January 2000 volume 4, issue 1 

There was a time when making a donation to your favourite charity was a simple matter of writing out a cheque, and claiming the gift on your income tax return.

While some companies and individuals continue to make cash donations to charitable causes, others are opting for other alternatives, from gifts of publicly traded securities to the establishing of private foundations. These creative forms of giving all provide attractive tax incentives, while at the same time giving donors the satisfaction of knowing they are making a difference in their community.

gifts of publicly traded securities
Instead of donating cash to a charity, more and more people are looking at donating publicly traded securities or bonds. The advantage of donating your shares in Bell Canada, for instance, is that not only do you get a donation receipt for the full fair market value of the shares you’re gifting, but you only have to include one-half of the taxable capital gain in income. By gifting shares, you pay less tax to the government on the disposal of the shares, and you still get a full donation tax receipt- truly a win-win situation.

This type of planning works well if you are looking for ways to donate to charities, and you wish to reduce the growing tax liability in your estate. Be aware, however, that there are only a couple of years left to take advantage of this type of gifting, unless the government decides to extend the time frame of this incentive.

gifts of insurance policies
Another alternative for gifting to your favourite charity is to donate the proceeds from a life insurance policy. Here are three basic options.

First, you can purchase a new life insurance policy with the charity named as the beneficiary. For this option to work, the ownership of the policy must be transferred to the charity. In most cases, donors agree to fund future premiums directly to the insurer on the charity’s behalf. As the donor, you will then be given a donation receipt by the charity for the premium payments made. In the event of your death, the insurance proceeds will be paid directly to the charity.

Another option is to consider gifting an existing policy to your charity of choice. If you simply make the charity the beneficiary of the policy, then you will not receive any donation receipt when the policy is finally paid out. To obtain any tax benefit, it is important to make the charity the sole beneficiary and to transfer ownership of the policy. By transferring the ownership, you will be eligible for a donation receipt on the value of the policy, which is generally the cash surrender value, plus any interest and dividends left on deposit. If you continue to pay the premiums on the policy, you can also receive a donation receipt on the premiums.

The third option is to name your estate as the beneficiary of an existing life insurance policy, and then make a specific bequest in your will to donate the proceeds to your chosen charity. This approach would allow the gift to be considered as a donation made in the year of your death, and as such could be claimed up to 100% of net income for the same or preceding year.

establishing a private foundation
Private foundations are generally set up by high-income individuals who are interested in providing a large sum for charitable purposes.

As the donor, you must first create and register the foundation (The John Smith Foundation, for instance) as a charity, and make the substantial donation to this new entity. You will then receive an official, one-time donation receipt, and a significant tax break that can be carried forward up to a maximum of five tax years.

As interest is earned on the foundation's principal amount, the money can be given away to worthy causes, whether general or specific. The foundation will not be taxed on the interest generated, provided the charity gives away its disbursement quota, determined annually.

This option works really well for those who wish to obtain the tax advantage today for their gift, and would like to see a legacy created that will be given in their name beyond their death.

When making a charitable donation, it pays to consider all your options. To learn more about these and other giving alternatives, contact your Wilkinson & Company LLP partner or CA.

Steve Thompson, CA, CFP, TEP is a tax partner and Certified Financial Planner with Wilkinson & Company LLP. He is a graduate of the Canadian Securities Course, and author of the best-selling tax guide, Beat the Taxman: Easy Ways to Save Tax in Your Small Business.