Donate for big tax savings

As superhero movies take over the box office, clients can do their part to help humanity by using the new First-Time Donor’s Super Credit (FDSC).

How the tax code treats donations

Canadians are entitled to claim non-refundable tax credits on any donations made to Canadian registered charities. The federal tax credit amounts to 15% on the first $200 of donations claimed in a year, and 29% on donations in excess of $200.

Provinces provide their own tax credits on charitable donations. Gifts made by spouses and common law partners can be amalgamated and claimed by the person who would receive the greatest tax savings.

Read: 4 questions to ask before clients put charities in their wills

How the FDSC works

The 2013 Federal Budget introduced the FDSC as a temporary tax credit designed to encourage Canadians who have not typically donated to charity to help the less fortunate.

New donors will receive an additional 25% credit on donations, to a maximum donation amount of $1,000.

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This means that the combined federal tax savings on the first $200 is 40%, and donations in excess of $200 achieve savings of 54%. Even better, these numbers don’t include provincial tax savings on donations.

On June 26, Bill C-60, which included the new FDSC as well as a number of other proposals from the budget, received royal assent. As a result, the FDSC is now part of tax law, meaning clients considered first-time donors can now reap big savings for their charitable donations.

Read: 70% of Canadians support new charity credit

Who’s a first-time donor?

The government defines a first-time donor as a person — or in the case of a married or common-law couple, the person and his or her spouse or partner — who has not claimed a charitable donation tax credit on his or her personal tax returns after 2007.

The spouses/partners can share the credit; but the total amount claimed cannot exceed $1,000, the same amount available to your client if he or she were single.

How big are the savings?

Here’s an example to illustrate. Let’s assume you have a client named Leslie who is considered a first-time donor. She is single, lives in Alberta and decides to donate $1,000 to her local church, which is a registered charity.

The combined federal and Alberta tax credits, which would include the FDSC would be equal to 50% (15% + 25% (federal) + 10% provincial) on the first $200 Leslie donates, plus 75% (29% + 25% (federal) + 21% provincial) on the remaining $800 donation.

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The tax savings on Leslie’s $1,000 donation is $700. This means that donating $1,000 to charity would only cost Leslie $300 ($1,000 – $700) out of pocket.

But you don’t have to live in Alberta to reap big savings. In fact, there is a great opportunity in every province to donate and take advantage of the tax savings. See the chart below for provincial tax savings.

But…only monetary donations qualify

Only donations of money qualify for the FDSC. Therefore, clients will not be able to transfer investments from non-registered portfolios in-kind to charity to take advantage of a perceived double tax benefit.

In other words, clients will not be entitled to eliminate the tax on the capital gain from the in-kind transfer of investments plus benefit from the FDSC tax savings.

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If clients need to access cash to donate from their portfolios, they will need to sell investments and contribute the proceeds. Where this is the case, there may be a tax liability on the sale of investments if they have appreciated in value. For appreciated securities, in the case of cash donations, the clients would only benefit if the tax savings from donations exceed the tax bill on the capital gain.

If cash is not readily available, suggest clients sell investments that do not have accrued capital gains or that have depreciated in value. In the case of investments with accrued losses, clients may be able to reap tax benefits from the capital loss as well as the tax savings from the FDSC.

Temporary measure

The FDSC is only available for donations made on or after March 21^st, 2013 and up until the end of 2017. Eligibility for the FDSC is based on whether donation credits were claimed in the last five years.

Some clients may have donated to charity within the previous five years but have not claimed them on their tax returns (donations can be carried forward for up to five years).

While the client may be considered a first-time donor (since he or she has not claimed a donation credit), he or she cannot use carried forward donations to benefit from the super credit. The client will need to make additional donations to charity in order to benefit, while the previous years’ donations will still be entitled to the standard donation tax credits.

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One time only

To maximize the tax savings from a charitable donation, clients should donate $1,000 in any one year between 2013 and the end of 2017. The client cannot split the FDSC across multiple years.