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Charitable Donations: Giving and Tax Savings

December 18, 2017

The season of giving has arrived!  You may be thinking of making some final charitable donations for 2017.  Many are inspired to give back to the community by donating to charitable organizations.  As you embrace the giving spirit by making donations, keep in mind the tax benefits available to you.

Eligible Donations

Donations are eligible for a donation tax credit if they are made to a charity registered with CRA.  Generally, a charity will be a registered charity if they have a 9-digit charity business number (for example, 89653 0485 RR0001).  You can check whether a charity’s business number is eligible by searching in CRA’s charities listings.

There are many alternatives available to individuals for charitable giving, namely cash donations and gifts of property (such as securities, artwork, real estate, etc.).  We will talk about the particular rules regarding gifts of property below.

Donation Tax Credit Basics

Individual donors are entitled to a donation tax credit with respect to eligible donations made in the year or unclaimed from any of the previous five years.  The donation tax credits available are calculated as follows:

Federal Tax Credit

  1. 15% of the first $200
  2. 29% of donations above $200
  3. 33% of donations above $200 to the extent that your income is above $202,800

BC Tax Credit

  1. 5.06% of the first $200
  2. 14.7% of donations above $200

Individuals can claim donation tax credits for donations made of up to 75% of their net income in the year of the claim.  Any donations made in excess can be claimed in the following five years.

Example A: BC resident with income less than $202,800 donates $1,000.

In this case, they would get combined Federal and BC tax credits of 20.6% on the first $200, or approximately $40.  On the remaining $800, they would get combined tax credits of 43.7%, or approximately $350.

Accordingly, the total tax credit will be $390 and the after-tax cost of the $1,000 donation will be $610.  If they donate another $1,000, they will get a combined tax credits of $437 and the after-tax cost for the additional $1,000 donation will be only $563.

Gifts of Property, or Donations in Kind

Where individuals make donations of property, or “donations in kind”, the amount of the tax credit is determined by the fair market value of the property donated at the time the gift is made.  At that time, however, individuals are deemed to dispose of that property at the same fair market value.  This means that they will have to recognize any income or gain that would arise as if the property had been sold.

Donations of capital property1 such as artwork, real estate, or shares of non-public companies will trigger a capital gain or loss.  However, donations of publicly traded shares2 are exempt from capital gains rules, so there is no corresponding income inclusion when such shares are donated.

There are also some specific incentives with respect to donations of “certified cultural property” and donations of ecologically sensitive lands to either the federal government, a province or territory, a municipality, or certain charities.

Example B: BC resident with income of $250,000 donates an art piece with a value of $2,000 and a cost base of $1,000.

At the time of the donation, they would be deemed to have disposed of the art piece.  This would result in a capital gain of $1,000 ($2,000 value less the cost of $1,000).  Half of the capital gain would be taxable meaning a taxable capital gain of $500.  At a 2017 effective tax rate of 47.7%, the tax cost would be approximately $239.

They would also be entitled to combined tax credits of 20.6% on the first $200, or $40.  They would have a combined tax credit of 47.7% on the remaining $1,800, or $859.  The tax credit will be at 47.7% because they have income of more than $202,800.

Accordingly, the combined tax effect of the donation will be tax savings of $899 and the after-tax cost of the donation will be $1,101.

Example C: BC resident with income of $250,000 donates public company shares with a value of $2,000 and a cost base of $1,000.

As noted above, they would have no taxable income as a result of the donation of public company shares.

They would have combined tax credits on the $2,000 value of the shares equal to $899 (calculated in the same way as in example B).  The after-tax cost of the donation of shares would be $1,101.

Donations by Will

Often individuals will make a donation or gift in their will.  Previously, these donations could only be used for a tax credit in the year of death.  However, donations can now be deducted in either the date-of-death return or in the immediately preceding year where an election is made by a qualifying estate3.  Gifts made by a non-qualifying estate can only be claimed in the year the gift is made or in the five subsequent years.

Other Matters

First-Time Donor’s Super Credit

2017 is the last year for the first-time donor super credit.  If an individual has never claimed a donation tax credit, they may claim an additional credit equal to 25% of first $1,000 of the amounts donated in 2017 or any preceding years.

Alternative Minimum Tax

In years where individuals have certain large tax deductions or capital gains in a year (relative to their other sources of income), they may be subject to alternative minimum tax (AMT).  Before making a donation, especially a large one, be sure to look into whether AMT may arise from a planned donation.

DMCL is Here to Help

At DMCL, we are ready and able to help with the required analysis and calculations to ensure that both you and the charities of your choice get the most out of your gifts.  If you have any questions about your planned charitable donations, or any other tax questions, feel free to contact your trusted DMCL advisor.

Footnotes

1:      Generally speaking, capital property is property held by a taxpayer not for the explicit purposes of selling it at a later time.  Examples include land and real estate, shares of corporations (unless the taxpayer is engaged in a business of actively trading such shares), and artwork.

2:      These shares need to be traded on a “designated stock exchange”.  These exchanges are essentially the key active stock exchanges in Canada and globally.  A complete listing of such exchanges can be found at https://www.fin.gc.ca/act/fim-imf/dse-bvd-eng.asp

3:      Qualifying estates are “graduated rate estates”.  This concept was recently introduced and, generally speaking, means an estate of an individual who passed away less than 36 months prior that has been designated as such.  Non-qualifying estates are any other estates.