Albertans were outraged last March when the provincial budget moved to reduce income tax credits they could claim on total charitable donations in a year greater than $200 from 21 per cent, one of the best rates among provinces, to 12.75 per cent. The change would have made Albertans pay an extra $90 million a year in taxes. But the outcry on social media was so powerful that within a month the government reverted to the 21 per cent credit.
Taxpayers in Alberta receive credits of 15 per cent federal and 10 per cent provincial on the first $200 of annual donations, then 29 or 33 per cent federal plus 21 per cent provincial on total donations greater than $200. Spouses or common-law partners are usually best off combining donations on one person's tax return, so the lower credit on $200 is used once instead of twice.
The generous tax credit is one reason Albertans are expected to donate an average of $982 to charities in 2016, compared to the Canadian average of $694, according to the annual BMO Charitable Giving Report. It's generally more tax-efficient to donate before death, although a person donating through an estate or life insurance no longer needs the money. Besides taxes there are moral reasons why people “gift” much of their good fortune, to family members, to people in need through a community foundation, to an educational institution, hospital or religion of personal significance, or to help a charity cure an illness that has touched friends or family.
Be careful in giving money to your children, and consider how financially responsible each child is. A parent gets no tax break giving money to an adult child, but in Canada the child pays no gift tax on the amount. An adult child will then pay the tax on any income from the gift including investment returns. With a minor-age child, the parent pays tax on dividends and interest under attribution rules, but capital gains are allotted to the child. Most wealthy philanthropists place their money in a private non-profit charitable foundation or trust. On a smaller scale, everyday people can create a family foundation, namely a donor-advised fund set up through a public foundation with most banks.
Donations have become increasingly important to educational institutions as governments tighten budgets, according to Tamara Carew, Annual Fund Officer with the University of Alberta. Gifts to the U of A have helped virology professor Michael Houghton's team discover the hepatitis C virus and work on developing a vaccine for it, while chemistry professor Jillian Buriak's team is developing paper-thin plastic solar cells that could revolutionize solar power.
Be aware which organizations you can claim income tax credits for, by checking Canada Revenue Agency's website for its' ever-changing list of registered charities. And if you're concerned how much a charity actually spends on research and treatment, MoneySense magazine annually rates 100 Canadian charities on issues like revenue efficiency after administration costs, and fundraising costs. Recently listed among the best were the Calgary Foundation, United Way of the Alberta Capital Region, Canadian Red Cross, Terry Fox Foundation, Calgary Inter-Faith Food Bank and Canadian Tire Jumpstart.
The 2006 federal budget made donating publicly-traded shares or mutual funds “in kind” directly to a registered charity more beneficial. Assuming a 36 per cent marginal tax rate, if you pay $10,000 for shares and sell them for $15,000 which you donate to charity, you would pay $900 in capital gains tax and an Albertan would receive up to $7,500 in donation tax credits. But if you donate the shares directly to charity, you eliminate the $900 capital gains tax and still get the $7,500 tax credit.
In 2013 the federal government introduced the First-Time Donor's Super Credit, claimable until 2017 for people who haven't donated in the previous five years. Credit is 40 per cent on the first $200 and 54 per cent on the amount from $200 to $1,000, plus provincial credits. Another change as of the 2016 tax year is that people with taxable income more than $200,000 may be able to claim a federal credit of 33 rather than 29 per cent on some or all donated amount greater than $200.