Planning Your Charitable Impact
Markus Muhs - Sep 24, 2018
Charitable planning is too often overlooked in a financial plan. It's time we take a look at how we can be more calculated and deliberate with our donations, while minimizing tax over our lifetimes.
Recently Canaccord Genuity Wealth Management partnered up with CHIMP, primarily to help us provide a simpler and more tech-enabled Donor Advised Account.
Not to make this post into an advertorial for CHIMP or to get you to open a DAA with me, it’s more an observation of FinTech applied to charitable giving. As well, after a visit to our branch by one of CHIMP’s representatives, a lightbulb went off in my mind regarding an area of financial planning that I – and many others – have perhaps been overlooking. Namely, charitable planning.
For many of us, giving to charity involves our friends or co-workers asking us to sponsor them for something or for a donation to some charity they care about, and out of kindness we give knowing we’ll get almost half of the money back on our taxes anyway.
Myself, when I first started giving regularly, I’d give $100 every time someone asked me for a donation. Then too many people asked, so I dropped it to $50. Most of us don’t really plan our finances around it, other than maybe imposing a budget on ourselves for how much we give. We tend to give passively; not deliberately.
CHIMP’s Technological Edge
What CHIMP enables the end user to do is to plan better and give more deliberately. That’s practically ripping the words right off their website, so I’ll explain how:
To get us started on their platform, CHIMP gave us (CGWM advisors) each a $25 credit to donate to the charity of our choice. I, of course, chose the Rotary Club of Edmonton, of which I’m a member, both to see if they’re listed on CHIMP’s platform as well as confirm how the money gets to the charity (will be checking with our club’s administrator next month).
What really blew me away when I looked up my Rotary Club was how much information CHIMP had on us. There was an entire profile page of the club’s charitable trust, including a breakdown of income, the percentage going to admin, and all sorts of charts and figures. Every registered charity in Canada has to file this information and it’s disclosed in some form on government websites, so CHIMP simply aggregates it and helps the donor make smarter decisions with their money.
At its core, the CHIMP platform lets the user easily donate a bulk amount to CHIMP’s own charitable trust – Charitable Impact Foundation – one-time, or on a recurring basis, with your credit card. CHIMP processes the transaction at a fairly low credit card transaction fee and issues you a tax receipt immediately. As a donor, this sure beats tracking a handful of different tax receipts each year, and from my involvement on the financial/administrative side of a charity (the aforementioned Rotary Club) I can tell you that the issuing of tax receipts takes a substantial amount of time and small charities tend to get worse credit card transaction fees than CHIMP.
Putting it into practice, imagine simply setting yourself a budget of $X per month, having it automatically charged to your credit card, filling up your CHIMP account balance. Now, whenever a co-worker asks for a donation to some charity or other, you just log into CHIMP, check what’s in your balance, check out the charity itself and ensure it’s run efficiently, and make the donation.
On top of that, you can do this all anonymously and avoid the additional solicitation one often gets from individual charities whenever you give.
Securities Donations In-Kind
Stocks, bonds, and mutual funds can be donated in-kind to charities fairly easily no matter where you hold them. Generally, you just sign a letter of direction and submit it to your broker and let the charity know so they issue you the tax receipt.
The main benefit to the donor, of course, is that, not only do you get a charitable receipt for the full market value of the securities, you also avoid having to pay any capital gains tax.
Say, for example, you bought 1000 shares of a stock in the emerging "alternative natural medicine" sector in Canada at $1 and it’s now worth $20. You’ve got a $19,000 capital gain, and at the highest marginal rate in Alberta that means a tax bill of $4560. You could sell it and pocket the net $15,440. If you’re super-generous, you could donate that $15,440 and get a tax credit, reducing your overall tax bill by around $7000. OR donate the shares and get a receipt for the full $20,000 (should lower your taxes by around $10,000).
The traditional way of donating securities, you can only benefit one charity, and then that charity has to deal with selling those securities, which they’re not all set up to do efficiently. Donating those shares to CHIMP, they handle the selling of those securities at a cost of 1%, and you get the money in your CHIMP account balance, to be doled out to numerous charities over a number of years if you desire.
Donor Advised Accounts
CHIMP itself is a big Donor Advised Account (in the neighborhood of $70 million, from what I can tell on the profile for their own foundation). Where CHIMP’s partnership really helps CGWM advisors and clients is in administering their own DAAs.
DAAs, in simple terms, are like “mini-foundations” that individuals or families can open much more easily and with smaller minimums than what it would take to establish a real formal charitable trust or foundation. At CGWM, the minimum is restricted to the minimum account size of the investment mandate, which could be as low as $25,000.
When you establish a DAA, you effectively are donating the money to CHIMP's foundation. You continue to direct the fund: how/when money goes into it, how much goes from your Charitable Investment Account to your CHIMP account, and then how to distribute to your chosen charities.
Some of us have charitable bequests built into our wills, where a certain amount of your estate goes to your favorite charities (in turn this can yield a large tax credit on your terminal tax return). For a large estate, a large bequest might exceed the maximum tax credit, which is 100% of the income in your final two years. In that case, if you know a large portion of your estate is going to charity, why not donate it over several years into a DAA and spread out those tax credits a bit?
A DAA can also facilitate the donation of securities. With the DAA invested into the CGWM Investment Counselling Program, stocks can easily be donated directly; essentially transferred from your own investment account into a DAA, where ICP automatically sells the shares and invests it according to the chosen investment mandate.
Prudent estate planning might also designate stocks/funds with large capital gains go directly into your DAA at death, again helping your estate avoid the capital gains tax and potentially establishing a legacy.
Some Charitable Donation Tax Basics
Lastly, just to give you some useful info you can use, to reward you for reading this far into the blog post, here are some of the basics when it comes to the impact of charitable donations on your taxes.
All too often I find myself correcting people: charitable donations yield tax credits, not deductions. As a result, your marginal tax rate isn’t as big of a factor. The maximum total donation you can claim in a year is 75% of your income.
So, where the benefit of a $1000 RRSP donation is much greater for someone earning $140,000 than someone earning $40,000, there’s no difference when it comes to charitable donations. How you apply them in a given tax year can make a difference though.
For Alberta residents, our first $200 donation claimed earns a 25% tax credit. That’s 10% provincial plus 15% federal. On the excess amount over $200, the credit is 21% provincially plus 29% federally (totaling 50%). Those with taxable income over $200,000 get a slightly higher federal tax credit of 33% on all or part of the excess amount, to reflect their higher marginal tax rate.
Some simple tax planning hacks are to have a higher income earning spouse declare all charitable contributions on their return. You can also defer claiming contributions and carry them forward, claiming them all at once in a future year. It’s all about reducing how much of your donations only get the measly 25% credit. Two spouses donating $200 each per year for three years can turn $300 worth of tax credits into $540 done correctly.
For more information directly from the horse’s mouth, check out the Government of Canada’s site on the matter.
If I have piqued your interest at all in making charitable giving part of your financial plan, OR if you're just looking for a worthwhile Rotary club to donate to, feel free to drop me a line.
Markus Muhs, CFP, CIM
Title pic at the top of this post is a picture from our February 2018 trip down to Belize as part of the Rotary Club of Edmonton and Literacy Without Border's Belize Literacy Program.