Canadians are a remarkably generous people. According to Statistics Canada 84% of Canadians made a financial donation in 2010 with the average annual donation of $446 for a total of $10.6 billion dollars. Canada’s tax system certainly plays an important role with generous tax credits. While many people are familiar with the rules for charitable giving, there are a few things to ensure before making that gift and there are interesting planning and tax reduction strategies available.
Donations are limited to 75% of a taxpayer’s net income, except in the year of death, when up to 100% of net income may be claimed. On the first $200 of donations in a year, the tax credit is at the lowest rate available and on total donations exceeding $200 the tax credit is calculated at the highest rate. In Ontario, on donations exceeding $200 the tax credit is approximately 46.5% making the after tax cost of $1,200 of donations, $690. For a donation claim to be valid, the taxpayer should have a receipt issued by a registered Canadian charity with the charity’s Business Number printed on the receipt. If an advantage is received in return for the donation (example – meals, tickets) the eligible gift for purposes of the donation claim is reduced by the value of the advantage received. Tax credits are non-refundable.
Beyond the Basics
Planning efforts may help to increase your charitable claims and reduce taxes payable. Canada Revenue Agency administratively allows legal spouses and common-law-partners to share tax credits. By pooling receipts and claiming them on one return, the overall tax credit will be increased. To the extent that a donation is not claimed in a tax year, it may be carried forward up to five years. If the donation is carried forward, either spouse may claim the donation.
A very important yet little used strategy is to donate qualified shares of a publicly traded company or donate qualified ecologically sensitive land. The Income Tax Act allows for the taxable capital gain on the disposition to be eliminated. This allows for the taxpayer to receive a donation tax credit on the value of the donation, but no tax needs to be paid on the gain. In some cases, the donation tax credit may exceed the original cost of the property.
Upon death, the limit for a donation increases to 100% of the deceased’s net income and unused donations may be carried back to the year before death. When preparing a Will, thoughtful planning including charitable giving may significantly reduce taxes upon death. For example, donating a stock portfolio may result in no taxes on the capital gain and tax credits to offset other taxes owing.
An endowment fund is a unique charitable gift. Most endowment funds require the original capital to be maintained in perpetuity and only the income from the gift is used for the charitable purpose. A gift to an endowment fund allows the gift to keep on giving for as long as the fund exists. Combining the strategy of a gift of a stock portfolio and an endowment fund may result in significant tax savings and a gift that lasts a lifetime.
A Word of Caution
Given the generous tax credits available, various donation schemes have been developed by promoters that offer plans to reduce personal income taxes by making donations and receiving tax credits that are in excess of the donation made. Canada Revenue Agency is well aware of these schemes and is regularly contesting them and usually winning in the Courts with unfortunate results including significant penalties and interest for the taxpayer. Before participating in a donation scheme, the taxpayer should be aware of the risks involved. Our firm will not prepare a tax return involving what we consider to be a donation scheme.
Plan Now and Save Later
Charitable organizations in Canada do great things and may help advance causes that are very important to individual taxpayers. Planning charitable giving in advance may be a method to significantly reduce taxes arising from investment gains or upon death while allowing the taxpayer to support important and worthwhile causes.