Claiming charitable donations can be a tricky business and this year, well-heeled donors will be faced with additional tax complexity when they file their 2016 tax returns, due to a new tax bracket and rate for high-income earners.
The federal non-refundable tax credit for charitable donations, in fact, is now a three-tiered credit, with a sweetener added to the mix for first-time donors until 2017. Here’s how it all works:
• Donations up to $200. the credit for the first $200 donated is calculated at a federal rate of 15%; so a donation of, say, $100 earns a non-refundable credit of $15.00.
• Donations by Mid Income Earners. If your income is below the high-income threshold to which a 33% federal tax rate applies (less than $200,000 in 2016), you’ll receive a credit calculated at 29% for the amount of your donation that exceeds $200. For example, a donation of $1,000 would earn you a non-refundable federal tax credit of 15% x $200 + 29% x $800 = $262.
• Donations by High Income Earners. starting in 2016, if some of your taxable income is taxed at 33%, you’ll get a credit for the lesser of 33% of the amount of income taxed at 33%, and the amount of your donations, less $200. (Yes, it’s tricky!) The remaining amount of your donation would be eligible for the credit at 29%.
Now for the sweetener: if neither you nor your spouse have claimed any donation credits after 2007, you’ll be eligible for a First Time Donor Super Credit of 25% of cash donations (i.e., not in-kind donations) of up to $1,000. As well, each province also provides an additional donation credit. In most cases, the credit for the first $200 is calculated at the lowest provincial tax rate and the remainder is credited at the highest tax rate.