Our tax system has generous incentives to encourage Canadians to donate to charities. Let’s take a closer look so you can understand exactly how what you give to others can benefit you at tax time.
For the first $200 you donate in a year, you get a tax reduction of 20.05% of the amount of the donation (if you live in Ontario). If you donate more than $200, you’re eligible for a tax reduction of about 46% of the donation amount. So for all donations above $200 you’re treated as if you’ve received a tax deduction at the highest possible tax bracket (around $129,000 in taxable income for 2011).
The maximum amount of donations you can claim in the year is equal to 75% of your net income. If you have receipts worth more, or if you choose to not claim a donation for any other reason, you can claim the credit in any of the following five years.
The annual limit for donations in the year of death, and the year before, is 100% of net income for the year.
To claim a donation, you need an official receipt showing the recipient organization’s charitable registration number. If your receipt doesn’t have an appropriate registration number it’s not a legitimate donation.
Those are the numbers – let’s look at how you can best use them for your family’s situation.
If you only donate small amounts in a year, consider combining two or more years of receipts into one year, so you can pass the $200 threshold. If you’re above this threshold in a particular year, think about making donations in December rather than early the next year, so you can maximize amounts.
If both you and your spouse contribute to charities, combine your receipts and claim them all on one of your returns in order to eliminate the $200 low rate threshold for one party. If you live in a province such as Ontario that levies high income surtax it’s always better to have the higher income spouse claim all the donations. This way, you can increase the effective value of your donation.
Every family is different. It may be worth it to split donations made by one spouse between the two spouses in whatever proportion you choose or carry them forward and claim them in either return in the future year.
A major tax planning opportunity to think about involves making donations of publicly traded shares rather than cash. Here’s why: if the shares appreciated in value over the period you owned them, normally you’d be subject to a capital gains tax of 23% of the increase in value upon sale. But if the shares are donated directly to a charity, without selling them first, the taxable gain on the transfer of the shares is deemed to be nil and you would save this 23% tax.
Keep in mind one of the changes in the 2011 budget was to eliminate the exemption from capital gains tax on the donation of shares acquired pursuant to a flow-through share agreement entered into after March 22, 2011. In the future, you’ll only be allowed an exemption from tax to the extent the cumulative capital gains in respect to the disposition of the shares exceeded the original cost of the flow-through shares.
Another donation option to consider for tax savings is the gift of cultural property or ecologically sensitive land.
If you carry on a business through a Corporation, there are more small business tax deductions available through the donation of publicly traded shares that have appreciated in value to a charity. First, the amount that’s taxable on the taxable gain is reduced from 50% to 25%. Second, the 75% non taxable portion of the gain can be paid to the shareholder on a tax-free basis by declaring a capital dividend of the amount. If it sounds complex, it is. If you’re considering this, you’ll need appropriate advice as there are a number of rules far too tedious and complicated to explore in this blog.
Similarly, there is a number of estate tax planning opportunities that are possible using charitable donations that should be considered when you’re drafting your will.
Just like all the topics explored in recent weeks, with good planning and organization, charitable donations can bring you substantial tax savings—while furthering the valuable work of Canadian charities.