Lawyer and tax expert Keith Masterman (BA ’84) explains how giving can boost your tax return
By Keith Masterman (BA '84)
Keith Masterman is a lawyer and vice president of the tax, retirement and estate-planning group at CI Global Asset Management. He also writes about tax and estate planning for Advisor’s Edge.
Meet Rachel and Mark
Rachel and Mark live in Oakville, Ontario. Mark is semi retired but Rachel is still working and has no intention of slowing down. She enjoys her job as a radiologist and the income it provides to the household.
When it comes to charitable giving, they support several organizations in their community out of a sense of compassion and commitment.
This commitment to charitable giving makes them typical of the Canadian populace. Imagine Canada recently reported that 84 per cent of adult Canadians donate to at least one charitable cause. That same report demonstrated the top reasons Canadians make a charitable gift:
- compassion for those in need (89%),
- personally believe in a cause and want to help (85%),
- contribute to our communities (79%),
- personally affected by an organization’s cause (61%),
- religious obligations or beliefs (29%) and
- income tax credit (23%).
In many ways Mark and Rachel are typical of all Canadians, but there is one way they are not. While the average charitable gift in Canada is $446, Rachel and Mark have chosen to tithe, donating 10 per cent of their income to charity each year.
Although the income tax benefits of a charitable gift are not front and centre it would be wrong to say that Mark and Rachel do not appreciate the income tax credits that accompany a donation. They have never fully understood how these tax credits worked, until recently when Rachel decided to do some research.
The basics
The first thing Rachel came to realize was that the system is complex. Once a taxpayer has reported the eligible amount of a charitable gift on their tax return, it is used to calculate a non-refundable tax credit. A non-refundable credit means that the credit cannot be used to create a tax refund, and a taxpayer’s benefit from the credit cannot exceed the amount owed in taxes.
The non-refundable tax credit varies based on three factors: the province where the taxpayer lives, the amount donated and the taxpayer’s income, and their tax bracket. In addition to the various provincial rates, there is also a federal rate. The tax credit is a function of the applicable provincial rate added to the federal rate.
In Ontario, where Rachel and Mark live there are three tiers of tax credits:
| Tier | Federal | Ontario |
|---|---|---|
| Total annual donations under $200 | 15% | 5.05% |
| Total annual donations over $200 when taxable income is less tahn $221,709 | 29% | 17.4%1 |
| Total annual donations over $200 when taxable income is more than $221,709 | 33% | 17.4%1 |
1Includes Ontario surtax savings where applicable
Applying the system to Mark and Rachel
Rachel was curious and decided to re-examine their 2021 tax return to determine the income saving from their donations. She first calculated what their taxes would be without any charitable gifts and compared it to their actual returns where they claimed the charitable gifts.
| With no charitable gift | With a charitable gift | |||
|---|---|---|---|---|
| Mark | Rachel | Mark | Rachel | |
| Taxable income | $50,500 | $330,000 | $50,500 | $330,000 |
| Charitable gift | $5,050 | $33,000 | ||
| Charitable tax credit | $2,343 | $16,6632 | ||
| Tax owing | $8,002 | $137,825 | $5,659 | $121,193 |
| Total household tax owing | $145,827 | $126,852 | ||
Had they contributed nothing to charity, their combined taxes would total $145,827. With the charitable gifts, they actually owed $126,852, a difference of $18,975. Looking at it another way, their generous gifts which totaled $38,050, cost the couple $19,075 on an after-tax basis.
Rachel also found a way that she and Mark could be even more tax efficient in their gifting. Spouses may share tax receipts and it is often beneficial for the higher income spouse to claim all the donations. In Mark and Rachel’s case, it would have been slightly beneficial to have Rachel claim all their donations.
| If Mark claims all charitable receipts | If Rachel claims all charitable receipts | |||
|---|---|---|---|---|
| Mark | Rachel | Mark | Rachel | |
| Taxable income | $50,500 | $330,000 | $50,500 | $330,000 |
| Charitable gift | $38,050 | $38,050 | ||
| Charitable tax credit | $19,177 | $19,177 | ||
| Tax owing | $0 | $137,825 | $8,002 | $118,648 |
| Total household tax owing | $137,825 | $126,650 | ||
If Rachel had claimed all donations, she and Mark would have saved an additional $202 in tax.
However, if Mark had claimed all the donations the couple would have actually paid more tax. This is because a non-refundable tax credit can only be used to eliminate tax owing. It cannot create a tax refund. Therefore, some of the charitable donation credit would have been lost.
There is also a limit to how much a taxpayer may claim, equal to 75 per cent of their net annual income each year. In Mark’s case, this means he would have been unable to claim the entire households’ donations as they exceeded 75 per cent of his income.
Gifts and taxes in estate plans
Rachel’s research uncovered the tax efficient nature of a charitable gift as part of an estate plan. At death the contribution limit is higher. A charitable gift made by a Will, in a life insurance policy or by a RRSP or RRIF, can be claimed against up to 100 per cent of net income in the final two years of the taxpayer’s life and up to 75 per cent of income over the next five years of the estate. Also, taxpayers who donate certain kinds of capital property in kind, including public securities, mutual funds, cultural properties and ecologically sensitive land, are exempt from the capital gains tax normally owed when property is otherwise disposed of.