Do you make charitable donations? Most likely you do. According to research by Charities Aid Foundation, two-thirds of Canadians donated to charities with an average donation in 2018 of $327 per person. Almost all of which are immediate cash donations that are used to fund programs in communities all across the country.
Charitable giving is a net positive to our country and I work with lots of clients to help them meet their annual donations. It’s an easy way to help you make a small difference in your local community. For some though, making an immediate donation doesn’t meet all their goals. Is there a better way to make donations now AND for decades afterwards?
I read this post by Cam Anderson of Future Legacies and I think his idea is the most coherent strategy to make immediate donations but also to build a real charitable legacy. He suggests making donations for immediate use while also investing a percentage of your old donations for future donations. As Anderson writes, “after fifteen years earning 5 percent, amounts invested have doubled” with your goal to then donate half of the investment and keeping the other half to keep growing.
For example, if you invested $500 today and it grew an average of 5% a year, in 2035 you will have $1000. Donate $500 and keep the other $500 for another 15 years. The benefit of this strategy are two-fold. You have doubled your impact in a short amount of time but you’ve also set up a perpetual donation machine that pays out $500 every fifteen years. Not a bad result and suddenly something that has real impact beyond your immediate cash donations.
In his blog post, Anderson doesn’t specify an amount to consider doing this but I think you could consider the following framework. If your annual donations are over $1500, take 1/3rd of that to start to build your perpetual charitable fund and donate the other 2/3rds as you normally would. It’s a mini-foundation to call your own!
There is another way to fund your charitable giving and that’s by donating eligible investments you hold in a taxable investment account. This option also has an added benefit in Canada that most people don’t know about. If you donate a holding that has a capital gain, you don’t need to pay tax on that capital gain AND you still get the credit for the full amount of your donation.
Holding those shares of your recently IPO’d company that have a huge capital gain? Have you dutifully bought shares in your company through the employee share purchase plan in your career? Donate some of them and suddenly your income tax concern is gone. Now imagine using them to start to fund your mini foundation? You’ve eliminated the capital gain tax, received an immediate credit for the donation AND built a lasting legacy.
There are good options for small charitable foundations once you get above $50,000 like our Gift Funds Canada program, that allow you to have a greater impact long term and don’t require as much work as establishing your own independent foundation. As a supporter of charities and the work they do in our communities I think it’s important that we all consider how we can best help now and in the future. Maybe the best way to do that is by building a mini-foundation of your own.