New tax brackets change donation credit decision

By now you’re familiar with the Liberal government’s key tax-bracket changes: a cut from 22% to 20.5% for income between $45,282 and $90,563, and a new 33% bracket for income over $200,000. Getting less attention is the way the new brackets impact charitable donations.

Until December 31, 2015, the federal donation non-refundable tax credits for gifts made to registered charities and other qualified donees were as follows:

• Non-refundable tax credit of 15% on first $200 of total donations
• Non-refundable tax credit of 29% for donations over $200

Read: Canadians plan to prioritize charitable giving

So, if your client donated $20,000 in 2015, his federal non-refundable tax credit would be calculated as follows:

• 15% on first $200 = $30
• 29% on donations in excess of $200 = $5,742
• Total non-refundable tax credit: $5,772

Effective January 1, 2016, taxpayers subject to the new 33% tax bracket can take advantage of a new 33% non-refundable tax credit for taxation years beginning 2016.

• Non-refundable tax credit of 15% on the first $200 of total donations
• Non-refundable tax credit of 33% on the lesser of:
  • the amount, if any, by which the individual’s total gifts for the year exceeds $200, and
  • the amount, if any, by which the individual’s taxable income exceeds $200,000
• Non-refundable tax credit of 29% on total donations for the year above $200 not eligible for the 33% rate

Read: Canada’s top-rated charities are…

Here’s how you would calculate the new federal non-refundable tax credit for a client with income of $215,000 wishing to make a $20,000 donation for the 2016 taxation year:

• 15% on the first $200 = $30
• 33% ($15,000) on the lesser of
  • the amount, if any, by which the individual’s total gifts for the year exceeds $200, ($19,800) and
  • the amount, if any, by which the individual’s taxable income exceeds $200,000 ($15,000) = $4,950
• Non-refundable tax credit of 29% on total donations for the year above $200 not eligible for the 33% rate ($4,800) = $1,392
• Total non-refundable tax credit: $6,372

In this example, the difference between 2015 and 2016 is $600. But the good news doesn’t end there. In addition to the federal non-refundable tax credits, this taxpayer will also be entitled to provincial credits.

It’s important for advisors to be familiar with the donation tax credit calculation. The 33% federal credit may spur more high-income clients to consider philanthropy as part of their overall financial plans. Advisors should also be aware that the new 33% won’t apply to donations made prior to 2016.

Read: Tax tips to help clients maximize refunds

Tim Brisibe

Tax & Estate

Tim Brisibe, TEP, is Director, Tax & Estate at Mackenzie Investments.