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By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2019, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2019, must have been implemented by the end of that calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before March 2, 2020 in order to be deducted on the return for 2019.
The fact that the clock has run out on most major tax planning opportunities for 2019 doesn’t however, mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2019 — by claiming all available deductions and credits on the return and also by making sure that those deductions and credits are claimed in the way which will give the taxpayer the most “bang for the buck”.
Everyone’s tax situation — and, therefore, their tax return — is different, of course, but millions of Canadian taxpayers make claims on their annual returns for charitable donations made. It may seem counterintuitive, or even illogical, to not claim every available deduction and credit in order to obtain the best possible tax result for the year. However, for charitable donation tax credit claims there are situations in which it makes sense to defer an available claim until a future year, or to transfer that claim to another person.
Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2019) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.
That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.
Take, for example, a taxpayer who makes a regular contribution to a favourite charity of $100 each month, or $1,200 per year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 × 15%, + $1,000 × 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 × 15%, + $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, + $5,800 × 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at different rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.
It’s also the case that a married taxpayer can claim a credit for charitable donations made personally as well as those made by his or her spouse. Since the amount of tax credit claimable increases with the size of the annual donation it almost always makes sense to combine donations made by both spouses, in order to maximize the available credit, and to claim those donations on one return.
Since the amount of credit which may be obtained isn’t affected by the income of the taxpayer claiming it, the benefit received from the credit will be the same regardless of which spouse claims it, with one major exception. The charitable donation tax credit is a non-refundable credit, meaning that it reduces tax otherwise payable, but does not create or increase a tax refund. Consequently, it’s important, when deciding who will make the claim for combined donations, to ensure that the taxpayer making that claim has tax payable for the year of at least as much as the amount of the charitable donation tax credit. If neither spouse has sufficient tax payable for the year, then it would be better to defer the claim and make it in a future tax year.
It would be easiest, of course, to simply add up the amount of charitable donation receipts for the year and claim them all on the return of the donor. However, investing a little time to calculate the amount of donations made by both spouses, to consider who should make the claim and, finally, to determine whether the claim is best made in current year or a future one, can provide a much better overall tax result.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.