Charities play a vital role in our society. The Canadian government recognizes this role and tax breaks exist to encourage taxpayers to give to their favorite charities.
Roger makes occasional donations to various charities. His donations are rather small and amount to only a few hundred dollars per year. He learned that he might get a bigger tax break if he was a little more generous with his donations.
Donations used to be a direct deduction from taxable income, but are now treated as tax credits. Basically, a taxpayer's federal income tax payable is calculated first, and then certain credits are deducted from the total owing. Provincial and territorial taxes are then calculated based on the federal taxes.
For cash donations to a registered charity, the first $200 earns a tax credit of 15% and anything over this amount (within certain limits) gets a tax credit of 29%. Roger can actually get a larger tax credit on his donations over $200 than what his federal taxes are. He is in the 26% marginal federal tax bracket.
For example, if he contributes $1,000 to charity, Roger will get a tax credit of $34 on the first $200. The credit on the remaining $800 is $232. His federal tax on the $800 was actually $208, so he comes out $24 ahead on his federal taxes. And he saves on his provincial taxes, too.
Mary has been a long time supporter of her favorite charity. She would like to make sure that her support continues after she passes away. Getting a tax break today would also appeal to her.
Life insurance can help make her wishes come true. The procedure is quite simple.Mary applies for insurance on her life, or uses an existing policy, naming the charity as the new owner and beneficiary. She pays the premiums and the charity gives her a tax-deductible receipt each year for the amount of the premiums she paid.
This approach is very effective because Mary can make a substantial bequest in the future by making payments over time, which may suit her situation better. Her donation is private and won't be publicized unless she wants it to be. The gift cannot be contested by anyone because life insurance is not open to such
attacks, unlike donations in a will.
IMPORTANT NOTE - This concept is based on the understanding that premium donations are in addition to a donor's current support.
Steve and Brenda have substantial RSP assets that will be taxed when passed on to their children. They also want to make a difference to a charity. It may be possible for them to avoid taxes altogether.
All RSPs can be left to a charity when they have both died. The final tax return can get a tax credit for the full amount of the donation, wiping out the taxes owing. They can use a joint-last-to-die life insurance policy to take care of their children's inheritance.
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