Not everyone has large amounts of cash sitting somewhere, ready to give.
In BC, your tax credits for charitable donations above $200 reduce the cost of your gift by almost one-half (more in other Provinces).
Federal and provincial government tax incentives encourage individuals to support their favourite charities, but many people grossly underestimate the true value of these incentives, in part because federal and provincial tax credits are calculated separately, not as one total amount on your individual tax return.
Use this charitable donation tax credit calculator to see just how little it actually costs to give. Let’s explain:
If you earn a salary: Federal and Provincial income tax is deducted from every paycheck. At the end of the year, the amount of income tax deducted should be equal to what you owe, based on that income. To get some of that money back, you need to have Tax Credits. If you had $10,000 in Income Tax deducted from your pay, but had a Tax Credit of $4,570 that you could claim on your tax form, you would get that amount of money back in cash from the government.
If you have income from other sources (Interest, Tips, Business Revenue etc.): At the end of the year you will have to pay income tax on those earnings. To reduce the amount of money that you have to pay, you need Tax Credits. If you owe $8,000 in taxes but have a Tax Credit of $4,000, you reduce the amount you owe to government by that amount. In other words, you get to keep half of what you would owe.
How is a charitable donation tax credit calculated?
For BC residents, charitable donation tax credits are calculated as follows:
⦁ For the first $200 of donations claimed, the combined tax credit totals 20.06% (15% federal plus 5.06% provincial) which = $40.12 (For simplicity, all of the the following examples assume the first $200 has been given.)
⦁ All donations after the first $200 get a combined tax credit totalling 43.7% (29% federal and 14.7% provincial) of the amount donated. (There are different rates depending on which Province you live in. See all the charitable donation tax credit rates here.)
NOTE: The total of charitable donations claimed for the calendar year cannot exceed 75% of your net income. If your donations exceed this 75% limit, you can claim the remaining donations on tax returns during any of the next five years.
Let’s look at the tax impact of a $10,000 charitable donation.
How much do you actually want to give?
In the above scenario, your donation of $10,000 only costs you $5,630 because of the money that you get back as a cash refund or save on taxes owed.
So how would you make a donation where it costs you $10,000? Using the formula for calculating the combined Tax Credit, you can make a “net to you” donation of $10,000 by making a donation of $17,762.
This will give you a Tax Credit of $7,762 that you include on your tax forms to get back from government a cash refund or a reduced amount of taxes owed after you file your tax return.
If you want to calculate the total gift you can actually make to hit a net cost to you, simply multiply your ‘out-of-pocket’ gift amount by 1.7762.
If you have assets in RRSPs/RRIFs, you might consider withdrawing funds to support Village 2021.
Normally, withdrawing funds from your RRSP can create a tax problem such as withholding taxes (up to 30% when over $15,000).
Example impact of a normal RRSP withdrawal of $25,000 (assuming a 44% tax rate)
⦁ The withholding tax of $7,500 creates a balance of $17,500 available to donate
⦁ $9,800 on which taxes are owed, $7,700 donation credit
However, you can avoid this by preparing the appropriate CRA Form with a direct transfer of proceeds to Village. You still report income, however, the charitable receipt fully offsets tax liability.
Impact of a RRSP withdrawal Using CRA Form
⦁ No withholding tax deducted at source
⦁ Balance of $25,000 available to donate
⦁ $14,000 on which taxes are owed, $11,000 tax credit
Alternate Option: Normal RRSP withdrawal of $25,000 plus replacing $7,500 withholding tax from other savings
⦁ Withdraw $25,000 and after paying $7,500 withholding tax receive $17,500
from financial institution
⦁ Donate $25,000 to Village, $17,500 from RRSP withdrawal and $7,500 from savings
⦁ $3,500 taxes owed (44% of $25,000 minus $7,500 withholding tax), $11,000 tax credit from donation. $3,500 used to pay taxes and $7,500 is used to replenish the savings that were used as part of the donation
⦁ The $25,000 withdrawal becomes a tax-free transfer to Village exactly like previous option.
Consult a tax advisor to determine the tax consequences of a gift from your registered plan. Careful planning is required to realize the charitable gift that you desire.
You can make a donation by using some of your investments, and save on Capital Gains.
In Canada, making your gift by donating listed securities or mutual funds to charitable organizations can eliminate the capital gains tax you would have to pay if you first sell the securities and then donate the proceeds from the sale to the campaign. These gifts may take the form of cash, stocks, bonds, or mutual funds.
If you intend to give listed securities to the campaign that have appreciated in value, it is important that you transfer these securities directly to Village.
You own shares that you purchased a few years ago for $4,000 and now they are worth $10,000. When you sell them, you will have a capital gain of $6,000 and half of the capital gain ($3,000) will be taxable.
Assuming your tax rate is 40%, your tax bill from the sale will be $1,200, but if you donate the shares to a charity, the gift is exempt from the capital gains tax and the total value of your gift is tax deductible, giving you a sizeable tax credit and potential refund.
A gift of shares now valued at $10,000 results in the following example of tax savings:
Donation tax credit: $4,370 (43.7% of $10,000)
Capital gains tax savings: $1,200
Total tax savings $5,570
In this example, the $10,000 gift of shares resulted in additional tax savings to the donor of $1,200 and when combined with the tax credit provides a total tax savings that is more than the original purchase price of the donated shares.
