Year-end giving is like being in a championship game of hockey with the time ticking down. Your opponent is up 2 – 1 and if you could just score one more goal and tie the game; you know you could take them in overtime. Year-end giving is exactly that! Your opponent is taxes and year-end giving is your last chance to score and win the big game!

With taxes rates climbing this gives us even more incentive to get those last minute donations into charities that we care about.

Most people think that charitable donations just reduce the amount of income you show on your tax return. But that is not accurate. Charitable donations give you a tax credit, which directly reduces the amount of taxes you have owing or the amount of taxes you have to pay.

When doing a tax return you add up all of the income you have and based on the income level this will determine what % you pay in taxes. The average family in Alberta pays 28.9% in taxes with the marginal tax rate being 36% (Highest taxes paid on top income). An income tax deduction; just like it sounds, reduces the amount of income shown on your tax return. If you have a low income already reducing your income doesn’t help you as much, because you already have a low tax rate. Charitable giving; however,  gives you a tax credit directly reduce the amount of tax you are required to pay.

Regardless of a person’s income, they would receive the following credits for donations.

The Canadian Federal tax credit is 15% of the first $200 given and then 29% of all donations above $200. In the province of Alberta you get 10% for the first $200 and an additional 21% for all donations above $200.

Let’s take a look at a tax credit for someone who gives $10,000 to a charity.

Example: With a Year-End Donation of $10,000, you get the following tax credit:

First $200: $200 x 15% = $30
Above $200 ($10,000 - $200 = $9800): $9800 x 29% = $2842

Province of Alberta:
First $200: $200 x 10% = $20
Above $200 ($10,000 - $200 = $9800): $9800 x 21% = $2058

Super Credit: First-time donors get an extra 25% of federal tax credit for donations up to $1000.

First Time Donor Super Credit
$1000 x 25% = $250.00

Total Tax Credit = $4950
For first-time donors Total Tax Credit = $5200

Whatever you paid in taxes this year, or have owing in taxes for this year, would be directly reduced by that tax credit. Whether you owe $26,000 or $6,000.

The same amount of money put into an income tax deduction would only result in a tax reduction of $3,600 ($10,000 x average marginal tax rate of 36%)1.

For all provinces, you can find your donation tax credit rates here.

If you have already paid your taxes, then this is a great way to get a tax return.  If you have yet to pay your taxes for 2018 this is a great way to reduce the tax bill that is coming. 

We can see, this is a great strategy for tax planning… the only catch is… you have to get your donations in before the end of the year. Like playing in the final game of the hockey championship you have to make your move and win the game before time runs out!

Author: Ryan Gaunce

Note: This is not tax advice or financial planning advice but is simply one strategy used by wealthy families in their year-end tax planning.  Please consult your financial planner or tax professional to determine your net benefit.
1The Marginal tax rate is dependent on income level.  Check with your accountant to determine the exact tax reduction by using an income tax deduction.