Canada: Top 2017 Year-End Income-Tax Planning Tips From Canadian Tax Lawyers—Part 2: Charitable Donations

Last Updated: December 15 2017
Article by David Rotfleisch

Charitable donations serve to improve the quality of life for many Canadians. But donating to charity can also serve to reduce your overall tax burden. In Part 2 of this series, our Canadian tax lawyers provide their top year-end tax-reduction strategies using charitable donations.

While we cater this discussion towards individual taxpayers, you should remain mindful that corporations can also reduce their tax burden by donating to charity.

1. Be Mindful of Your Deadline

If you wish to claim your donation tax receipt on your 2017 income-tax return, you must donate to your registered charity by December 31, 2017.

If you donate after this deadline, you will need to wait until 2018 to claim your donation tax receipt. You will also lose out on your last chance to claim the first-time donor's super credit.

2. Don't Miss Your First-Time Donor's Super Credit: Gone After 2017

A first-time donor receives an additional 25% tax credit on his or her first $1,000 in charitable donations. You're a "first-time donor" if neither you nor your spouse or common-law partner has claimed a charitable-donation tax credit any time after 2007. So, if your household has never donated before, the first-time donor's super credit offers a means of significantly reducing your tax bill.

But you need to act now: The first-time donor's super credit disappears after 2017.

3. Donate Securities and Avoid Potential Taxable Gains in the Process

Instead of donating cash, you can donate publicly listed securities to a qualified charity. You'll receive a donation tax receipt equal to the fair market value of the security at the time of the donation. In addition, by donating the securities to a registered charity, you won't incur tax on the accrued gain. (Gifting the securities to a non-qualified done would result in a disposition at fair market value and thus a taxable gain if the market value exceeds cost.)

If you plan on donating securities—and wish to receive the tax credit this year—the transfer must take place before December 31st. As a result, you should start this process soon to allow time for processing and settlement time, which typically takes at least five business days.

4. Don't Forget Your Corporation

You may want to consider making donations through your corporation if you own one. Individuals get donation tax credits, but corporations can deduction donations from taxable income. Moreover, donations of capital property can increase the capital dividend account of your private corporation. Your corporation can then pay this amount to you tax free.

But you'll need to compare the benefits of donating personally versus through your corporation. Personal donations might result in greater tax benefits due to the lower corporate tax rates.

5. Make a Gift of Life Insurance

You can make a donation of a whole-life insurance policy, which is a policy combining insurance with an investment fund. You donate by transferring ownership of the policy to the charity and by naming the charity as the policy beneficiary.

Generally, the tax value of the donation is the policy's fair market value minus any outstanding policy loans. But, if the tax value exceeds your tax cost of acquiring the policy, you must report the excess as income.

After donating the policy to a charity, you may claim your subsequent premium payments on the policy as additional charitable donations.

Finally, your estate may be able to claim a donation tax credit if you name a charity as a beneficiary of your life insurance in your will. The estate can claim the credit in either your terminal tax return or your tax return for the year before your terminal year. Similar rules apply if your will names a charity as the beneficiary of your RRSP or RRIF.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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