If you own one or more pieces of land, sell and donate some or all proceeds for a tax credit
If you own a piece of property that you purchased as an investment, or live on a larger acreage that is/can be subdivided to sell for a profit, there are tax implications. The gain on the sale of real estate is a capital gain unless the property has been purchased with the intent of reselling at a profit, or developed and sold as a business endeavour. If it is considered a business transaction, the entire profit on the sale is taxable or deductible.
If land is purchased without a housing unit on it, that property cannot be considered the principal residence until the year that a house is built and you move into it. The CRA usually considers that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, and there would be a capital gain on the excess when the property is sold, even if the rest is the principal residence.
By selling land and donating some or all of the proceeds, your tax credit could offset the taxes owed on your profits and possibly other income or capital gains in your tax year. Consult your tax advisor for more information on what might be the best option for you.
If you have a rental property that earns taxable income, donate some of the proceeds.
If you own a rental property or have a suite in your residence that you are renting, you are generating taxable income. To offset this tax liability, consider donating a percentage of the monthly rental income to the Village 2021 project.
If you want to make your donation by using a Line of Credit (LOC) in the amount of your desired gift to Village Church, you then get a tax credit for that amount.
This option allows you to use the refund you would get with the tax credit to repay a significant part of the LOC. This means you only have to repay the outstanding balance of the LOC, including less total interest, or you can use the refund to pay the interest on the LOC for many years, as you repay the principle amount on your own schedule.
Joe & Mary want to make a $10,000 gift to the Village 2021 project now.
Secured LOC $10,000 Donation
Tax credit: $4,370 (43.7% of $10,000)
Monthly Interest on LOC @5.5%: $25
Having made a $10,000 charitable donation, the 43.7% tax credit would allow them to pay back a significant portion the $10,000 they borrowed on the LOC. This drastically reduces the amount owed to $5,630 plus the interest cost on the monthly re-payments.
If retirement is in your near future, consider waiting and donating one or more years of “work”.
If you plan to retire in the near future (perhaps by selling your business) consider the option of working for one or more years, and donating the proceeds.
You can still begin to implement your retirement financial plans, but instead of continuing to take a salary or other business earnings, donate them entirely to the campaign and use the tax deduction to reduce the tax implications of your retirement financial plan for one or more years.
Is it something to think about? Why not talk to your accountant or tax professional and see if the end result can be a win – win for both your plans and Village Church.
Talk to your Employer
If you are working for someone else and about to reach the point where you can take Canada Pension and retire, you might want to talk to your employer about staying on or retiring and coming back on contract for another year ….. and donating that extra year of salary.
There could be many tax credit advantages to this for your retirement plans, and might even convince your employer to contribute as well – now that they don’t have the additional benefit costs and other expenses they had before.
Retirement savings outside of a registered fund can be used creatively to donate.
If you have savings outside of a RRIF (Registered Retirement Income Fund) and are using them to generate retirement income from Bonds or GICs, you can generate a higher retirement income through a Gift Annuity and make an immediate gift to Village 2021.
A charitable gift annuity involves a contract between a donor and a charity, where the donor transfers cash or property to the charity in exchange for a partial tax deduction and a lifetime stream of annual income from the charity. The amount of the income stream is determined by many factors including the donor’s age, gender and marital status; the older you are the higher the annuity income will be.
⦁ Based on a deposit of $100,000, a gift annuity would provide a 65-year-old couple with the equivalent of a pre-tax annual GIC interest income of about 3.8% plus a tax receipt of $25,000 (and a gift of $25,000 to Village)
⦁ A 70-year old couple would receive the equivalent of a pre-tax annual GIC interest income of about 4.4% plus a tax receipt of $25,000 (and gift of $25,000)
⦁ An 80 year-old couple would receive the equivalent of a pre-tax annual GIC interest income of about 5.8% plus a tax receipt for $25,000 (and gift of $25,000)
⦁ An 80-year old man would receive the equivalent of a pre-tax annual GIC interest income of about 6.8% plus a tax receipt for $25,000 (and a gift of $25,000)
⦁ An 80-year old woman would receive the equivalent of a pre-tax annual GIC interest income of about 6.5%, and a tax receipt for $25,000 (and gift of $25,000)
You can make a larger gift and a greater bequest by re-arranging your savings
If you are considering making both a gift to the campaign and a future bequest through your estate, you should explore the options of a Legacy Bond to support Village Church.
By re-arranging your savings, you can make a significant gift to Village now, leave a larger bequest for the future needs of Village Church, and increase retirement income. The actual results of this option depend on several individual factors, such as your age, gender, taxable income, health status, current interest rates and your giving goals.
For example, with a $100,000 investment, couples between the ages of 70 – 80 could:
⦁ Make a one-time gift to Village of $25,000
⦁ Leave a $100,000 bequest to Village, and
⦁ Receive the equivalent of a pre-tax annual GIC interest income of about $5,500 for as long as they live.
Please let us know if you are interested in learning more about this giving option.
For assistance with planned gifts please email us.