Some people will go to great lengths to avoid paying income taxes. They are always looking for ways to get out of giving more money to the government. Unfortunately, many of their tactics entail unassessed risk or, worse, actually cause a decline in their assets even as they reduce the tax burden.
It is usually smarter to make full use of all the tax deductions and credits available for individuals or couples. Various simple planning strategies, such as making RRSP contributions or splitting pension income between spouses, can also be very effective.
One such strategy that is often overlooked is taking advantage of the maximum tax credit for charitable giving. In fact, individuals who make charitable donations are eligible for a 12.53% federal tax credit on the first $200 and 24.22% on the remainder.
Quebec residents completing a provincial tax return can declare a 20% credit on the first $200 and 24% on the remainder. As a result, the first $200 in charitable giving entitles them to a combined federal/provincial tax credit of 32.53%, while the remainder generates a 48.22% credit.
Both the federal and Quebec governments limit the donation tax credit to 75% of a taxpayer’s net income (except in the year of death, when it is 100%). If the total donations exceed that limit, the unused donations can be carried over during the following five years. You are also allowed to voluntarily carry over donations to any of the subsequent five years even if you have not reached your donation limit for the current year.
For a Quebec resident who makes a $200 annual donation, the question is therefore whether it is more advantageous to claim the 32.53% credit every year or carry over the donations to subsequent years in order to benefit from tax credits at the higher 48.22% rate.
This table shows that an individual who makes a $200 donation and takes advantage of the annual tax credit will receive a total tax refund of $260 over a four-year period. In this case, all the donations are eligible for a tax credit at the lower combined rate of 32.53%.
If that person chooses to claim the tax credit only every two years, the total tax refund would be $323 because combining two years’ worth of donations would entitle him to a credit at the higher rate. We est imate that the $65 tax refund received by the person in Case #1 would have to be invested at an annual rate of 8.83% in order to equal the amount received by the person in Case #2.
In Case #3, the total refund would be $354 because 75% of the donations ($600 of the $800 total) is eligible for a tax credit at the higher rate. To match this amount, the person in Case #1 would have to generate a 12.69% investment return.
Consequently, in light of the major difference in tax credit rates between the first $200 in charitable donations and the remainder (32.53% versus 48.22%), we highly recommend that Quebec residents consolidate their donations from multiple years into a single year if their total donation amount is significantly more than $200.