Survey by Mackenzie Investments highlights Canadians' commitment to impactful giving, and how advisors can play a role
In the world of philanthropic giving, it’s fair to say the phrase “give until it hurts” represents the norm rather than the exception. And in an exceptional year like 2020, it appears that Canadians are continuing to uphold that charitable ideal.
In its inaugural Canadian Charitable Giving Pulse Check conducted by Pollara Insights, Mackenzie Investments found that out of more than 1,200 adults aged 18 years old and above, 40% have had to lower the amount they planned to give to charity this year due to the financial impact of the COVID-19 pandemic.
Nevertheless, the fact that 83% had either already donated or had plans to donate to a charitable cause this year, with an average estimated donation of $585 per person, speaks volumes about Canadians’ capacity for compassion.
“We're finding trends where some people who are getting a financial windfall, maybe from selling their business now or winning the lottery, are giving a generous donation,” said Carol Bezaire, vice-president, Tax, Estate & Strategic Philanthropy, at Mackenzie Investments. “Everybody's thinking about it because any time there's a natural disaster, they ask themselves how they can help the community and the charities they know.”
There’s little doubt that charitable organizations have had a tough go of it this year. COVID-19-driven lockdowns have effectively eliminated in-person fundraisers and gala dinners, where they can sell premium tables to the most generous champions of their cause. Their ability to address the public and make their case through usual information campaigns has also been hampered. In the worst cases, the inability to collect donations has threatened foundations’ ability to stay open.
Those concerns weren’t far from Mackenzie’s mind in the summer, Bezaire said. With its own charitable foundation, the firm supports 33 grassroots charities focused on at-risk families and children, which do not get a lot of money from the government.
“Because of the pandemic, we reached out to them and said ‘do you need more money to keep your lights on?’” Bezaire said.
The impact of the pandemic on the community and health is clearly influencing Canadians’ philanthropic priorities. Among the causes identified by participants in the survey, the most popular were medical services and research (54%); local and social services organizations that support youth development, food banks, and shelter services (47%); and humanitarian and relief organizations.
“They’re tending to forgo things like a new business school with their name on the side, and honing it down to the things that society urgently needs right now,” Bezaire said.
One important question for those making donations, including 57% of participants in the survey, is how to make sure the impact of their donations is maximized. To allay such concerns, Bezaire said Canadians should pay attention to their chosen charities’ impact report, which should contain details such as what programs are being implemented, any new initiatives that were introduced, and what they accomplished.
“When you get the impact report, look at it carefully and think about how well the programs align with your goals and ideals of how to help others,” she said. “Another common sticking point for donors concerns how much of their money goes to administrative costs rather than those in need, so we encourage people to pay attention to the annual report, particularly the disclosures on how a foundation allocates its finances.”
That need for transparency is driving more Canadians to consider using donor-advised funds, Bezaire said. Aside from letting them confirm how much financial support is going to their preferred charities, such funds – including one offered by Mackenzie – provide a low-cost and flexible vehicle for people to make their contributions.
Managing donations in a tax-efficient manner is also a priority for Canadians looking to get the most bang from their philanthropic buck. In Mackenzie’s survey, 50% of participants expressed an interest in learning how to manage donations tax-efficiently, while 52% were interested in general best practices and strategies when donating to charities.
“We recently had a webinar for financial advisors which raised the question about what your client wants in the way of philanthropy, and I think the survey just reinforces how important that is,” Bezaire said. “We've got a lot of Canadians who would like to learn more about charitable giving, and they just don't know where to find out how they can do this better, what they can do, and how it works in their plan. If we can add that into their wealth planning, their tax planning, and their estate planning, and just have the conversation, it definitely reinforces the value of advice.”
On the tax-planning front, one tried-and-true piece of advice is to nudge clients toward making donations in kind. As Bezaire explained, investors who donate publicly listed stocks, mutual funds, or segregated funds to their chosen charity can avoid losses from capital-gains tax, which usually gets included in their income at 50%.
“You’re still donating to charity, but it costs you less,” she said.
Estate donations are another way to approach in-kind donations. Bezaire explained that in all provinces and territories aside from Quebec, people have the ability to designate a charity as a beneficiary on their RRSP, RRIF, TFSA, or life insurance policy. Using that approach, she said, would give the executor the flexibility of using the donation tax credit and eliminating up to 100% of the tax a person would pay in their final year of life.
“If there are extra tax credits, they can use them and carry them back to the year before you pass,” she said. “If there’s still excess tax credits or you didn’t really have a lot of income, your executor can use the donation tax credit to eliminate tax in your estate itself for the first 36 months.”
Canadian-controlled private corporations, she said, are another area of opportunity. Because of federal changes to the taxation of corporations, the government has the ability to retract the small business deduction (SBD) for corporations earning more than $50,000 in passive investment income. That means corporations that invest their retained earnings and make more than $50,000 from that investment can be exposed to a higher tax rate on their active income. On average across Canada, Bezaire said it represents a difference between roughly 10% on the first $500,000 in active income, and about 25% starting on dollar one of the excess.
“These companies that have investment income in their retained earnings can also donate in kind,” she said. “They can give the security to the charity, and the charity can sell it; in effect, they avoid that kind of capital gains taxation that can have a knock-on effect on their small-business limit.”
While philanthropic Canadians would be the last to argue against the importance of reducing inequality in society, some government efforts to impose fairness through taxation can have unintended consequences. That includes a wealth tax, a recurring topic of conversation among policy experts that was most recently floated by the National Democratic Party as a way to pay for health care, housing, and other social programs.
“In my humble opinion, I would think that it will offset charitable giving,” Bezaire said. “If you look at the philanthropic people that the wealth tax would apply to, much of their charitable giving is already aimed at reducing economic inequality through health, medical services, food banks, and the like.”
The upshot, she estimated, will be that wealthy households will be convinced to give up at least some of their efforts at tax-efficient giving in favour of simply paying the tax to help the needy. But while affluent households might be willing to make the trade-off, that doesn’t necessarily mean everyone will be thrilled about it.
“The thing with that one per cent tax is that they're not going to have a say in how it’s used. The government is going to take that over,” Bezaire said. “That’s a problem if there’s a cause they believe in that they think is underserved … if it’s not among the government’s priorities, it may not even be touched.”