Donation tax credit gets a facelift

Much of the hoopla that followed the Liberals’ election victory was about the middle-class tax cut.

The federal rate on income from $45,282 to $90,563 is 20.5% for 2016, down from 22%. That reduction has been paired with a new 33% bracket for income above $200,000. Establishing a new top rate required the government to tweak donation tax credit rules. If it hadn’t, all taxpayers below the top bracket would have received an unintended windfall.

Charitable credit structure

Up to now, the charitable donation credit has been 15% on the first $200 of annual donations, and 29% on amounts over $200.

These percentages corresponded to the lowest and highest tax brackets. The higher rate on donations over $200 applied regardless of whether the donor’s income is actually in the top tax bracket.

A two-tier credit structure encourages people to donate more than $200. The trade-off for the government, of course, is that it forgoes tax revenue.

Consider a person who had $80,000 of taxable income and made a $10,000 donation in 2015 (limiting the analysis to federal taxes). The credit is $30 on the first $200 and $2,842 on the remaining $9,800, for a total of $2,872.

Had the government done nothing more than adjust bracket rates, our middle-class donor making the same donation in 2016 would receive an extra $400 (33% – 29% = 4%; 4% × $10,000 = $400), reducing tax revenue by the same amount.

At the same time, if the second tier of the credit isn’t in line with the new top bracket rate of 33%, those earning more than $200,000 may be less inclined to make large donations.

Multi-step credit calculation

The government’s solution modifies the second tier of the credit calculation. The 15% rate still applies to donations up to $200, and 29% generally applies thereafter. However, the higher 33% rate is available if a taxpayer makes more than $200,000.

To illustrate how this will work, consider a $10,000 donation made by a donor with taxable income of $203,000. Of that $203,000, $3,000 of income is subject to the new 33% bracket; therefore, $3,000 of the donation is entitled to the 33% bracket.

• The first $200 receives a credit at 15% as before. Of the remaining $9,800 to be claimed, $3,000 is entitled to the 33% credit rate and $6,800 is claimed at 29%, for a total of $2,992 ($30 + $990 + $1,972).
• If taxable income had been over $209,800 ($10,000 less the $200 subject to a 15% credit), the credit would have been worth $3,264 ($30 + [$9,800 x 33% = $3,234]).
• On the other hand, if taxable income had been below $200,000, as in our $80,000 donor example, the credit would have been $2,872 ($30 + [$9,800 × 29% = $2,842]).

So, for those at or near the $200,000 income level, future years’ donations may require more strategic planning.

When a client’s income might fluctuate below $200,000 in a year, they may want to consider delaying a donation so they can claim a higher credit in a future year, bearing in mind the time value of money and the charitable purpose behind the donation.

Doug Carroll

Tax & Estate

Doug Carroll, JD, LLM (Tax), CFP, TEP, is a tax and estate consultant in Toronto.