Make the most of your charitable donations
John Connolly, Senior Tax Manager with MRSB Tax Services, provides some useful tips on maximizing your tax benefits when making charitable donations
Many of us are already familiar with the tax benefit of making donations. Your first $200 in donations earns you a tax credit based on the lowest personal tax rate. For donations in excess of $200 you receive a tax credit based on the highest personal tax rate. On Prince Edward Island this is 24.8% on the first $200 and 45.7% on everything over $200. If you donate $200, your taxes are reduced by $50. If you donate $400, your taxes are reduced by $141.
These are the basic rules. If you are willing to put in a bit more effort, here are some ways that you can boost your tax benefit through annual donations.
Delay your donation claim
The tax credit for donations is optional, and unclaimed donations can be carried forward up to five years. If you donate $200 or less each year, you may want to consider delaying your donation tax credit claim to take advantage of the higher tax credit on donations over $200 in a future year. For example, if you donate $200 per year and claim the tax credit every year, then you would save a total of $298 over six years. If you donated the same amount but claimed your donation tax credit every second year, you would save a total of $423 over six years - $125 extra in your pocket! If you carry forward your first five years of donations and claim all $1,200 in year six, you would save $507 ($209 more than if you claimed the credit every year), but you have to wait six years to receive the additional savings.
Be a first time donor
As of 2013 there is a new tax credit that will save a 'first time donor' up to $250 more in tax. You are a first time donor if you (and your spouse or common-law partner if you have one) have not claimed a donation tax credit since 2007. The new tax credit is 25% of up to $1,000 in cash donations. If you don't have $1,000 to take full advantage of the credit in one year, you can carry your donations forward as the credit can be claimed on up to five years of donations. For example, if you are a first time donor who gives $200 per year and claims the donation credit each year, you get an extra $50 tax savings the first year and no extra credit the other years. Conversely, if you wait and claim five years of donations at once, you will get $250 back. The four year delay would save you $367 in additional tax ($200 from this credit and $167 from the higher rate on donations over $200). Keep in mind that this temporary tax credit ends after 2017, so donations that qualify shouldn't be carried forward beyond your 2017 tax return.
Donate your shares
If you have unrealized capital gain in a stock market investment you can use it to increase your donations tax credit. Instead of donating cash to your registered charity of choice, you can make a donation of shares of the same value as the amount that you planned to donate in cash. You get a cash receipt for the value of the shares and the capital gain on the shares is not taxed. If your income is in the top tax bracket and you donate shares with a $1,000 accrued gain, then you save an additional $237 of tax because that capital gain is not taxed. The tax savings of this strategy should be compared to the cost of any fees your broker charges for transferring your shares to a charity.
If you have any questions about the tax benefits of charitable giving or other tax matters, contact a member of the MRSB Tax Services team.