That Giving Feeling
Topic: Foundations & Endowments, Tax Planning
October 9, 2018
Image used with permission: iStock/pinkomelet
That Giving Feeling
Summer is now a distant memory. In fact, a radio announcer declared only 77 days until Christmas. Ugh. It is usually in the last quarter of the year that clients start thinking about how much they should be giving to charity and how they should go about it. Donating to a charity doesn’t have to be a year-end scramble in the spirit of the season. In fact, charities and financial institutions will thank you if it is not.
The question I get asked most often: “Is there a way to eliminate having to write multiple cheques or prepare multiple in-kind transfers of securities each year when giving to more than one charity?” There are, in fact, vehicles you can use to capture donations and direct giving to multiple charitable organizations. The more permanent way is through a private foundation or a donor-advised fund. These vehicles are ideal for those who want to be strategic in their giving and want to create a legacy. A less permanent way is to use flow through organizations that will, for a fee, take one donated amount each year, split it among charities of your choice and manage the details for you.
Recap of the Income Tax Incentives for Charitable Donations
An individual, when making a donation to a charity, receives a non-refundable charitable donation tax credit on their tax return. Depending on the province of residence, the combined value of the federal and provincial tax credits may reach as high as 54% of the donation. In Ontario, the highest combined value is 44%. The credit is a deduction against taxes payable.
Individuals may generally claim charitable donations up to 75% of their net income in a year, or up to 100% in either the year of death or the immediately preceding year. Any donations that are not claimed in the current tax year can be carried forward for five years.
Corporations can also make charitable donations. However, they are able to deduct the amount of donation directly from their taxable income up to a maximum of 75% of the corporation’s net income for the year.
Both individuals and corporations benefit from a tax-free gain on the donation of publicly listed securities when the donation is made in-kind rather than selling the security and donating cash.
A private foundation is the most permanent and highly structured form of long-term giving. A significant initial donation is recommended in order to justify the costs of setting up and maintaining a private foundation. Therefore, private foundations are often established to coincide with a significant event in the donor’s life, like the sale of a business or receipt of an inheritance. The funds that land in the foundation are invested and annual grants are required to be made out of the foundation to selected charitable organizations.
The primary advantage to establishing a private foundation is the retention of control over the funding and affairs of the foundation within a family. This includes decisions around which charities receive grants from the foundation and how the funds inside the foundation should be invested. Those that are interested in a private foundation are often keen to include the younger generation in order to foster philanthropy and teach family values as part of their legacy.
A donation made to a private foundation is treated the same for an individual or corporation in that an immediate tax benefit is received for the amount donated either in-kind or cash and you can provide funds to more than one charity through the foundation’s required grants to donees each year.
Donor-advised funds are a popular alternative to private foundations. A donor-advised fund is a philanthropic vehicle established by a public foundation. It allows donors to make a charitable contribution, either in cash or in-kind, and receive an immediate tax benefit, just like a private foundation. The key difference with a donor-advised fund is that you do not have the cost, compliance, administrative responsibilities and time commitment associated with a private foundation.
There is variation in how each donor-advised fund operates. Often the donor can provide guidance on how the funds are invested. There is usually a person at the organization who can provide recommendations or advice regarding how the funds are ultimately granted. The administration and other fees to run the foundation are shared with other donors. With a donor-advised fund, many individuals can donate to a single fund in which gifts of like-minded donors are pooled. Alternatively, a separate “foundation account” can be opened and named, allowing donor-directed grants from the foundation account. Foundation accounts usually require a minimum donation size.
For both a private foundation and a donor-advised fund, there is a separation between the timing of your donation, which can occur at any time, and deciding which charities receive grants. This is an attractive feature because it reduces the pressure on the year-end scramble to figure out where your charitable dollars are going in order to get the tax credit or deduction for the calendar year.
Flow-through organizations will take your donation, either in cash or in-kind, issue you a donation receipt for that amount and then allocate the donation out to different charities on your behalf based on your instructions. Unlike a private foundation or donor-advised fund, the donated money does not get invested and partially granted out. The full amount, less any fees the organization charges, goes to charities of your choosing. As is the case with donor-advised funds, each flow-through organization operates differently. Since the flow-through organization must have its own charitable registration number to issue you a tax receipt, they likely are involved in their own charitable activities.
At Nexus we are familiar with several different organizations that have donor-advised funds and/or offer flow-through services. We are happy to provide a referral. DCW