December is here, trees are decorated, and Christmas songs are playing. It is officially Christmas season! It seems as though winter and Christmas bring out the charitable side of people. Yes, Christmas is coming but so is a lot of charitable giving. 30% of donations happen in December with 5% of the annual amount happening on Dec 31 alone.
Giving is not just about making a donation. It is about making a difference.
Kathy Calvin
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Now before getting into the nitty-gritty of one of the most under-utilized charitable giving strategies, let’s go over some general rules and FAQ’s of charitable giving.
Charitable Giving FAQ’s
Is there a charitable giving deadline?
For charitable giving to be applicable for a given tax year, the donation must have occurred within that calendar year. For example, if you want to claim it on your 2021 tax return, you must donate before Jan 1, 2022.
Note that there is an exception to this rule that we will touch on later.
Who can I donate money to and receive a charitable receipt?
In order for your charitable giving to qualify for the tax credit, it must be given to a registered charity. For more information on charitable receipts and which charities qualify, check out Making a Donation.
Can I claim previous donations?
As was said early, donations made by December 31 may be claimed in that tax year. However, any unclaimed donations can be carried forward for 5 years and claimed in the current year. Furthermore, donations made by your spouse or common-law partner in the current year or the previous 5 years can be claimed.
Is there a limit to how much I can claim?
There is a limit to the amount of charitable giving you are eligible to claim. You can claim up to 75% of your net income. However, in the year of death, a person can claim 100% of their income. Furthermore, for gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.
How is the donation tax credit calculated?
When making a donation you receive a federal and a provincial tax credit. The rate a which those are calculated depends upon where you file your taxes.
The federal tax credit is calculated as follows: 15% on the first $200, and 29% on anything above $200. However, this calculation does change for income earners above the $200,000 level and incentives them further.
Provincial tax credits, as stated earlier, depend upon the province you file your taxes. In Manitoba, for example, it is calculated as 10.8% on the first $200, and 17.4% on anything above $200. Income has no bearing on the provincial tax credit calculation.
Here is an example: Bill has an income of $225,000 and wants to donate $30,000.
Federal tax credit calculation
- 15% on the first $200 = $30
- 33% of $25,000 = $8,250, which is the lesser of:
- The amount by which their taxable income exceeds $200,000 ($25K).
- the amount by which their total donation exceed $200 ($29,800).
- 29% of $4,800 = $1,392 Which is the amount of their total donations for the year over $200 that is not eligible for the 33% rate ($29,800- $25,000).
Bill’s federal tax credit = $9,672.
Provincial Tax Credit Calculation (MB)
- 10.8% on the first $200 = $21.60
- 17.4% on the next $29,800 = $5,185.20
Bill’s total provincial tax credit = $5,206.80.
Bill received a total of $14,878.80 in donation tax credits.
For more information on this check out, Charitable donation tax credit rates.
Can I only donate cash?
Donations can come in more forms than just cash. This leads to our charitable giving strategy.
Donating Shares rather than Cash
When it comes to charitable giving people often think of donations in the form of cash. However, cash is not the only way to make charitable donations, and you may be missing out on more tax savings.
Before we get into the alternatives to donating cash, let’s look at an example:
Bill has an income of $225,000 and wants to donate $30,000. Bill wants to take the money from his investment portfolio. He has shares of company XYZ that have an Adjusted Cost Base (ACB) of $10,000 that are now valued at $30,000. This means he will realize a capital gain of $20,000 if he sells the shares to make his donation.
Bill has two options. He can either sell the shares for $30,000 and donate the cash, or he can donate the shares directly to the charity. Let’s look at the difference in both of the options.
Selling the Shares and Donating the Cash
In this scenario, Bill will have to pay capital gains tax on the sale of the shares. This, in turn, increases the actual cost of the donation. Let’s look at the breakdown:
| Donation amount | $30,000 |
| Adjusted Cost Base of XYZ (ACB) | $10,000 |
| Fair Market Value of XPZ Shares | $30,000 |
| Capital Gains | $20,000 |
| Capital Gains Tax Rate MB | 25.2% |
| MB Tax Credit | ($5,206.80) |
| Federal Tax Credit | ($9,672) |
| After Tax Cost to Donate | $15,121.20 |
Note: the table above assumes that the top marginal tax rate starts at $200,000. In reality it starts at $210,000. This will adjust the amount of capital gains that would be paid slightly.
Donating the Shares Directly
Now let’s look at the difference in the cost of the charitable giving if Bill were to donate the shares directly.
| Fair Market Value of the shares | $30,000 |
| MB Tax Credit | ($5,206.80) |
| Federal Tax Credit | ($9,672) |
| Capital Gain tax Savings from donating share directly | ($5,040) |
| After Tax Cost to Donate | $10,081.20 |
By donating shares directly to a charitable organization Bill can avoid having to pay the capital gains tax in his name. In the above example, Bill was able to give the exact same gift but cut the cost he incurred by more than $5,000.
Conclusion
The year is coming to end and many people are thinking about year-end charitable giving. However, many people are still unaware of the above-mentioned strategy.
A word to the wise. Do not wait until the last minute to try and implement this strategy. It often takes longer for the donation to be processed due to backlogs on the charity’s end and administration on your investment administrators’ side. We recommend sitting down with your advisor sooner rather than later.
Let’s do everyone a favor and spread awareness about this strategy! Share this article with your friends and family. If you need help with your year-end charitable donations, contact us, we would love to help.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy
Sources
https://www.tewealth.com/how-to-increase-your-tax-benefit-for-charitable-donations/
