BC business owners have a tradition of extending their personal philanthropic values to our communities by charitable giving either through their companies or by personal donations.
Because incorporated small- business owners falling into the highest marginal tax bracket often pay more in personal taxes than the corporation, it might make more sense for them to contribute personally. Such philanthropy can be managed to increase benefits for both the business owners and the charities.
Those choosing a charitable giving or donor-advised fund have an endowment set up wherein they make an irrevocable gift of cash and other assets, which are invested to maximize the worth of the contribution and increase its value. They make grant recommendations on which registered charities receive donations and get an immediate tax benefit that can be carried forward up to five years.
To ensure an enduring legacy, the charitable foundation can be named beneficiary of the registered plans, and successors can be named to assume the advisory role. If the donor dies, the plans’ assets are transferred directly to the foundation, and the estate receives a tax credit for the value on disposition. This can offset tax on income and effectively bypass probate, further benefiting the estate.
With gifts of life insurance, the charity is named as beneficiary in a permanent life insurance policy. When the donor dies, the charity receives the policy’s cash surrender value plus any net accumulated dividends and interest. The executors receive a tax credit for the value of the donation, which can be applied to a final tax return with a provision to carry back any unused portion to the preceding tax year.
If the charity is designated as owner of the policy, all premiums paid to the policy after donation generate ongoing tax credits, providing a more immediate tax benefit, but no further tax credits accrue to the estate.
A charitable remainder trust best benefits older donors who wish to donate to charity but still require income from their investment. The charity will receive the capital on death, but the donor gets an immediate tax benefit and continues to receive income during his or her lifetime.
Donating securities is a tax-efficient method of financing philanthropy. The donations are exempt from capital gains, and the donor receives a charitable tax receipt for the full market value of the donated securities.
Consider the owner of a $100,000 stock position originally bought for $20,000. There are two options: donating the cash after selling the shares or donating the shares directly to charity.
If the shares are sold and the proceeds donated to charity, capital gains tax has an impact. Assuming a 44% marginal tax rate, $82,400 net proceeds are left to donate and the tax credit generated by the donation would be $35,600.
If the donor gives the shares directly to a charity, both are better off. By donating the shares directly, the donor is not subject to capital gains tax. This means the charity receives $100,000 worth of shares and the donor gets a $43,200 tax credit. The extra value of donating shares is $7,600. This strategy applies to all publicly traded securities, including stocks, bonds and mutual fund investments.
For business owners, the most important decision is whether to donate personally or through the business. Donations made through unincorporated businesses are treated as donations, whereas those made through corporations are treated as expenses. It’s important to run the numbers in determining the best approach. •
