By Susan Yellin
It’s better to give than to receive, they say, but if you can pay less tax at the same time, it’s even better!
Giving generously is suitable for your bank account and your state of mind. Charitable donations entitle you to two tax credits in Canada: one is granted by the federal government and the other by the province where you live, says Les Wolf, a chartered professional accountant at Dundas, Ont.
Suppose you make donations totalling $1,000: the first $200 is eligible for a 15% federal tax credit, or $30, and the next $800 is suitable for a 29% credit, i.e. $232; the total federal tax credit is, therefore, $262. Each province also offers its tax credit and the federal tax credit.
According to Mr Wolf, you can, for a given year, claim the tax credit not only for your donations but also for those of your spouse or common-law partner. The spouse with the higher income usually claims the tax credit to reduce his taxable income.
Also, says Mr Wolfe, you can carry forward your tax credits to later years. For example, if your income decreases for a given year and you do not need to use your tax credits immediately, you must still report your donations; however, you can carry forward the related tax credits for up to five years. “You must report your donations in the year you made them; this way, the Canada Revenue Agency will be able to keep track of it. You are not supposed to accumulate them until you find it advantageous to declare them.” (For a simple explanation of the difference between a tax credit and a tax deduction, read the article Are you paying more tax than you should?)
According to Wolfe, some tax-filing applications automatically indicate whether you should claim the tax credit for the current year and report credits carried forward to future years if any.
Another way to donate and pay less tax is to purchase life insurance on your life and designate a charity as the beneficiary. By doing so, you will not be entitled to any tax credit for the premiums you pay during your lifetime, except in the year of your death, which will help reduce any balance owing on your final tax return.
You can also transfer an insurance contract that you own to a charity of your choice. In such a case, you continue to pay the premiums, but you effectively cede control of the contract. However, you can then claim a tax credit for each year’s tips.
Whichever approach you take, it’s essential to let your lawyer and financial adviser, your executor and the relevant charity know so that the money goes to the intended recipient.
Getting advice from qualified professionals for your financial and estate planning will help ensure that you have sufficient funds to fulfil your last wishes and so that you can enjoy a long and happy retirement in the meantime.
