Have you made a resolution to be more charitable in 2013? Whether you're planning a large donation or small monthly contributions, now's the time to consider the best way to go about giving.
According to Prashant Patel, a vice-president at RBC Wealth Management, Canadians that opt to give generous donations could be receiving a fair bit more back if only they paid closer attention to their tax returns. Why wait until year's end to start your tax planning? The smarter move is to plan your philanthropy by consulting with a financial advisor to ensure you're getting the most out of your donation dollars.
Here are some tips to get you started…
Deductions versus tax credits
Canadians can make contributions to any worthwhile non-profit organization that they wish throughout the year. However, only donations that are made to registered charities qualify for an income tax credit. Even though donations that are made to registered charities are often referred to as "tax deductible", that's not exactly the truth. In most cases, these donations qualify for non-refundable tax credits, rather than deductions. For more information, review the Canada Revenue Agency (CRA) Donations and Gifts resource page.
In most cases, Canadians can get a credit for all donations to any CRA registered charity, up to 75 percent of an individual's net income. In the year of death (and going back one year), this limit increases to 100 percent.
Maximize your donation
Did you know that, in order to encourage more donations, the federal and provincial governments have provided a two-tier credit system designed to benefit your bottom line? This system is based on what is loosely referred to as the ‘$200 Rule’. During the year, keep track of all of your charitable donations. The amount up to $200 qualifies for a tax credit at the lowest tax rate. Any amount over $200 will qualify for a credit at the highest tax rate.
This combined program can help taxpayers reduce their taxes by roughly 25 percent of the total amount donated up to $200. For the amount over $200, the savings are roughly 45 percent, however this varies by province.
Since the tax credit is higher for donated amounts over $200, there is a further benefit to combining donations with a spouse and for carrying your donations forward.
- Combining returns
Donations made by one spouse/common law partner can be claimed by either person in the relationship. The best way to maximize your tax credit is thus to lump your gifts together in order to push your collective total as far above the $200 mark as possible. It doesn't matter which person claims the donations; they can use the credit as long as they pay taxes.
- Carrying donations forward
Canadians have the option of carrying some or all of their donations forward by up to five years. As such, if you find that you've fallen short of the $200 mark come year-end, it may be beneficial to carry your donations forward into the New Year. What's more, donations made in years of low income should be carried forward in order to maximize your return.
Give more for the same net amount
It's worth noting that securities and insurance can be donated to a charity, along with cash. For example, new rules encourage the donation of publicly listed securities (stocks) that have appreciated in value. Individuals who donate in this manner won't be charged capital gains taxes on the gifted amount. This can often save you a great deal on your tax return. For more information on how to execute this type of gift, check out the CRA's resources on Gifts of Capital Properties to a Charity and Others.
There are two ways to donate the proceeds of a life insurance policy to a charity: the charity can be the owner of the beneficiary of the policy; or the donor can remain the owner, while the charity is the beneficiary.
There are benefits to either method. In the first instance, the donor receives a credit for the premiums paid on the policy as a donation on their annual income tax return. Typically, insurance premiums aren't tax deductible. This method enables you to convert your payments into deductions during your lifetime. The latter allows the donor to claim the amount that is paid by the policy when they die (this can help a great deal when it comes to offsetting a final tax return). By naming the charity as the beneficiary, you essentially avoid the probate process. As such, you'll enjoy almost a dollar-for-dollar offset in donation tax credits against your final tax bill.
Planning ahead pays
According to Statistics Canada, donors who take the time to map out their charitable donations end up giving more than others and enjoy great tax savings. Begin the year on a generous note – visit CanadaHelps.org to find a charity that speaks to you!
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Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.