"Giving" Advice | March 2015

Reducing the cost of donations with charitable tax credits
Written by: Saul Plener, National Leader, Private Company Services, PricewaterhouseCoopers LLP

Canada’s federal and provincial governments encourage individuals to donate to charitable organizations by granting non-refundable charitable donation tax credits that reduce personal income taxes payable. Depending on the province of residence, individuals can receive a non-refundable tax credit in 2016, of up to 54% of the total amount donated to registered charities in the year exceeding $200 (see the table), decreasing the effective cost of the donations.

Generally, donations of cash, land or listed securities to a registered charity or other qualified donee are eligible for a charitable donation tax credit. For a donation to be eligible, the transfer of ownership has to be voluntary and the individual must receive an official donation receipt from the registered charity or other qualified donee.

An individual’s annual donation claim limit is generally 75% of net income (100% in the year of death and the year immediately preceding death). However, the annual donation limit may be higher than 75% of net income for certain gifts of capital property and will be 100% of net income for gifts of certified cultural property or ecologically sensitive land. Further, Quebec's 2016 budget eliminates the 75% threshold for provincial purposes starting 2016. Donations not claimed in the year in which they are made can be used in any of the five subsequent taxation years, subject to the individual’s annual donation limit for those years.

An individual will receive a charitable donation tax credit for federal tax purposes and one for provincial purposes, based on the province of residence. The general rule is that, for total annual charitable donations above $200, these tax credits are granted at the top marginal federal and provincial income tax rate. However, there are exceptions for federal tax purposes as well as in Alberta, New Brunswick, Ontario and Quebec. The exceptions increase the complexity of determining the effective cost of charitable giving.

For annual donations over $200 made after 2015, an individual will qualify for the top federal 33% donation tax credit rate only to the extent the individual has income that is subject to the top federal 33% personal income tax rate. This will be the case if the individual has taxable income exceeding $200,000. Otherwise, the tax credit rate on these donations will be 29%. In addition, a temporary federal first-time donor’s super credit can be claimed by first-time donors only once and must be claimed after 2012 and before 2018. The first-time donor’s super credit is an additional 25% tax credit (on top of the regular charitable donation tax credit) on up to $1,000 of charitable donations made after March 20, 2013.

Alberta is the only jurisdiction in which the provincial top tax credit rate on donations of 21% exceeds its top personal tax rate of 15%. As a result, the province’s top combined charitable donation tax credit rate of 54% is higher than its top combined marginal income tax rate of 48%. As shown in the table, Albertans along with Nova Scotians can reduce their personal income taxes by up to 54% of their charitable donations, the highest reduction available in Canada.

In New Brunswick, Ontario and Quebec, donation tax credit rates have not risen to reflect recent increases to top marginal personal income tax rates. Therefore, in these jurisdictions, the top provincial tax credit rate on donations is less than the top personal income tax rate (see the table). The result is that the top combined charitable donation tax credit rate is lower than the top combined marginal income tax rate. Although individuals in these provinces who are in the top tax bracket are not as incentivized to make donations as individuals in other jurisdictions, these provinces still offer significant tax savings, which reduce the effective cost of charitable donations. This is shown in the table. However, Quebec’s 2016 budget will increase the province’s top charitable donation tax credit rate effective 2017, to 25.75% (to match its top provincial tax rate), but only to the extent the individual has income that is subject to the province’s top 25.75% tax rate.

Table - 2016 Top charitable donation tax credit rates and top marginal income tax rates

Note:

(1) Top charitable donation tax credit rates:
• apply to donations over $200; a reduced credit applies to the first $200 of annual donations (e.g., 15% federally, 10% in Alberta and 10.8% in Manitoba);
• assume the federal first-time donor’s super credit does not apply; and
• assume the individual can claim the 33% federal charitable donation tax credit rate on donations (i.e., the individual has income that is subject to the top 33% rate).

(2) Top marginal rates apply to taxable income above $200,000 in all provinces, except Alberta ($300,000) and Ontario ($220,000).

(3) The rates in Ontario and Prince Edward Island reflect surtaxes that apply in these provinces, as follows:
• in Ontario – there are two surtaxes (20% + 36% = 56% of Ontario tax), resulting in a 17.41% top donation tax credit rate (11.16% donation tax credit rate x 1.56), and a 20.53% top marginal income tax rate (13.16% tax rate x 1.56); and
• in Prince Edward Island – there is one surtax (10% of Prince Edward Island tax), resulting in a 18.37% top donation tax credit rate and top marginal income tax rate (16.7% rate x 1.1).

(4) Quebec’s combined rates reflect that the federal rates are reduced by the 16.5% “Quebec abatement.”

Saul Plener can be reached at, saul.plener@pwc.com

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