Thinking about what happens to your money after you pass away is never easy. Many Canadians choose to leave a portion of their wealth to charities. This is a wonderful way to create a meaningful legacy.
However, your family and heirs might not always be thrilled to see parts of their potential inheritance go to an outside group. Fortunately, Canada’s tax laws offer a powerful tool that benefits everyone. Leaving money to a charity in your will triggers valuable tax credits. These credits can dramatically lower the final taxes your estate has to pay.
Tax Deductions vs. Tax Credits: What’s the Difference?
Many people confuse tax deductions with tax credits, but they work very differently:
- Tax Deductions: Reduce the total amount of income you are taxed on.
- Tax Credits: Directly subtract from the final amount of tax you owe.
For example, if you owe $10 in taxes but have $9 in tax credits, you only pay $1. Because charitable donations create tax credits, they act like a direct discount on your final tax bill.
How Much Can You Save?
The calculation for donation tax credits depends on how much you give and how much money you made. The federal government calculates the credit using three main tiers:
- The First $200: You receive a 15% tax credit.
- Amounts Over $200: You generally receive a 29% tax credit.
- Top Income Earners: If your income puts you in the highest tax bracket, you can receive a 33% tax credit on donations over $200.
Your province or territory will also add its own tax credit on top of these federal rates, saving your estate even more money.
The Power of Donating Through a Will
When a person passes away, Canada treats all of their assets as if they were sold right before death. If you own property, stocks, or investments that grew in value, this “hidden sale” can trigger a massive capital gains tax bill for your estate.
Normally, the government caps your annual donation claims at 75% of your net income. But when you make a donation through a will, that cap jumps to 100% of your net income.
This gives your executor incredible flexibility. If your donation is large enough, they can use the tax credits to wipe out your entire tax bill for the year you passed away. If there are still credits left over, they can even apply them to the previous year’s tax return to get a refund.
Making Sure Your Gift Counts
To get these tax savings, the money must go to a Qualified Donee recognized by the government. This includes registered Canadian charities, municipalities, and the Canadian government.
Most importantly, the gift must be explicitly written into your will. If you do not leave a formal will, the administrator of your estate cannot make these donations on your behalf to save on your final taxes. Because tax laws are highly complex, it is always best to work with a legal professional to ensure your wishes are carried out exactly as you intend.