Earlier this week it was revealed that former ad agency owner Jean Lafleur,
who gave generously to the federal Liberal party during the years he profited
from the government's federal sponsorship program, claimed his political
contributions as "business expenses" on his tax returns.
Unfortunately, the ability to deduct political contributions from income is
specifically prohibited under the Income Tax Act.
The tax law provides specific rules and limits as to the amount of political
contributions that can be claimed in a particular year. Rather than claiming a
deduction, as Mr. Lafleur did, contributions made to registered federal or
provincial parties or to federal or provincial election candidates are eligible
for a credit against taxes payable.
On your 2004 tax return, you can claim a federal tax credit equal to 75% of
the first $400, 50% of the amount from $400 to $750, plus 33.33% of the excess
up to $1,275. Thus, federally, the maximum political donation credit is $650.
Note that the credit is available only in the year in which the contribution was
made and cannot be carried forward. This differs from charitable contributions,
which may be carried forward for up to five years.
Each province also has its own set of political contribution tax credit
rates, which may differ from the federal rates. The limitations both federally
and provincially are fairly low and certainly well below Mr. Lafleur's 2001
contribution of $5,500.
It's interesting to note that because the tax credit rate actually decreases
with the amount of political contributions made in the year, it is often
beneficial to have each spouse claim their own contributions and to consider
contributing smaller amounts in successive years as opposed to one large amount
in a particular year.
Again, this tax planning strategy differs from charitable contributions where
the opposite advice is given. Because the donation credit for charitable
contributions is higher for any donations made over $200 in a particular year,
it is advisable for spouses to pool their donations in one year to reach the
higher credit threshold faster.
In contrast to political contributions, some businesses have successfully
argued in court that they make charitable donations as a form of advertising or
promotion, allowing them to deduct the full amount in the year as a business
expense, and not be limited by the 75% of income limitation generally associated
with charitable donations.