Sharing some tax-credit strategies

National Post

2007-11-17





There are many ways to give back to the community, but if you decide to make a financial donation, you can get the added boost of a tax break.

Following is a quick primer on four common methods of donating and their tax consequences.

Donating cash The amount you donate is eligible for both federal and provincial donation tax credits. For the first $200 of donations you make in a calendar year, the federal donation credit is equal to 15% of the amount given. The provincial/territorial credit varies from 4% to 11% of the amount donated.

Once you've made at least $200 in donations in any year, the donation credit jumps to 29% federally, plus between 11% and 21% provincially.

On a technical note, since you're getting a tax credit (a reduction of tax owing) as opposed to a tax deduction (a reduction of taxable income), the tax credits amount to the same for low-, middle-and high-income earners.

Donating shares If you donate appreciated, publicly traded securities, including mutual funds and segregated funds, not only will you be entitled to a donation tax credit, you won't have to pay capital gains tax on any increases in value.

Donating your RRSP or RRIF If you donate funds or property from your registered savings plan or retirement income fund, the amount withdrawn will be immediately included in your income and you'll face a tax hit at your marginal tax rate. However, you would then be entitled to a donation tax credit, which would offset any taxes owing on the RRSP or RRIF withdrawal. Essentially, the donation becomes "tax neutral."

Gifts of life insurance There are two main ways to donate life insurance: The first is to buy a policy naming the charity as the beneficiary. The second method is an arrangement whereby the charity owns the policy on your life, naming itself as the irrevocable beneficiary. The first scenario provides you with the most flexibility as you can always change your mind and replace the beneficiary. If the charity remains the beneficiary upon your death, it will receive the death benefit and your estate would be entitled to a donation tax credit equal to the value of the policy upon your death.

If the charity owns the policy, each year it will issue you a donation receipt equal to the value of the life insurance premiums you paid. The downside? You can't change your mind should you have second thoughts about naming the charity as the beneficiary.