Giving to charity is a powerful way to create impact, but in retirement, it needs to be done strategically. Before using any of these approaches, two conditions should be met.
First, your retirement plan must show that you can comfortably meet your spending goals without running out of money. Second, if leaving an inheritance is important to you, that should also be built into your plan before making large donations.
Once those are in place, there are several ways to support causes you care about while maximizing your tax efficiency. Here are three strategies to consider.
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Use Form T1213 to offset tax on RRSP or RRIF withdrawals
Gary didn’t like paying taxes on his RRSP withdrawals. Each year, he withdrew $30,000 and donated it to charity to reduce the tax bill. But there was a problem. His financial institution withheld 30 percent in taxes upfront, leaving him with only $21,000 to donate.
He was being taxed on $30,000 of income but could only claim a $21,000 donation. That mismatch led to more tax than necessary.
Gary could have used CRA Form T1213 to request no tax withholding. Once approved, his institution would have released the full $30,000 without withholding tax. He’d still have to report the $30,000 as income, but he’d also have a matching $30,000 donation credit to offset the tax. The result: potentially no tax owing.
This strategy takes time to set up, so it shouldn’t be left until the end of the year.
Donate securities directly instead of selling them
Sarah, who lived in Manitoba, earned $100,000 per year and wanted to donate $75,000 to a charity that meant a lot to her. Her original plan was to sell investments in her non-registered account to fund the donation.
She had invested $10,000, and the investment had grown to $75,000. If she sold the full amount, she would trigger a $65,000 capital gain. Half of that would be taxable and add to her income, resulting in a tax bill of over $13,000.
Her donation would still provide a tax credit of around $21,000, but she would end up with lower net savings overall.
A better strategy was to donate the securities directly to the charity. This would eliminate the capital gains tax altogether and still provide the full tax credit, putting her more than $13,000 ahead compared to selling first and then donating.
Donate while you’re alive, not just through your will
Alfred was 93 and had $40,000 in taxable income. His will stated that his full $1 million estate should go to charity.
The problem is that donations made through a will can only offset income in the year of death and the year prior. So Alfred’s $1 million donation could only be used to offset about $80,000 in total income, resulting in a limited tax benefit.
If Alfred had instead made annual donations while he was alive, he could have received a tax credit every year, reducing his lifetime taxes and potentially allowing him to give even more.
Final thoughts
These three strategies won’t be the right fit for everyone, but when used properly, they can help you support the causes you care about without sacrificing your own financial security. The key is to plan ahead, understand the tax rules, and align your giving with your overall retirement strategy.
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