Many retirees devote their time and energy to charitable causes in retirement. Volunteering is a great way to remain healthy and active in retirement. Plus, giving back to causes that are important to us make us feel good.
In-addition giving time back to our favorite charities, donating money can also have a big impact on our income tax bills in retirement.
Review of the Canadian income tax treatment for donations
Chartiable donations entitle you to a three-tier credit in Canada.
- The first $200 of donations for the year (to all charities) gives you a 15% federal tax credit, worth about 24% when you factor in the provincial tax credit.
- Donations above $200 give you a 29% federal tax credit, worth about 47% when provincial tax is factored in.
- If your income is over $214,368, you will get a 33% federal tax credit, worth about 51% including the provincial credit, for the portion of your donation above $200 that equals your income over $214,368.
Example: Samantha has taxable income of $220,000 and makes a donation of $20,000, the tax credit is calculated as:
- 24% x $200, plus
- 47% x $14,168, plus
- 51% x $5,632 ($220,000 - $214,368)
The 33% federal credit is available for 2016 and beyond.
The limit on charitable donations that you can claim in a year is 75% of your net income, except for the year you pass away and the year before you pass away. In those years, you can deduct 100% of your income.
Charitable Giving Strategies
Here are some strategies that might help you increase your income tax savings for charitable donations:
- Combine multiple years of donations – if you contribute small amounts each year, consider combining donations over several years to get over the $200 threshold. Remember, donations of $200 and below attracts the smallest charitable tax credit. If you combine your donations over a couple of years to get over that line, the charitable tax credit will be worth more.
- Combine charitable tax credits with your spouse and claim them on the higher income spouse’s return – consider claiming your charitable donations onto the higher-income spouse’s income tax return. This will allow you to avoid getting the low credit on $200 of donations and below twice (see above). If you or your spouse earns above $214,668, consider claiming the charitable contributions on the higher income spouse’s tax return to take advantage of the third tier of credits mentioned above.
- Donate securities or assets to charity instead of cash – instead of donating cash to charity, consider donating actual securities or assets. This will enhance the size of your gift, as well as the income tax savings for you.
For example – Samantha wants to make a large gift to her favorite charity this year. Sam has a non-registered investment portfolio that is worth $50,000 with a cost basis of $25,000. Sam has two options:
- She can sell the securities and donate the proceeds – Sam would realize a $25,000 capital gain (50% taxable at her marginal tax rate). After setting aside the money she would need to pay the taxes, her gift to the charity would be $43,625 ($50,000 minus ($12,500 taxable capital gains x 51% marginal tax rate)). Her donation tax receipt would be for $43,625.
- She can donate the securities directly to the charity – there is no capital gains income inclusion for donated property, as long as the property is marketable securities (ie. stocks, bonds, ETF’s, mutual funds). So the total amount of the portfolio could be donated with no capital gains tax going back to Samantha. Her donation tax receipt would be for $50,000.
Charitable Donations made through your will
If you decide to make a donation to charity through your will, remember that the charitable donations limit is 100% of your net income in the year you pass away, plus the year before you pass away. This will give your executors some flexibility to figure out the best way to spread out your charitable tax credits and achieve the most tax savings.
When planning out charitable donations in your estate plan, consider the following:
- Family First – while giving to charity is a noble cause, make sure that you have considered your spouse and dependents’ needs before making a sizeable charitable donation.
- Be clear in your intentions – make sure you identify the charity you want to donate to using their exact legal name and contact information and make sure to keep it up to date. There have been legal battles between charities of similar names, or divisions of the same charity, because the will was not clear which entity the gift was meant for.
- Make sure that your estate has enough cash to make the gift you intend – if your estate clearly states that you want to give a certain dollar figure to a particular charity, and the estate doesn’t have that cash available, your executors will be forced to sell other assets to fulfill your wishes. Make sure you have thought this through in advance and identified the assets that you wish to use to make your gift
- Be mindful of big gifts – if you plan to make a large charitable gift in your estate plan, the value of the gift may end up being larger than the amount you can use to write off against your income taxes. In this case, you might consider a longer-term giving plan that spreads out your gift throughout your lifetime. This strategy will allow you to maximize your tax benefits and have more control over how the gift is given. You may also get some satisfaction seeing how your gifts made a difference while you are still alive.
Saving money on taxes is not the primary aim when giving to charity. But, with some proactive planning you can make sure your gifts go where they are intended, leaving more in your hands to either donate or provide for your loved ones.
Please consult with your financial advisor, tax professionals, and legal professionals before making any decisions.