Donating with cash, checks, or credit card is generally considered to be a tax-inefficient way to donate in Canada because it offers different tax benefits than donating securities or other assets. When you donate cash or other property to a charitable organization in Canada, you may be eligible to claim a tax credit on your income tax return. However, the amount of the credit is based on the value of the donation, and it is generally more favourable to donate appreciated assets (such as stocks, mutual funds, or real estate) rather than cash.
One reason for this is that when you donate appreciated assets, you can claim a tax credit based on the full fair market value of the asset, rather than just the cost that you paid for it. For example, suppose you purchased a stock for $100 and it is now worth $200. If you were to sell the stock, you would have to pay capital gains tax on the $100 of appreciation. However, if you donate the stock to a charitable organization, you can claim a tax credit based on the full $200 value of the stock, and you do not have to pay any capital gains tax. This can make it more tax efficient to donate appreciated assets rather than cash, as it can allow you to claim a larger tax credit while also avoiding capital gains tax.
Another reason donating appreciated assets can be more tax efficient is that it allows you to claim a larger tax credit overall. In Canada, charitable donations are eligible for a tax credit based on a percentage of the donation amount. The federal tax credit is calculated as 15% of the first $200 of donations made in a year, and 29% of any donations made above that amount. Provincial tax credits may also be available, depending on your province of residence. For example, if you donate $1,000 in cash or other property that has not appreciated in value, you would be eligible for a tax credit of $345 (assuming you live in a province that does not have a separate tax credit for charitable donations). However, if you donate $1,000 worth of appreciated assets, you would be eligible for a tax credit based on the full $1,000 value of the assets, which could be worth more than the tax credit available for a cash donation of the same amount.
In addition to the potential tax benefits, donating appreciated assets can also be a convenient and cost-effective way to make charitable donations. When you donate securities or other assets, you can avoid the cost and hassle of writing a check or making a cash donation, and you can also avoid the fees associated with selling the assets and donating the proceeds. This can make it easier and more efficient to make charitable donations, particularly if you have a large portfolio of appreciated assets that you would like to donate.
While donating with cash, checks, or credit is certainly a way to support charitable organizations and make a difference in your community, it is generally considered less tax-efficient than donating appreciated assets. By considering the tax implications of your charitable donations and choosing the most tax-efficient method, you can increase the impact of your contributions and minimize the overall cost of your charitable giving.
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