Making the most of your pension income tax credit

Say a word for the pension income tax credit. It may pack a comparatively smaller financial punch, but ignore it at your peril. As part of a comprehensive wealth planning strategy, it plays its own modest part in helping Canadians make the most of their retirement savings.

I’ve asked my colleague Jeffrey Smith to break down the ins and outs of this sometimes underappreciated tax credit. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
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What is the pension income tax credit?

The pension income tax credit (PITC) is a tax credit that you can apply to the first $2,000 of eligible pension income, which would result in a tax savings of 15% of eligible income. The maximum savings federally is $300 ($2,000 x 15%), plus a provincial credit depending on the province you live in.

The PITC is non-refundable, so you cannot carry it forward in subsequent years. You use it or lose it.

That may lead to your next question: what is eligible pension income?

Eligible pension income

There are different sources of income that are eligible to claim the PITC. What’s interesting is that age may factor into eligibility. If you’re under 65, the PITC is available for the following pension income from as early as age 55:

• A life annuity payment from a superannuation
• Payment from a specified pension plan
• Annuity payment arising from the death of a spouse under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Deferred Profit Sharing Plan (DPSP).

If the above income is elected split pension income, your spouse or common law partner will qualify for the PITC as well.

If you do not have the income sources noted above, when you reach age 65 there are many new types of income that qualify for the pension amount. These types of income are:

• Payment from an RRIF
• Interest from a prescribed non-registered annuity
• Payment from a foreign pension
• Interest from a non-registered GIC offered by a life insurance company.

Non-eligible pension income

Clients are sometimes surprised by the list of benefits that don’t qualify for the PITC – especially when it comes to government benefits. Income from the following sources generally does not qualify for the pension amount:

• Old Age Security
• Canada Pension Plan
• Death benefits
• Quebec Pension Plan
• Retirement compensation agreements
• Foreign-source pension income that is tax free in Canada
• Salary deferral arrangements
• Income from a U.S. Individual Retirement Account (IRA)

Potential tax savings

Now that we have identified what does and what does not qualify for the PITC, below is an example of the tax savings on the federal level for each marginal tax rate. For the purposes of this discussion, we have ignored federal surtaxes that apply on personal rates.

Federal tax rate	15%	22%	26%	29%
Eligible pension income	$   2,000	$   2,000	$   2,000	$ 2,000
Federal tax	300	440	520	580
Pension tax credit	-   300	-   300	-   300	-   300
Net federal taxes payable	$          0	$      140	$      220	$    280

Each province has its own respective tax rates and pension tax credit limits, so the total tax savings will vary by province.

Tax planning opportunities

If you have income that is eligible for the PITC, you should use it. However, if you are 65 or older and do not have eligible income, you can still take action to use this credit for you and your family. Here are three mechanisms on which we advise clients:

• Transfer $14,000 of an RRSP to an RRIF. This will allow you to draw $2,000 per year and use the PITC from 65 to 71 when your RRSP converts to an RRIF naturally. This is an opportunity whether you need the income or not.
• Transfer any unused PITC to a spouse who earns pension income greater than $2,000 and has not used the pension credit themselves.
• Transfer a Locked-in Retirement Account to a Life Income Fund and annuitize.

These recommendations should be reviewed on a case-by-case basis to ensure that any pros and cons have been outlined before making a decision. Reach out to your advisor to assist you with structuring your assets in the most tax-efficient manner.

Jeffrey Smith - CPA, CA, CFP - is a Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

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Five Ways to Make a Charitable Donation

On Monday, I vented about the First-Time Donor’s Super Credit, an income tax program created to incentivize Canadian’s to make charitable donations. Today, I get off my soapbox and discuss alternative ways to make charitable donations and the related income tax consequences.

Cash Donations

Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits. In Ontario, for many people, the actual tax savings for a donation will range from approximately 40% to 46% of your actual donation, for any

donations in excess of the $200 limit.

Thus, for many Canadian’s, the tax credit obtained when making a donation is close to almost one-half of the actual donation made; not a bad tax savings vehicle, especially when you factor in the altruistic aspect of helping those less fortunate than you.

Donations of Public Securities

If you incur a capital gain on the sale of a stock or bond, the income tax rate on that gain at the highest marginal income tax rate is approximately 23%. However, if you donate securities, such as a stock or bond, listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated and the net after-tax cost of the donation is reduced substantially.

For example, if a high rate Ontario taxpayer (not super-rate) sells a stock for $3,500 that has an adjusted cost base of $500, they would owe approximately $700 in income tax on the capital gain the following April. If they donate the gross proceeds of $3,500, the donation would result in income tax savings of approximately $1600 when they filed their return next April. The net after-tax cost of the donation is $2,600 ($3,500 value of shares/donation less the $1,600 donation tax savings plus the $700 capital gains tax)

However, if the taxpayer donated the stock directly to a charity, the organization would receive $3,500, the taxpayer would receive a refund of approximately $1600 and they would owe no taxes on the capital gain, making the net after-tax donation cost only $1,900.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds;  a direct contribution of the security to a charity is far more tax efficient.

Donation of Flow-Through Tax Shelters

Prior to March 22, 2011, you could also donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value of the shares. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are very complicated), if you paid $10,000 for any post March 22, 2011 flow-through shares, only the gain in excess of $10,000 will now be exempt and the first $10,000 will be taxable.

