The Canada Revenue Agency (CRA) encourages taxpayers to contribute to charities by offering significant tax benefits on their donations. Your tax calculation can change depending on how much donation you give and how you give it, in cash or in-kind (publicly listed securities, mutual funds, property, and more). Even in cash and kind, there are multiple ways to give to charity and reap the tax benefits for the next five years. This benefit is called the federal donation tax credit, and the government has extended the deadline for making eligible donations for the 2024 tax year until February 28, 2025.
In this article, we will understand how taxation works around donations and various strategies you and your business can use to save taxes through donations.
How Federal Donation Tax Credit Works?
The CRA allows a 15% federal donation tax credit rate on the first $200 donation. If you make donations above $200, a 29% tax credit rate applies. If you fall in the 33% tax bracket (taxable income over $246,752), you can use the 33% donation tax credit rate up to the income taxable at 33%.
For instance, John’s 2024 taxable income is $250,000, and he donated $20,200 to a registered charity. His federal donation tax credit will be calculated as follows:
- 15% on the first $200 = $30
- 33% on ($250,000 – $246,752) $3,428 = $1,131
- 29% on remaining donations of $16,572 = $4,805
John can get a non-refundable federal tax credit of $5,967 on the $20,200 donation. A provincial donation tax credit will also be added.
Taxpayers can claim donation tax credits up to 75% of their net income, which could increase to 100% the year the taxpayer dies and a year before. Taxpayers can carry the unused donation tax credit for five years or pass it to their spouse or common-law partner.
How to Use Donations in Tax Planning
However, there are other ways to use donations for tax planning than making cash donations and claiming credit. It depends on how you structure your donation.
Charity Through Bequest in a Will
Bequest in a Will is adding a clause stating the registered charity as the beneficiary of the assets you wish to donate. You can claim tax credit on the asset’s fair market value (FMV) in the year of donation. This credit can be applied against 100% of income in the year of death and the preceding year.
Donations Through Registered Savings Plans
You may also consider naming a registered charity as your Registered Retirement Savings Plans (RRSPs) beneficiary. The RRSP withdrawals are taxable. However, if the RRSP funds directly go to a registered charity, it will generate a donation tax credit and reduce taxes. As the funds are not passing through your estate, probate fees and taxes on RRSP withdrawals will also be eliminated.
Donations Through Life Insurance
Life insurance is an effective tool to collect funds for tax liability arising after the taxpayer’s death. However, you can also use life insurance to accumulate donation tax credits in two ways:
- If you have an insurance policy you don’t need, you could consider transferring the policy’s ownership to charity. The charity will give you a donation tax receipt for the FMV of the policy after deducting any outstanding policy loan and for any future premiums you pay.
- You could gift a new insurance policy to a charity and get a tax credit worth its value.
- You could buy insurance in your name and make the charity the beneficiary. The estate will receive a tax credit on the insurance proceeds the charity receives after the insured’s death.
Charity Through Donor-Advised Fund
If your estate is significant and you want to give higher value to charities on an ongoing basis, you could consider establishing donor-advised funds (DAF). You could consider transferring the assets to these funds and get an immediate tax receipt on the FMV of the asset. The assets can grow in the DAF, and when you find the charity you want to support, you can instruct the DAF on giving out donations. The DAF can use the above methods (life insurance, will, RRSP) to give charity.
Charity Made by Corporations
Companies can give donations in cash or kind, such as publicly traded shares, mutual funds, and ETFs. If they directly donate shares to charity, they can get a donation tax credit worth the FMV of the security. If the security value increases, 100% capital gain is exempted from tax instead of 50% if you sell the share and realize the gain in the company’s name. Moreover, the company can add the exempted capital gain, 100% in this case, to the capital dividend account (CDA). The amount in CDA can be distributed to shareholders tax-free.
Donations are an excellent way to reduce the income taxed at 33%.
Contact Ford Keast LLP in London, Ontario, to Help You Plan Tax Strategies
Donation alone has various ways to generate tax benefits. There are many other tax strategies an individual or company can use to save taxes without avoiding taxes. At Ford Keast LLP, our accountants and tax experts can provide services such as tax planning and strategy to help you avail yourself of the many tax benefits the CRA offers. To learn more about how Ford Keast LLP can provide you with the best tax planning expertise, contact us online or call us at 519-679-9330.
