Maximizing Tax Savings When You Donate

Under our tax system, the money you have available to donate to a charity is usually after-tax money, that is, money that you’ve already paid taxes on.  As a result, when you donate to charity, in many cases the Government is simply giving you a credit for taxes you have already paid.  It’s the Government’s way of allowing you to use your tax dollars to support the charities you want rather than the way the Government wants.  Do you think your Government can spend your money more wisely than you?  Each year there are examples of Government waste.  Donations allow you to direct your tax dollars to worthy organizations that you support.

Here are some tips for maximizing the tax benefits when donating:

1. Make sure the organization that you are supporting is a registered charity and provides you with an official donation receipt with its Revenue Canada registration number on it.  If you don’t get an official donation receipt for income tax purposes, you can’t claim a tax credit on your income tax return.  Even if you don’t particularly need the tax credit for yourself, claim it anyway and donate your refund to your favourite charity.  This allows you to give twice with the same donation.

2. Couples should combine their donations and claim all of them on one tax return. This allows you to reach the maximum tax credit available more quickly.  If your total donations in the year are under $200.00, your tax credit is worth about 24%.  The tax credit on donations over $200.00 is worth about 44%!  The more you give, the better it gets.

3. New rules allow you to name a charity as the beneficiary of your RRSP, RRIF or life insurance policy.  This provides you with the opportunity to donate a part or all of your RRSP, RRIF or life insurance proceeds on your death and avoid any complications relating to your Will and also avoid probate fees – another form of taxes.

4. If you want to make a large donation to charity, make sure you have enough income to use up all of the tax credit you will get as a result of the donation.  Sometimes large gifts in your Will create tax credits that can never be used.  Consider a planned gift (e.g. a series of annual gifts during your lifetime) to ensure that you get all the benefit of the tax credits you are entitled to.

5. If you have no taxable income or you can’t use all of your donation tax credits, consider making gifts to a family member who can donate the funds and receive tax credits they can use.  Make supporting a charity a family affair.

6. If you are lucky enough to own shares, stocks or mutual funds which have gone up in value, consider donating some of those investments to charity. Most charities are equipped to receive donated shares and value them every bit as much as a cash donation.  The key to this program is a new tax rule which allows you to get a full tax credit for the current high value of the shares plus you get a 50% reduction in the capital gains tax on those shares.  This “super tax incentive” was established by our Government to encourage you to donate shares.  Don’t miss out on this terrific tax incentive program.

7. Do you own books, manuscripts, works of art or other objects that can be considered to have particular value due to their historical or cultural significance?  You may be able to donate these objects to a university, museum or other institution or historical society which can preserve these objects and share them with future generations. These objects can be appraised and you are entitled to a tax credit for the appraised value.

8. If you own any real estate such as revenue property, acreage, farm land or vacation property, you may be facing a tax bill for recapture of depreciation on buildings or capital gains when you sell the property.  Consider a charitable donation to reduce or eliminate the taxes.  Bonus:  in many cases, the tax credits you receive will be greater than what you need to eliminate all the taxes on the sale of the property.  This will leave you with extra tax credits which you can use to reduce other income taxes that you owe. This is particularly satisfying if you leave land to an environmental charity which has the purpose of preservation of land or wildlife for future generations.

9. Amounts you receive from your RRSP or a RRIF are fully taxable. If you don’t need the income, consider an annual donation equal to the RRSP or RRIF payment in order to eliminate the taxes.

10. If you need a large tax deduction this year but aren’t ready to turn that money over to your charity or you aren’t sure which charities to give it to, consider a family foundation or a permanent endowment fund where you donate a lump sum today and direct how the income is distributed each and every year after.  It’s the gift that keeps on giving. The cost of setting up one of these is not as expensive as you might think.

11. Want to make a real difference to your charity but don’t have a large enough estate?  Consider starting a special life insurance policy in the name of your charity.  If set up properly, your annual premiums will generate an annual tax credit for you and on your death, your charity will receive a large lump sum which will truly make a difference.  What if you are not insurable?  Consider insurance on another family member.

Planned giving is a way to maximize the tax benefits your Government wants you to receive for supporting charities.  Know the rules and you will receive what you are entitled to under the law.  Talk to an experienced estate planning or tax lawyer, accountant, financial advisor or a planned giving officer at your church or charity.  Remember, a tax planned gift can result in more dollars to the charities that you want to support.

Tom Fellhauer is a tax and estate planning lawyer with the law firm Pushor Mitchell LLP and is also a director of the Central Okanagan Foundation.