How tax credits for charitable donations can lift your spirit and your pocketbook
This weekend, as many of us sit with family and friends exchanging Christmas and Hannukah gifts, it’s also important to keep in mind others that could use our support this holiday season. Fortunately, you still have a full week to make a donation to your favourite cause and reap the tax benefits for the 2016 tax year. And if you’re feeling charitable, why not take full advantage of the myriad potential tax benefits available to you, depending on how you choose to make your gift.
Donation tax credit
For starters, let’s review the donation tax credit system. Charitable donations attract both federal and provincial non-refundable tax credits. On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200. These rates are equal to the tax rate of the lowest federal bracket (income below about $45,000) and the second-highest bracket (income above approximately $140,000) respectively. Donors who have income subject to the new 33 per cent top federal rate (for income over $200,000) and who donate more than $200 annually benefit from a 33 per cent tax credit on such donations.Parallel provincial credits work similarly, although not all provinces have adopted their top tax rate as their top provincial donation credit rate.
“First-time donors” can also take advantage of the temporary First-Time Donor’s Super Credit, which provides an additional 25 per cent non-refundable tax credit on up to $1,000 of donations. A first-time donor is someone who hasn’t claimed a donation credit after 2007. If you’re married or living common law, neither you nor your spouse qualify if either of you has made a donation after 2007. The FDSC can only be claimed once and expires at the end of 2017.
The FDSC could be particularly helpful if you’re a recent graduate who’s starting your first job. Perhaps you’ve never claimed a donation credit in prior years’ tax returns since the combination of the basic personal credit, along with your tuition, education and textbook credits were sufficient to reduce your tax payable to zero while in school.
Since 2006, donations of publicly traded shares, mutual funds or segregated funds to a registered charity not only get you a tax receipt equal to the fair market value of the securities or funds being donated, but also allow you to avoid paying capital gains tax on any accrued gain on the shares or funds donated. Similarly, if you’re an employee who has received stock options, you can avoid paying tax on the stock option benefit by choosing to donate the proceeds of option exercise to charity within 30 days of exercise.
With just a week to go in 2016, now is a great time to think about “tax-gain donating.” While you might be more familiar with the concept of tax-loss selling, which involves crystallizing a capital loss in 2016 so it can be used to shelter capital gains you’ve realized this year or in the prior three calendar years, tax-gain donating involves crystallizing those winning stocks or funds by donating them “in-kind” to charity.
For example, let’s say Bob wishes to make a $1,000 donation before Dec. 31. He can give the $1,000 in cash or by credit card (“to get the points!” as I’m often told) and get a receipt for $1,000, worth up to 50 per cent or about $500 in donation tax credits. But, if Bob was to donate appreciated securities worth $1,000 that he purchased years ago with an adjusted cost base (ACB) or tax cost of, say, $600 to the charity instead, not only would he get the same receipt worth $500, but he would save up to $100 of capital gains tax, depending on his tax bracket. ($1,000 – $600 = $400 X 50 per cent capital gains inclusion rate X 50 per cent tax bracket).
Even if Bob wants to hold on to those securities in the hope of enjoying further capital appreciation, he can simply take the $1,000 that he was going to use for the donation and buy back the securities he just donated. That way, he gets the donation tax receipt, pays no tax on the capital gain and bumps up his ACB of the security repurchased back up to fair market value, reducing his ultimate tax bill on a future sale.
Donations of real estate and private company shares
Finally, you may recall that earlier this year, the federal government announced in its budget that it was not proceeding with draft legislation that would have exempted capital gains from tax when the proceeds from the sale of real estate or private company shares are donated to a registered charity. This measure was introduced by former Finance Minister Joe Oliver in the 2015 federal budget and was to come into effect for donations beginning Jan. 1, 2017 but was cancelled by the Liberal government without any warning or explanation.
The proposed rule would have put donations of the proceeds from the sale of appreciated private corporation shares or appreciated real estate on a similar footing as donations of publicly traded securities.
A pre-Budget submission by former investment banker and philanthropist Don Johnson estimated that if this measure were to be reinstated, it would increase charitable donations by an additional $200 million annually. But don’t hold your breath as this recommendation was not ultimately adopted in the final Report of the Standing Committee on Finance, issued earlier this month.