If you are considering donating flow-through shares to charity, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Donations on Death

Many people are hesitant to make substantial donations while alive, as they are concerned they may require those funds to pay for medical care or to cover their day to day living expenses. However, they fulfill their altruistic wishes by making a large donation(s) on their death. In general, donation bequests made in your will are deductible on your final terminal tax return, with no limitation. The requirements for supporting these donations can be found on page 16 & 17 of the CRA guide, T4011, Preparing Returns for Deceased Persons 2012.

The guide says “Support the claims for donations and gifts with official receipts that the registered charity or other qualified done has issued, showing either the deceased’s name, or the deceased’s spouse’s or common-law partner’s name".

Your executor can also claim charitable donations made through your will as long as they can support the donations. The type of support you have to provide depends on when the registered charity or other qualified donee will receive the gift:

•  For gifts that will be received right away, provide an official receipt.

• For gifts that will be received later, provide a copy of each of the following;

- the will
– a letter from the estate to the charitable organization that will receive the gift, advising of the gift and its value; and
– a letter from the charitable organization acknowledging the gift and stating that it will accept the gift.

Private Foundation

Private Foundations are beyond the scope of today’s post, although, I may discuss this topic in the future. However, for purposes of today’s blog post, I just want to note that wealthy individuals may wish to consider the use of a private foundation. These foundations are typically funded with a large initial charitable contribution (which is a creditable charitable donation as per the general discussion above). The foundation is often formed to create a sense of family philanthropy and donation decisions are often made as a family. Foundations are heavily administered by the CRA and must abide by a number of tax rules, including minimum donation disbursement requirements.

Your Time

If you give your time and effort to a charity, you cannot receive a charitable donation for your time or any services your provide (see this link). Therefore, I have not included time as of the five ways to make a charitable donation. However, in many ways, it is the best charitable contribution you can make. As someone who has been a Big Brother, granted wishes to various children through the Make-A-Wish program and been on other charitable boards, giving of your time can be very self-satisfying, while helping others in need. Whether you make cash contributions or not, you should consider giving your time and effort to your favourite charity.

As I circle back to my post on Monday, in my opinion, the income tax benefits already in place and the satisfaction of helping others in need should be sufficient incentive to make a charitable donation. We should not require a “super credit” to consider making a donation in the first place. But as I stated, if this credit helps even a few people get in touch with their more charitable sides, then I can’t fault it.

 

Charitable Giving - The First-Time Donor’s Super Credit - Why is it Necessary?

In August, Preet Banerjee of the Globe and Mail wrote an article titled “A super (secret) way to quadruple your charitable giving”. The article discussed the income tax benefits of the new First-Time Donor’s Super Credit (“FDSC”). While I applaud any charitable giving, I find it very sad that because of a shrinking donor pool; the government had to create such a program to entice Canadians to make their first charitable donation since 2007, or in some cases their first donation ever!

According to this CBC article, Canadians are one of the most generous nations in the world, yet “from a high of almost 30 per cent in the early 1990s, the proportion of taxpayers claiming charitable

donations on their tax returns had fallen to 23 per cent by the 2011 tax year.”

As Preet describes in his article, the FDSC was announced in the 2013 Federal Budget and is effective from March 21, 2013 to December 31, 2017. Essentially, this new credit is available as long as neither you nor your spouse or common-law partner has claimed a charitable credit since 2007 (Note: if you made a donation but did not claim it, you are still eligible).

For income tax purposes, the first $200 of charitable donations qualify for a 15% credit and any donations in excess of $200 qualify for a 29% federal credit. The FDSC increases those federal credits by an additional 25% on all donations claimed to a maximum of $1,000.The provinces also provide charitable tax credits, however, they vary by province.

The CRA provides the following example of the FDSC from a federal perspective where you make a $500 donation:

First $200 of charitable donations claimed:	$200 x 15% =	$30
Charitable donations claimed in excess of $200:	$300 x 29% =	$87
First-Time Donor’s Super Credit:	$500 x 25% =	$125
Total FDSC and CDTC:		$242

This program would appear to make some sense in the context of students entering the workforce or those who have endured hard economic times and have not had much if any discretionary income to make charitable donations. However, a lower income is not necessarily a deterrent to making charitable donations. Over the years I have often been asked to prepare a caregivers tax return by their employer; often the caregiver has made substantial donations and sometimes donated a significantly greater proportion of their income than their employer. 

Based on the number of charitable requests I receive from friends, family and associates for every biking and running charity event, I find it almost inconceivable that most people have not been "guilted" into at least one donation since 2007. You would think most Canadians would almost have no choice but to make a donation or two a year just from family and religious expectations.

Over my 25 years as an accountant, spanning various firms, I have worked with clients making hundreds of thousands of dollars if not millions of dollars. These clients often make so many donations and have so many donation receipts, that we cannot staple their tax returns. Yet, one particular firm I used to work for, for some reason had several clients whose charitable donations consisted solely of a single donation of say $100 or a few small donations which I found shocking given their financial resources. I have a hard time accepting there could be people in the top 1% of earners in Canada potentially claiming the FDTC.

Believe it or not, I have had the occasional client complain to me about how much tax they have to pay. Where they make minimal charitable contributions, I may inform them in as nice a way as a Blunt Bean Counter can, that they are missing the best tax planning vehicle around, the donation tax credit you receive when making a charitable donation. Sometimes this awakens their charitable giving and sometimes not.

I had not given much thought to the FDSC until Preet’s article. But when I read the article, I couldn’t help thinking that it is absurd for a country as prosperous as Canada to require such a program, when we already have such a generous donation tax credit scheme. However, if the program changes even a few people’s charitable behaviour, than I guess it has to be considered a success. Wednesday I will discuss some alternative ways to make charitable donations and the associated tax advantages.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.