Charitable giving is one of the best ways we can create a legacy of our generosity and positively impact our world. Donating helps to make us feel good about our contributions to humanity and better connected to our communities, which increases happiness. We’re honoured to work with so many wonderful individuals, and we know that they would want to donate to their favourite charities regardless of government incentives. However, the incentives in Canada increased in 2016, which means charitable donations are also good for you pocketbook.
Since 2016, Canadians receive a 15% non-refundable tax credit on the first $200 of cumulative donations. That’s equivalent to $30. However, all donations over the first $200 receive a 29% credit for Canadians earning less than $200 000. The wealthiest among us benefit from an even larger credit of 33% against any donated income above $200 000 annual.
Let’s do an example. Carolyn has $225 000 of taxable income this year and donates $30 000 to charity. How large is her tax credit?
- The first $200 gains her $30 of tax credits (0.15 x $200 = $30)
- Next, she’d have to calculate how much of her income above $200 000 is donated. ($225 000 - $200 000 = $25 000) So the following $25 000 gains her $8 250 (0.33 x $25 000 = $8 250)
- The remaining amount receives a tax benefit at the normal rate of 29%. ($30 000 - $25 200 = $4 800) Therefore, she’d receive a final credit of $1 392. (0.29 x $4 800 = $1392)
In total, Carolyn will receive a total federal tax credit of $9 672.
Provinces also offer tax credits, and while rates vary from province to province, rates are generous. If Carolyn lives in Quebec, which offers the highest provincial rate, she could see a combined tax credit worth 54% of her donation. In Nunavut, which offers the lowest rates, Carolyn would still have a combined tax credit of 44.5%.
Since Canadians are able to benefit from donating up to 75% of their net income, and they are able to carry tax credit forward up to five years, the most fortunate Canadian families are able to significantly lower their tax burden through donations while maintaining their prefered quality of life. This is even more true for those who wish to make a charity the heir of their estate.
In the year of death and the year proceeding, 100% of an individual's net income is eligible for tax credits when donated. This can make charitable giving a powerful tool for reducing your estate’s tax burden after you pass.
For ultra-high networth Canadians with more than $5-million available for annual donations, it may even make sense to create your own charity. This will allow you more control over how your funds benefit your cause and can create an enduring legacy for you in the future. An option you may also wish to consider is donating stocks in-kind rather than writing a traditional cheque. Donating stocks will still benefit you with tax credits, but you’ll also avoid paying taxes on the capital gains from the stocks. This can mean receiving close to 70% of your donation back in tax savings.
At MacMillan Estate Planning, we’re privileged to work with so many wonderful, generous people. Many of our clients enjoy participating in philanthropy, and it is our honour to help you create a legacy through charitable giving while simultaneously benefiting your estate and finances through the laws created to encourage donations. If you want to learn more about how charitable giving can fit into your personalized estate plan, contact the experts at MacMillan Estate Planning today and schedule your free consultation.