice - this is a great way to donate! This mini-series is in no way attempting to downplay the numerous monetary and non-monetary benefits of making any type of donation, rather, we are simply trying to shed some light on different donation mechanisms. With that in mind, let’s jump in.
Virtually all personal donations are made with after-tax dollars meaning that individuals have already paid tax on the money that they are donating, through income tax, thereby decreasing the donation by the amount of tax they had to pay. The results of the donation amount being reduced by taxes are as follows:
1. The charity receives less money
2. The donor receives a smaller tax credit
But what if there was some way to avoid paying income tax on money that you are planning to donate… Is it even possible to donate pre-tax money? The answer is “Yes, well, sort of.” Although one cannot donate pre-tax employment income, one can donate pre-tax investment income by donating securities that have capital gains to a charity. By donating securities with capital gains directly to a charity rather than donating cash allows the charity to take on the tax obligation from the capital gain associated with the security rather than the donor taking it on themselves. This may seem like it is harmful to the charity by forcing them to incur more taxes, however, since charities do not pay tax they will be exempt from the capital gains tax that the donor would have been required to pay. Therefore, the benefits of doing this are as follows:
1. The charity receives a larger donation
2. The donor receive a larger tax credit
3. The donor never has to pay tax on the capital gain attached to the security they donated
A caveat to this strategy is that securities must be donated from a non-registered account (i.e. not an RRSP, TFSA, etc.), however, if an individual already holds investments with a capital gain in a non-registered account and they actively donate then this could be a very useful strategy.
To wrap up, it truly is possible to increase your cash flow AND donate more at the same time. Keep watch for our next and final post on how to use life insurance as a donation tool!