Brush Up on New Calculations for Charitable Donations

According to numbers from 2013 reported by Statistics Canada, 82% of Canadians made a financial contribution to a charitable or non-profit organization, down by 2% from 2010. However, although fewer Canadians donated, those who did donated more—14% more in fact, for a total of $12.8 billion.

Claiming charitable donations can be a tricky business and this year, well-heeled donors will be faced with additional tax complexity when they file their 2016 tax returns, due to a new tax bracket and rate for high-income earners.

The federal non-refundable tax credit for charitable donations, in fact, is now a three-tiered credit, with a sweetener added to the mix for first-time donors until 2017. Here’s how it all works:

• Donations up to $200.  For those who donate smaller amounts, the credit for the first $200 donated is calculated at a federal rate of 15%; so a donation of, say, $100 earns you a non-refundable credit of $15.00.

• Donations by Mid Income Earners. If your income is below the high-income threshold to which a 33% federal tax rate applies (less than $200,000 in 2016), you’ll receive a credit calculated at 29% for the amount of your donation that exceeds $200. For example, a donation of $1,000 would earn you a non-refundable federal tax credit of 15% x $200 + 29% x $800 = $262.

• Donations by High Income Earners. However, starting in 2016, if some of your taxable income is taxed at 33%, you’ll get a credit for the lesser of 33% of the amount of income taxed at 33%, and the amount of your donations, less $200.  (Yes, it’s tricky!) The remaining amount of your donation would be eligible for the credit at 29%.

Now for the sweetener:  if neither you nor your spouse have claimed any donation credits after 2007, you’ll be eligible for a First Time Donor Super Credit of 25% of cash donations (i.e., not in-kind donations) of up to $1,000.

There is a fifth consideration: each province also provides an additional donation credit. In most cases, the credit for the first $200 is calculated at the lowest provincial tax rate and the remainder is credited at the highest tax rate.

However, provinces that have introduced high-income brackets do not often provide a credit at the highest rate. In Ontario, for example, the rate on the first $200 is 5.05% and the rate applicable to the remainder of the donation is 11.16%, despite the fact that there are now brackets at 12.16% and 13.16%.

Clear as mud? Check in next week as we provide some true-to-life scenarios.

ADDITIONAL RESOURCES: Knowledge Bureau Calculators including the Income Tax Estimator and the Donations Savings Calculator. To achieve professional certification in developing Investment Strategies in Charitable Giving, please review the curriculum under the MFA-Retirement and Estate Services Specialist™ Program.

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