By Tony Maiorino (guest author)
As the end of the year approaches, often so does a renewed focus on being charitable. Even in times of a challenging economy, charitable values and giving during the winter holiday season seem to hold steady for many people. In fact, an Ipsos poll late last year found that more Canadians would rather cut back on holiday gift-giving among family and friends than they would on charitable donations.
For some, it’s the spirit of the season that boosts charitable motivations; for others, it’s factored in as part of year-end tax planning. Either way—or whether a combination of both—there can be many benefits to incorporating charitable giving as part of one’s overall wealth planning.
We know that for many Canadians, giving often tends to be reactive or more ad hoc in nature. By understanding one’s charitable objectives or tax planning needs, our RBC Family Office Services team helps people recognize that a structured, holistic approach can help them create a greater impact than they expected, in a way that’s tax efficient and aligned with their wealth planning.
For those in the philanthropic sectors, it’s important to be aware of underlying circumstances that could impact donors’ decision-making. With economic and tax considerations in mind, here are six factors that might affect charitable giving in 2024.
1. The giving season
The holiday season can be a very popular time for philanthropy. According to the 2023 CanadaHelps Giving Report, December is the largest month of giving, accounting for 30 percent of all annual donations.
Not surprisingly, many causes and organizations run campaigns or seasonal giving opportunities at the end of the year, making it even more of a challenge to stand out. For those in philanthropy, it may be effective to promote a structured approach to giving or different giving options available. Doing so may appeal to or strengthen relationships with donors who could benefit from a charitable giving strategy or who are interested in including it in their overall wealth planning. Against this year’s backdrop of ongoing economic uncertainty, it may also help donors who are more focused on how giving fits with their annual budget.
2. Donation tax credits
On the tax planning side, many donors are aware that donations to qualified recipients need to be made by Dec. 31 of the tax year to receive a donation tax credit. The donation tax credit can be claimed on their tax return and helps individuals reduce their income taxes in the year they make the claim.
In general, there’s no limit to the amount a person can donate in a year, so if someone has or anticipates a large tax bill, the donation tax credits can be very advantageous to help lower their tax liability. For tax purposes, Canadians can generally claim a charitable donation of up to 75 percent of their net income in a taxation year (100 percent for Quebec).
With that in mind, some donors may be looking at their tax situation towards year-end, even more so this year given some of the proposed tax measures from the 2024 Federal Budget. A donation might make sense, not only because of their charitable intentions but also as part of their tax planning.
3. Further potential tax benefits
Still in the realm of tax planning, there are situations where the potential tax benefit of charitable giving is amplified.
For those who’ve had a liquidation event like the sale of a business or of real estate, for example, making a charitable donation and claiming a donation tax credit may have a significant impact to help offset their taxes payable. The same goes for those who’ve sold assets with large capital gains in the year. With the proposed changes to the capital gains inclusion rate (more on that below), this may be more impactful for some in 2024.
Sometimes, a donation can also help rebalance an investment portfolio. For example, it may work well in some scenarios to donate securities in-kind to a registered charity or other qualified recipient to avoid having to include any capital gain accrued on the donated security as taxable income. Recognizing that may be an effective option for some donors from a tax perspective, accepting in-kind donations of securities can be a solid strategic plan for those in the charitable sector.
4. Various options for giving
With many options for giving beyond a direct donation of cash, donor awareness of approaches—whether during their lifetime or as part of wealth transfer and estate planning, or both—is another important factor. Just as some charitable organizations can accept in-kind donations of securities, they might also solicit other non-cash gifts like capital property, art and other collectibles, for example. As part of developing a charitable giving strategy, certain donors might choose to establish a private foundation or donor-advised fund. Or, some may opt to make a charitable bequest in their Will. This is where planning conversations and engagement become crucial, so people understand what options best align with their charitable goals and their overall financial picture.
5. Proposed increases to the capital gains inclusion rate
The 2024 Federal Budget’s proposed increase to the capital gains inclusion rate has the potential to create a significant tax impact for some Canadians.
As a quick overview, it’s proposed that the capital gains inclusion rate for individuals will increase from 50 percent to 66.67 percent for any capital gains (beyond the $250,000 threshold) realized on or after June 25, 2024. The $250,000 threshold means that the inclusion rate would be 50 percent on the portion up to $250,000 and 66.67 percent on any portion above $250,000.
For corporations, the capital gains inclusion rate would be 66.67 percent for all capital gains realized, as there’s no threshold like there is for individuals.
While not yet passed into law [as of the date of publishing], the proposed changes have made it increasingly important this year for individuals to revisit their year-end tax planning, and charitable donations may offer a heightened tax planning opportunity.
6. Proposed revision of alternative minimum tax (AMT)
Alternative minimum tax (AMT) is an important consideration for those making a donation to reduce their taxes payable. AMT is a tax that aims to ensure every Canadian pays a minimum amount of tax and that prevents some high-income earners from paying little or no tax as a result of certain tax incentives.
Notably, in the 2023 Federal Budget, the government proposed that 30 percent of the capital gains realized on the donation of a security in-kind be included in income and the donation tax credit would be halved for the purposes of calculating AMT liability. Those proposed changes left many re-evaluating their charitable giving plans, given the measurable potential impact on the tax treatment of charitable donations.
Fast-forward to the 2024 Federal Budget, which proposed amendments to the AMT calculation. This year’s Budget proposed that 80 percent of the donation tax credit would be allowed for the purposes of calculating AMT instead of 50 percent. This would lessen the impact of AMT on charitable giving, however, it’s still important for individuals to work with a qualified tax advisor to determine if AMT would apply or not.
While charitable giving often gets heightened attention at year-end, we know that a structured plan for giving—at any time of year—can help donors create a more meaningful impact for the causes and organizations they care about, in a way that complements their wealth and legacy planning.
Tony Maiorino is head of the Family Office Services team with RBC Wealth Management Canada. This team of over 230 professionals provides legal, tax and financial planning expertise to help advisor teams within the Wealth Management Canada segment deliver integrated wealth management and planning to high-net-worth clients and their families. Tony has over 30 years of experience advising high-net-worth clients in Canada, and often contributes to publications on various topics within wealth planning. For more information, visit: https://www.rbcwm.com/en-ca/videos/our-approach.