12/04/2014 05:59 EST | Updated 02/03/2015 05:59 EST

Give a Little and Get a Lot: Giving to Charity This Holiday Season

Alex Slobodkin via Getty Images

It could be a passion for the arts, a sick family member or even a near-death experience. It's rare to find a Canadian without a personal connection to a charity. Working with investors over the years has given me a firsthand glimpse into the varied reasons why people give.

One of my clients -- I'll call her Andrea -- had worked hard to build a successful career. She was a high-income earner, didn't spend a lot and all of a sudden, she had accumulated significant wealth. Andrea married later in life, didn't have children and was distant from her extended family. We proposed what seemed to her like a bold plan: a donor-advised fund. It was a great option for Andrea since it was timely, flexible and allowed her to quickly realize a tax benefit. Andrea was able to select charities to support annually, choosing causes that help low-income families in her community.

Andrea isn't alone. A growing number of wealthy people have decided to pledge their fortunes to charity rather than leaving large inheritances to their children or extended family. Warren Buffett, Sting, Gene Simmons, Jackie Chan, Kevin O'Leary and Bill Gates have famously promised their wealth to charitable causes. "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing," Buffett has said.

Giving: A Canadian tradition

The latest statistics show 84 per cent of Canadians aged 15 and older donate to charitable and nonprofit organizations. In 2010, the average individual donation was about $446 per year which adds up to $10.6 billion dollars annually. The rates of giving are highest in the 35 to 54 age group.

Giving to charity isn't just a smart strategy for community-building: it provides tax benefits too. The Canadian tax system encourages gifts to charities by granting tax credits to individual donors. The first $200 of eligible donations receive a federal tax credit at a rate of 15 per cent of the donation amount and donations over $200 receive a federal tax credit of 29 per cent. Add to that the provincial tax credit, the overall credit can reach into the 40 to 50 per cent range. Charitable gifts may be claimed up to an annual limit of 75 per cent of net income -- a number that rises to 100 per cent for gifts made in the year of death and the year before. You can carry donations forward to any of the following five years.

You have options: donating on your own terms

While people often default to donating cash directly to a charity, there are a variety of options to consider:

  • Donor-advised funds. A donor-advised fund is a private fund administered by a third party to manage charitable donations on behalf of individuals, a family or an organization. Individuals can open a donor-advised fund through their investment advisor, community foundation or charitable foundation. There is typically a minimum donation required to set up a donor advisor fund. The Canada Revenue Agency requires donor-advised funds to pay out 3.5 per cent of assets to charities every year, even in weak market conditions. The money contributed to a donor-advised fund is eligible for a donation tax credit up to the limits mentioned above. For families, donor-advised funds add a different dimension to wealth by providing the opportunity to involve kids in charitable giving decisions each year. It's a great way to educate the next generation and instill a passion for making the world a better place.
  • Private foundations. Many affluent people set up private foundations to formalize the distribution of their wealth. Generally, private foundations are best suited to individuals with more than one to two million dollars to donate. Foundations are set up through a lawyer and require administrative duties, including registration with the Canada Revenue Agency, tax returns and possibly a board of directors depending on how it is structured. Grants made from a private foundation are public record, which may dissuade some from setting one up.
  • "In-kind" donations of bonds, shares or mutual funds. This is an often overlooked way to donate. Giving investments in-kind is incredibly tax efficient for you since it eliminates capital gains and provides a charitable donation receipt for the fair market value. Charities are well-equipped to handle these types of transactions.

No matter how you give -- money, time or both -- kudos to you for contributing to your community. Challenge a friend or family member to do the same!