Charitable Donations & Gifts, the Tax and Estate Benefits
A donation given to a registered charity in Canada can be claimed as a charitable donation on your tax return. The Donation Tax Credit available after the first $200 of annual donations is effectively the top marginal tax rate in a given Province or Territory. For 2021 in Ontario, that top rate is 53.53%. That is almost more than half of your donation that can come back to you in the form of the Donation Tax Credit, which offsets other taxes payable.
Donation Tax Credit In Action
John decides to support his local church with a $1,000 donation. Assuming John is a resident of Ontario and has already given $200 of donations for the year to registered charities in Canada, John can expect his $1,000 donation will create a $535 Donation Tax Credit on his tax return. If John would have been getting a $NIL tax refund before the donation, he now can expect up to a $535 tax refund. John gave $1,000, and is asking for almost more than half of it back on his tax return!
Now to take advantage of the Donation Tax Credit, a donor must have taxable income. It seems a little obvious, but there are many cases where donations are made by a taxpayer who has no or little taxable income. The donor in these cases is generally a taxpayer who is asset rich but income poor, such as a retired senior, a holding company, or an Estate. The charitable donation is still a gift towards a cause near and dear to that donor’s heart, but the Donation Tax Credit available will not lead to any tax refund if there are no taxes otherwise payable. The Donation Tax Credit can be carried forward for up to five years if it cannot be used in the year of gifting, if that is helpful. But the takeaway here is: if you want the tax benefit of a Donation Tax Credit, you need to match the donation with the income that would otherwise be taxable.
It was largely this mismatch of income and the Donation Tax Credit that lead to proposed changes within the 2014 Federal Budget affecting donations made by Estates. When an individual passes away, he/she is generally deemed to dispose of all of their assets, and deemed to withdraw all of their RRSPs and RRIFs, as applicable. This can create a large taxable income on the last individual tax return for that individual, often called the Date of Death tax return. If this individual was intending to make a charitable gift on his/her passing, they would likely want or expect the Donation Tax Credit to be matched against the deemed taxable income on the Date of Death return. However, depending on how they planned for the charitable gift, the Donation Tax Credit may actual belong to the Estate of the individual.
The Estate is a separate taxpayer (a trust) created after we pass away, and depending on what it inherits from the deceased individual and how long it holds it, the Estate may not have sufficient taxable income to get the benefit of the Donation Tax Credit. This outcome left Beneficiaries of the Estate witnessing the need to pay both a sizeable income tax bill on the death of a loved one and a sizeable charitable gift to a charity, all of which negatively impacted the size of their inheritance to the benefit of the tax authorities.
The proposed changes under the 2014 Federal Budget should permit more flexibility to deal with these unintended mismatches, with donations made by the Estate within the first 3 years being automatically eligible for claim on the Date of Death return at the discretion of the Executor of the Estate. These donations would also include donations made by way of payment to a charity through an RRSP, RRIF, TFSA or Insurance policy beneficiary designation.
However, these proposed changes do not address all situations, nor should they be relied upon solely to help maximize the benefit of the Donation Tax Credit. If you are making regular charitable donations, or you are planning to make a sizeable gift to a charity during your life or after your passing, get the necessary advice now in advance to ensure that for every dollar you give, you get half back.