DONATION TAX CREDIT
A charitable tax credit can be issued by any registered Canadian charity. The combined federal/provincial tax credit rate for donations in British Columbia is as follows:
For the first $200 it is 20.06% and 43.7% on any amount over $200.00. The effective tax credit rate on a $1000 donation is 39%. For first time donors the effective rate on a $1000 donation is 63.9%. The super-credit is only on the first $1000. Donations over $1000 are calculated at the combined rate of 43.7%
The effective tax credit rate on a $2000 donation (requires a $20,000 investment) is 53.8% or $1076.00. You would receive a charitable tax credit worth that amount.
However, in that the Housing Trust Community Investment Model is based on an interest-bearing loan (secured against land and property) the interest earned is taxable. So an investment of $20,000 would earn $2000 in interest and that has to be added to income. That income would be taxed at the investor’s personal income tax rate.
So if an individual’s income tax bracket is 30% then that would mean that he/she would owe an additional $600 in income tax. This then reduces the value of the tax credit by that amount so a $2000 investment would then net out at: $476.00. The ROI on that investment is 2.38% ($476 divided by $20,000.)
A smaller investment of $2000 would yield $200 in interest. For a first time donor that would equate to a $30.12 net tax benefit and have an ROI of 1.51%.
Sometimes there is a negative consequence. In the case of a $2000 investment by an investor in a 30% tax bracket the result is that the added income tax is greater than the charitable tax credit and the ROI is a negative return and in that specific case -0.99%.
We have provided an ROI calculator for investors to determine the real return based on specific amounts and on personal tax brackets. For reference here are the combined 2015 marginal tax rates for British Columbia.
Generally, individuals in the highest and lowest tax brackets don’t really benefit from the charitable tax credit and in some specific cases end up with a negative result for when you take the interest earning option that interest is added to your annual income and has to be taken into account.
Individuals in the mid-income levels ($36-105,000/yr) investing more than $200 earned interest and taking the charitable tax credit option can realize between one half to approximately four percent ROI.