Charitable gifts: Tax credits and how they work

Some time ago, I had a conversation with a regular charitable donor that went something like this: “What a rip off! It’s not like it used to be. The government only gives a 29% tax credit for my charitable donation. I get way more than that for an RRSP contribution. I used to get a deduction for the full amount of my charitable contributions, just like my RRSPs.” “You’re right,” I replied. “It’s not how it used to be, but you actually get a bigger bang for your buck with a charitable gift than you used to. In fact, it’s better than just about anything else you can do. From a tax perspective, it’s much better than contributing to an RRSP for most people. Just bear in mind that an RRSP contribution is setting money aside for yourself, while a charitable donation is irrevocably giving that money away to a good cause.”

Tax Credits and how they work…

Why the confusion? Well, decades ago, charitable contributions were treated the same as RRSP contributions. A taxpayer would reduce their income (take a deduction) for the exact amount of donations they had. This reduction in taxable income would result in paying less tax. Then, all of a sudden, the Canada Revenue Agency (CRA) switched to a tax credit system for charitable contributions. It confused many people then and it still does today.

The easiest way to think about it is like a store credit. One dollar is still worth one dollar, but the store won’t give that to you in cash. If you owe them money because of a purchase, you can apply the store credit like cash. It’s the same with the CRA but, instead of needing to apply it towards a purchase, you can only use it to apply against taxes that you owe. Fortunately, even if you don’t owe taxes now, the CRA gives you seven years to use the credit before it expires. 

Just to clarify, when I say “owe taxes”, I am referring to the base amount that you owe for the year, not how much you still have to pay when you file in April. The filing in April is just a determination of what you owe at that time (ie. what you owe for the year minus what you’ve paid in advance). In other words, if you file your taxes and it comes out that you “owe” $10,000 but have prepaid $12,000 over the past year, you will get $2,000 back. So, because you owed a total of $10,000 in taxes, you are eligible to take advantage of the charitable tax credits. 

For BC residents, the total tax benefit of donating is 45.8 percent of the amount donated. Essentially, an additional donation of $100 on top of your existing donations will save you $45.80 in taxes (and it is similar in other provinces). That’s a fantastic deal – it’s almost half back! However, there are so many exceptions and qualifications that it’s worth understanding how it all works.

First off, the above does not apply to the first $200 given. A donor only receives a small tax credit (about $40) on that initial amount. After that, assuming that the taxpayer’s income is high enough to owe tax, the 45.8% kicks in. For higher income earners that earned more than $159,483, the benefit increases a bit more in keeping with the higher marginal tax rates at that income level. 

Secondly, while a tax credit directly reduces how much tax you owe, keep in mind that a federal tax credit reduces only how much federal tax you owe, which then reduces how much provincial tax you owe. So even though you look on the tax return and it shows you only got a 29% tax break, don’t forget that there will be a subsequent reduction in the provincial tax you owe. 

You don’t even need to trust me on this. If you use personal software to complete your return, you can easily see it for yourself. Most tax software has a summary section when you can see what you owe at a glance. Make a note of what you owe. Go back and increase your donations by $100. Take a look at the new summary and most of you will see a benefit of $45.80.

Just don’t forget to go back and remove that $100 when you’re done testing. I don’t want you getting in trouble with the CRA by mistake. 

So, now that you know a $1,000 donation will only really cost you $532, does that make you think about giving more? I’d like to know. Email me at dr.rrsp@visionvest.ca and let me know what you think.

Sources:

– Canada Revenue Agency (https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/claiming-charitable-tax-credits/calculate-charitable-tax-credits.html)

Arnold Machel, CFP® lives, works, and worships in the White Rock/South Surrey area. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Arnold is now accepting a limited number of invitations to speak. If you are interested in having him speak to your congregation or other group regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.