Common Sense

It is Better to Give AND Receive

Daniel Duval, CFP - December 1, 2001

December 31 is your last chance to reduce your 2001 income taxes by making charitable donations. Not only do Canadian tax laws encourage charitable giving, but they are perhaps the most generous in the world (yes, our government does do some things right).

Special rules give "bonuses" for donations made by people who are under the top tax rate ($100,000 income), give incentives if you donate capital property (stocks, mutual funds), and have almost no limit on the amount of tax relief that can be generated each year.

"The basic rule is that you receive a tax credit of 26% of the first $200 donated, and 39% of the value of gifts over $200. Because these are tax credits, not deductions, the value of the credit is the same no matter what your personal tax bracket.

For example, a charitable donation of $1,000 would yield $364 in tax credits (26% of $200 + 39% of $800). Compare this to a tax deduction, such as an RRSP contribution, and you’ll find that unless you’re making over $100,000, the credit generated from giving is worth more than a tax deduction would be worth.

Put more simply, this means that anyone who has taxable income of less than $100,000 and who gives more than $200 a year will get tax credits at a rate higher than the rate of tax they're paying.

Another rule that was introduced as an experiment in 1997 has just been made permanent in October 2001: If a donation was made of "listed securities" (i.e. stocks, mutual funds, etc.) to a registered charity, the capital gain associated with the donation would be taxed at one-half the normal rate.

This may be better explained with an example. Suppose you own some shares of a life insurance company that were given’ to you when your life insurance company demutualised, and those shares are worth $2,000. Further suppose you'd like to contribute that $2,000 to your favorite charity.

Since your cost for those shares is considered nil, if you sell them you’ll have a $2,000 capital gain, $1,000 (50% of $2,000) of which will be taxable. If you instead give the shares to the charity, only 25% of the capital gains will be taxable, which means only $500 is taxable (vs. the normal $1,000), PLUS you get the charitable gift credit for the full $2,000 (about $754 tax credit)!

The bottom line here is that those who have appreciated qualifying assets and want to make charitable donations can get a substantial tax break by donating the assets directly to charity, no matter what your income level. Almost every public charity will accept gifts in this fashion, all you need to do is ask.

You should always consult a tax professional for advice if you have specific questions relating to your particular situation.

It is the season to be generous and receive substantial tax relief in the process.

back to ARTICLES

Feel free to contact us at:

Common Sense Financial Ministries
22 Menlo Cres. Sherwood Park, AB T8A 0R9
phone: (780) 467-8031 (7283) fax: (780) 464-6564

HOME / TESTIMONIES / SEMINARS / MATERIALS / ARTICLES