Have you considered investing your tax refund in your favourite charity? Canadians are charitable people—every year, 94% of us give to charities or non-profits. These gifts keep giving back: not only are they good for society, but thanks to a generous tax credit system (that costs the government $2.3 billion a year), they’re good for you too.
You can give up to 75% of your net income to charity; this rises to 100% on your final return. You can also choose to transfer qualifying securities to your favourite charity and completely avoid capital gains taxes—while at the same time scoring a donations tax credit. Just stay away from charitable donation schemes. The taxman acts swiftly to remove any tax advantages; worse, taxpayers must now pay 50% of the reassessed taxes even while you object to the assessment.
I’m also happy to report there is extra good news for first-time donors, with a special “super credit” available on the first $1,000 donated. Here’s how it all works:
Regular Donations to Charities
For those who have donated in the past, the donations tax credit returns up to 50 cents on the dollar, depending on contribution levels and province of residence:
■ The first $200 in total gifts is eligible for a credit at a rate equal to the lowest federal tax bracket (15%).
■ Remaining gifts are eligible for a credit at a rate equal to the highest federal tax bracket for the year (29%).
■ When provincial taxes are added, donations over $200 can return up to 50% of amounts donated.
Donations may be claimed either by the person making the gift or by a spouse or common-law partner. Because of the higher tax credit above $200, families should group donations on one return.
First-Time Donor Super Credit
To qualify for an extra 25% federal credit, available only for tax years 2013 to 2017, a donation must be in cash and only the first $1,000 qualifies. To qualify as a first-time donor, neither the taxpayer nor his or her spouse can have claimed a donation credit since 2007.
Consider this scenario: Chloe and Janine are single Albertans who each donate $500 to a favourite charity. Chloe donates regularly but Janine has never claimed a charitable donation before. Each is entitled to these credits:
First $200 (15%) $30
Next $300 (29%) $87
First $200 (10%) $20
Next $300 (21%) $63
Tax credits $200
Janine is also eligible for:
Super Credit on $500 (25%) $125
Janine’s total tax credits $325
So in this example, Chloe gets back 40% of her $500 donation, while Janine, as a first-time donor, gets back 65%.
What Can You Give?
The allowable claim for the regular donation credit is based on qualified gifts: cash, securities or other types of capital assets. The donation credit is limited to the lesser of your donation and 75% of your net income. Where gifts of certain capital property include capital gains, the 75% of net income limitation may be increased.
For example, you can claim 100% of your total cultural and ecological gifts. Cultural gifts must meet criteria set by the Canadian Cultural Property Export Review Board. Ecological gifts are of land certified as ecologically sensitive, donated to Canada, a province, municipality or registered charity dedicated to preserving the environment. Best of all, there is no capital gains tax on the disposition of these gifts.
Charitably inclined investors with significant non-registered portfolios will especially appreciate tax-free gains on transfers of securities to charity. Use a 0% capital gains inclusion rate rather than the normal 50% when transferring shares, debt obligations or rights, unlisted securities and partnership interests.
Year End Planning
If you qualify, consider giving $1,000 cash to maximize the First Time Donor’s Super Credit, perhaps by first selling a losing stock. You receive a donation receipt while generating a capital loss that can offset other capital gains this year, gains from the three prior tax years, or any future capital gains. If you also own stock with accrued gains, consider transferring these securities to charity. You avoid tax on the capital gain and get a charitable donations receipt.
Regular gifts made by you or your spouse in this or any of the five previous years can be claimed on this year’s return if those donations have not already been claimed. If it’s not to your advantage to claim the donation credit this year, elect to carry the unclaimed gifts forward by up to five years.