By Jamie Golombek, CPA, CA, CFP, CLU, TEP
Canadians do not give to charity for the tax benefits. After all, no matter how tax effective we can structure a charitable gift, a donor will always have more money left at the end of the day if she had kept the funds donated for herself and not made a gift. But for individuals who are philanthropically inclined, having a good understanding of the math behind a charitable gift may encourage some donors to consider giving more when they realize the real net after-tax cost of their gift.
Let’s take a look at three scenarios: the value of the donation receipt, the donation of a gift of appreciated marketable securities and making that gift of appreciated securities via a private corporation.
The donation credit
Charitable donations to registered charities or foundations attract both federal and provincial non-refundable tax credits. On the federal side, donors get a credit of 15 percent for the first $200 of annual charitable donations. For total donations exceeding $200, the federal credit rate jumps to 29 percent and, for high income earners, the rate is 33 percent to the extent that their taxable income exceeds that top federal rate (income over $214,368 for 2020). Parallel provincial credits work similarly, although not all provinces have adopted their top tax rate as their top provincial donation credit rate.
What’s interesting, however, is that for all but the highest income Canadians, donors who give more than $200 in total in a calendar year receive an effective combined federal/provincial donation tax credit rate that is higher than their marginal tax rate. This leads to some interesting results. Let’s take a look at an example.
Let’s say that Carol lives in B.C., has $75,000 of income and contributes $1,000 in total to a variety of charities in 2020. The first $200 of donations attracts a federal tax credit of 15 percent or $30 and a B.C. tax credit of 5.06 percent or $10.12. The next $800 of donations will attract the higher federal credit rate of 29 percent or $232 and the higher provincial B.C. credit at a rate of 16.8 percent or $134.40. Thus the total donation tax credit Carol will get from her 2020 donations is worth $406.52 (i.e. $30 + $10.12 + $232 + $134.40).
Since Carol’s 2020 income is $75,000, that would put her in a marginal tax bracket in B.C. of 28.2 percent. This means that for each dollar Carol gives to charity above the first $200, she is getting a donation credit at 45.8 percent (29 percent federal + 16.8 percent in B.C.) but only paying tax on that dollar of income at 28.2 percent! In practical terms, this means that for $800 of the donation she has excess credits of 17.6 percent (i.e. 45.8 percent less 28.2 percent) that can be used to shelter tax on the income not being donated to charity.
Donations of publicly traded shares, mutual funds or segregated funds to a registered charity not only provide the donor with a tax receipt equal to the fair market value of the securities or funds being donated, but also allow the donor to avoid paying tax on any capital gains on the shares or funds donated.
Let’s say Mike lives in Ontario and has units of ABC Fund, a mutual fund trust that he purchased for $600 and that is now worth $1,000. Mike’s 2020 income is $75,000 and he wants to make a $1,000 donation to charity. If Mike sells the shares and realizes a $400 capital gain, he will pay combined federal and Ontario capital gains tax of about $60 on the gain. Assuming he already gave $200 in 2020, he would get a charitable donation receipt for $1,000, which is worth about $402 in tax savings. As a result, Mike’s cost of his $1,000 gift would be $658 ($1,000 gift + capital gains tax of $60 – $402 benefit of the donation receipt).
Now, if Mike had donated the Fund units directly to the charity instead of selling them first, the capital gains tax of $60 would be eliminated and the total cost of the $1,000 gift would drop to $598 (i.e. $1,000 gift less the $402 benefit of the donation receipt and no capital gains tax.)
Donations in-kind via CCPC
Finally, let’s assume that Mike held those appreciated securities within a Canadian controlled private corporation or CCPC. If his CCPC made a donation in-kind to charity, it would get a triple benefit: a deduction against corporate income for the amount of the donation, no tax on the capital gain, and a credit to the corporation’s capital dividend account, allowing Mike, at some future time, to receive a tax-free capital dividend from the corporation equal to the tax-free gain on the donated securities.
Since the value of the corporate tax deduction varies based on the type of income the CCPC earns, we’ve left this math to the CCPC’s accountants to figure out!
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.