
E-Bulletin 38 John Q Gregg Late December 2003

TAX STRATEGIES: OPTIMIZING CHARITABLE DONATIONS

The charitable donations tax credit is unique. Tax rates are applied to it unlike any other credit or deduction.

This email responds to requests for fuller detail.

Recall that a “marginal tax rate” is the rate applied to the last dollar earned. And a “combined marginal tax rate” is that combining both federal and provincial rates. For 2003, one earning $20,000 has a combined MTR of 22%, one making $120,000, 43.6%

Tax credit for the first $200 of donations is granted at the lowest MTR, 22%. Whether one earned twenty grand, or ten times twenty grand, the tax credit remains $44.00.

Tax credit for amounts over $200 (up to 75% of net income) is granted at the highest marginal tax rate, nearly 44%. Again, income level doesn't play into it. After the first $200, a $100 donation costs you, the tax payer, $56.

This application of the highest MTR (43.6%) provides a bigger kickback for lower and middle earners. Take someone earning, say,$50,000, who annually donates $200. She has any number of ways in which to further reduce taxable income, including RRSP contributions and child care expenses. Using these strategies, she would decrease her tax bill by $311 for each $1,000 deducted (MTR = 31.1%). But each $1,000 donated to charity saves her $436 (MTR = 43.6%) – a further $125 earned back from taxes.

So why not give more? This, one could argue, is precisely the reason for such a lucrative tax credit, to encourage you to do so, to help replace the social safety net governments have so drastically slashed. If you truly wished to give $100, you'd give $178. ($178 – (178 x 44%) = $100).

Another feature of the donation tax credit is that it is non-refundable. Meaning that it can be used to reduce your tax owing to zero, but after that, . . . it's wasted; you'll receive no refund for it.

These features dictate the following strategies:

Carry donation credits forward (if zero tax).
If tax owing is otherwise reduced to zero, don't squander the donation credit; carry it forward to a larger income year. You've got up to five years to use each donation receipt.
Carry donation credits forward (for a bigger bang.)
If one is in the habit of regular small donations, they may wish to stockpile their receipts in order to climb that $200 threshold. Two hundred dollars donated annually for five years provides a total tax credit of $220 ($44 x 5). But combined, in the fifth year, the tax credit is $396 ($200 x 22% + $800 x 44%)
Combine spousal donations (for an even bigger bang).
Two hundred dollars declared by each spouse results in a combined credit of $88.00. But when applied to one spousal return, the result is $132.00 ($200 x 22% + $200 x 44%)

To test out your own tax credit strategy, plug your numbers into Walter Harder's Income Tax Estimator. [http://www.walterharder.ca/T1.html] Note how his estimator breaks out the donation credit into federal and provincial portions.

Two other donation tax strategies are worthy of note. One can give in kind, for example the family heirloom grand piano to a needy orchestra (registered as a charity), and receive a tax credit for full market value. Additionally, special rules around donation of common stock make it a thoroughly rewarding technique. More involved than simple cash, either strategy should be discussed with your tax advisor.

Special thanks to Paul Michel Simard and to Gill Campbell for their insights to this issue.

Please feel free to forward this on to those who may gain from it.

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