Towards the end of the year, we're often searching desperately for tax breaks. We'll even take on unreasonable investment risk, often to the point of probable loss of capital, simply to avoid paying more taxes.
WEAL It's time for a more rational alternative, but it calls for some contrarian thinking on where some of the best investments are.
We are surrounded by priceless wealth in the non-profit community organizations and religious institutions that affect our lives daily. Our homeless are sheltered and fed, the distressed are counselled, the sick are comforted, worshipers are welcomed, single parent families are supported, those with debilitating circumstances are enabled and the cause for a safe and sustainable environment is championed.
We can all understand that the real wealth in these organizations is immeasurable.
However, money is about as essential as oxygen in their continued operation.
Because governments are unable to provide all of these services, there is tax relief in supporting non-profit organizations who do.
I'm suggesting here that charitable giving is a great way to invest in your community and reduce your taxes along the way.
Unlike RRSP contributions and other tax deductions, the tax relief from charitable contributions comes in the form of a tax credit.
What this means is that, rather than reduce your taxable income, you will receive a credit that reduces your total federal and provincial tax.
The net result of this is that, regardless of what tax bracket you are in, you will receive a substantial tax refund to reward you for your generosity. If you are in the lower 20.06 per cent or higher 43.7 per cent marginal tax brackets, you will effectively receive a 43.7 per cent refund on every dollar you donate. This assumes that you have already met the $200 minimum donation to qualify for this higher credit, that your taxable income is well over $11,354 and that you are donating no more than 75 per cent of your net income.
Consider a person earning less than $37,013 who is in a 20.06 per cent marginal tax bracket. Every $1,000 contributed to an RRSP will generate a tax refund of $200.60. On the other hand, a charitable contribution will grant a tax credit that will return a $437 tax refund. Your earnings would need to exceed $132,406 before an RRSP contribution achieves the same tax reduction.
The fact is that every one of us has an ability and responsibility to make a mark in this world, to leave a legacy. Making a generous charitable contribution to an organization that you care about is an extremely tax-effective way to lend a hand.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Vetter is a certified financial planner and owner of WealthSmart Financial Group (www. wealthsmart.ca).
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