Building better donors gets more money to important causes and reduces clients’ overall tax bills
I’ve said it before, Canadians are generous, giving over $14 billion each year to registered charities. In fact, according to the Charities Aid Foundation (CAF) World Giving Index 2022, Canada is one of the world’s 10 most generous countries.
But while many Canadians have a financial plan, an estate plan, and even a plan for next year’s vacation, not very many have a strategic plan to help them enhance the impact their charitable gifts can make. That’s unfortunate, because as the old adage goes “if you don’t know where you are going, you’ll end up someplace else”.
Clients expect financial professionals to understand Canada Revenue Agency’s rules with respect to charitable tax donations and tax credits. For example, donations made in any year can be carried forward for five years, and individuals can claim a maximum of 75 per cent of their eligible net income as a tax donation. A clear understanding of how donation credits work is important, but simply understanding the rules doesn’t help determine which clients are inclined to give and which are not.
The power of conversation
For some reason, many advisors seem reluctant to lead the conversation about charitable giving. It’s almost like they are waiting for permission. But because we already know that most Canadians support charitable causes, I think it is incumbent on us as professionals to lead the giving conversation. Here are some ideas to get you started.
- Do you currently support charitable causes? If so, how are you supporting them (gifts of cash, credit cards, gifts of appreciated securities, legacy gifts)?
- Given your current situation, are you open to ideas on how to support these causes with greater tax efficiency, giving more to the charity and less to the government in the form of taxation?
- Do you plan on giving similar amounts each year, or do you anticipate this number fluctuating over time based on your income?
- How likely is it that you will revise or change the charities you support from year-to-year?
- Are you interested in discussing strategies to maximize the long-term impact of your donation?
Learning more about a client’s goals and objectives is an important way of building and maintaining a trusted relationship. And, while gathering knowledge is important, it is equally important to be able to present a credible recommendation to them based on that knowledge.
The Power of Knowledge – Introducing Donor-Advised Funds
One strategy that works equally well for clients who have a well-defined plan and those who do not is using a donor-advised fund (DAF). A donor-advised fund enables clients to make donations in any given taxation year and disperse it to their selected charities at a later date.
Like any charitable gift, a donation to a DAF generates a charitable donation tax receipt, which can be used to offset taxable income. Importantly, the donor retains advisory privileges with respect to how much and how frequently funds are ultimately distributed to selected charities. It’s the advisory power that makes DAFs so powerful.
When the account is established, the donor establishes which charity or charities will receive donations from the account each year. As long as there are funds in the account, gifts will be granted indefinitely. The donor can change which charities receive annual grants, making the structure appealing for those who haven’t yet determined which organizations they would like to support.
This strategy is widely embraced by high-income earners, or those that earn large income in a given tax year – perhaps through the sale of a business or investment property. When income is high (and clients are paying higher marginal tax rates), clients who are philanthropically minded may elect to contribute to donor-advised funds using their excess capital. They will qualify for donation tax credits, which can be used to reduce their overall taxable income. The DAF allows donors to support charitable causes in years when their income may be lower or there are no material tax benefits from making additional donations.
Similarly, a company can also set up donor-advised fund to support their corporate giving plans. Just as with individuals, in years where profits are strong, making donations to charities can reduce the overall corporate tax bill. Because the DAF permits distribution to charities across multiple time periods, a company can continue to support causes in their community even during years when revenues are down.
The power of next steps
Clearly, the ideal candidate for a DAF is someone who has already expressed an interest in charitable giving. I can’t think of a better way to help clients than by helping them maximize the impact they want to have on their community.
Building better donors puts more money in the hands of important causes and reduces the client’s overall tax bill. How many of your current clients are interested in learning more about charitable giving? I strongly recommend that you start asking them before one of your competitors does.
Craig Swistun is a Portfolio Manager with Raymond James Investment Counsel. The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed.
This information is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.