How to get the most tax back from giving to charity

National Post

2015-04-02



At the seder, the festive meal that marks the beginning of the holiday of Passover which begins Friday, the youngest child is encouraged to launch the retelling of the Passover story by asking the age-old question: "Why is this night different from all other nights?

Given that Passover always falls during tax season, one could rephrase the question slightly with regards to the donation tax credit and ask: "Why is this credit different from all other tax credits?"

The answer is that while most non-refundable tax credits, such as the basic personal amount, age amount, spouse or common-law partner amount, and so forth, are calculated at the lowest credit rate, when it comes to charitable donations, a two-tiered credit system applies.

You can claim a federal non-refundable tax credit of 15% for the first $200 of annual charitable donations. The federal credit rate jumps to 29% for cumulative donations above $200. These rates are equal to the tax rate of the lowest federal bracket (income below about $45,000) and the highest bracket (income above approximately $139,000) respectively.

So why the two-tiered credit system only for charitable donations?

Its history can be traced back to the 1988 federal tax reform that converted various tax deductions into credits. The theory behind the two-tiered approach is that since donations are purely voluntary, if the credit was set at the low credit rate, it may have resulted in a decline of donations from high-income earners who were used to getting a deduction at their high, marginal tax rates.

The result of our two-tiered system is that small gifts below $200 are equivalent to a deduction by a person in the lowest bracket while donations over the $200 threshold are equivalent to a deduction at the top bracket, regardless of whether the taxpayer is, in fact, actually in the top bracket.

So it makes sense to claim more than $200 annually. Or, if you claim less, save the claim for a future year (there is a five-year carryforward).

When provincial credits are added to the federal ones, your total credit can be as high as 50%, depending on your province of residence. Interestingly, while both Quebec and Ontario introduced new high-income brackets in 2013, the provincial donation credit rates in those provinces remain unchanged, thus at these high-income levels, the credit is not as valuable as a deduction would have been.

In its recent budget, Alberta's revenue-strapped government announced a reduction in its provincial tax credit for donations, beginning next year. Currently, Albertans who give over $200 annually to charity can claim a 21% provincial donation credit, despite the fact that Alberta's current flat provincial tax rate is only 10%.

Alberta's unusually high credit was the result of a 2007 enhancement meant to encourage higher donation levels. But, as the recent budget stated, while the enhanced credit gave existing donors significant additional tax savings, it had limited success in encouraging higher total donations and as a result was deemed to be "not an effective tax measure."

As a result, Alberta's rate for donations over $200 in 2016 will be returned to 12.75%, the rate in effect prior to 2007, resulting in an estimated $90 million of tax savings annually to the province's coffers.

Finally, keep in mind that if you are a "first-time donor," you can take advantage of the temporary First-Time Donor's Super Credit, which provides an additional 25% federal non-refundable tax credit on up to $1,000 of donations.