Friday, May 1, 2015

Donate to Charity Efficiently!

 Combine Multiple Years Donations Together - And Save

Well, it's tax time in Canada again, so here's one last tax related article for a bit.

Many of you probably use Ufile, TurboTax or some other free software to file your taxes. The Canadian Government is pushing these, by no longer mailing out paper forms, and take a look at the website where you can download forms:



My family and I have been using UFile for over years now and for $20 to do 4 returns, it does save a lot of time. Prior to this, my parent's, and I all filled out paper forms, which involved lots of calculation by hand and transposing numbers from page to page. Ufile by contrast, is more like a "wizard" where you click next over-and-over, answering interview questions and entering information from paper tax forms.

Unfortunately, using a "wizard" to enter tax information, doesn't let you see how things work under-the-covers. The credits for charitable donations are a perfect example of this.

How Cash Charitable Donations Are Calculated

Before reading too much into this, please note that if you choose to donate investments (stocks, mutual funds, etc.) it can be much much more efficient than donating cash. That said, let's get started.

Please also note: I'm not a tax professional, there are some other wrinkles to this material, like limits on the maximum amount you're allowed to claim as a donation (if you start donating a large percentage of your net income). Do you own research or talk to someone else if you're making very large donations.

I'm also ignoring the "First Time Donor Super Credit", because I'm assuming you've donated to charity once within the last 7 years.

For 2014, looking at Schedule 9 - Donations and Gifts, the section on donations is as follows:


I've added the red highlight. If we were to write this algebraically it would be:

If Donation Amount is $200 or greater, credit = ($200 * 15%) + (Donation Amount - $200) * 29%
If Donation Amount is less than $200, credit = Donation Amount * 15%

Conclusions

So, the cash donation credit is only 15% on the first $200, but larger on the subsequent money. Therefore, it is a lot more efficient, which allows you to donate even more or pocket the difference, to make fewer, larger donations to charity rather than regular annual donations.

Each year you donate, the dollars in the first $200 are generating a credit (29%-15%) = 14% less than they would if those dollars were part of a larger donation.

Example: $200 per year vs. $1000 every 5 years
In this example, you have 4 years of $200, that are going to make 14% more credit than if you donated every year. That's a total of $112. It costs 11% less to donate $1000 every 5 years than $200 per year. That's quite a savings!

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