When Morgan Fisher and his sister Laurel discovered hidden treasure worth $17,000 in their relative’s attic, they donated the loot to charity. The donation earned them a large income tax credit ensuring a win-win for themselves and the charity. (For more information on their find, see Funny Money Found in Attic Turns Out to Be Treasure for Two.)
First let’s review the obvious benefit of a charitable donation.
The Bonus of Supporting a Charity: A Generous Income Tax Credit
Donating to charity feels good, but it also helps donors at income tax time. Providing you have the proper paperwork, the donation can be claimed for a credit on your annual income taxes.
For example, say you donated $2000 to the local food bank and that the food bank is a registered charity listed by the Canadian government. If so, you or your partner can claim the entire donation or you can split the donation. Whoever claims it gets an income tax credit.
If that was your only charitable donation that year, the credit is calculated as (200)*.15 + (2 000 – 200)*.29 = 30 + 522 = $552.
That’s just for the federal portion of the income tax credit. Many provinces and territories also have tax credits.
Estimating the Tax Credit for a Charitable Donation
The government has put a handy calculator on their website to allow you to estimate what the tax credit might be for a donation. It’s at http://www.cra-arc.gc.ca/chrts-gvng/dnrs/svngs/clmng1b2-eng.html
It says, for Newfoundland for 2012 a donation of $2,000 is worth a combined federal and provincial credit of $806.80. For Ontario for 2012, the combined credit would be $762.98. (At those rates, maybe it would be worth moving to the Rock from Ontario if you’re planning to donate a few million to charity!)
However there are other often overlooked benefits to donating.
Overlooked Benefit 1: Another Reason to Donate: Avoiding Capital Gains Tax
Right now, the government is providing an incentive to donating to charity. Under current Canadian tax rules, you do not have to claim or pay taxes on the capital gain of an asset donated directly to a registered charity.
For example, say forty years ago Gramma bought 100 shares of CIBC stock at $20 each. Due to stock splits and reinvested dividends, she now has 300 shares with a current value of $78 each. It will take a lot of math to figure out her adjusted cost base and her capital gain on the shares if she sells them.
If she donates them all to charity, however, she does not have to declare the capital gains on her income tax. Instead, she can claim a tax credit for the donation of 300 shares at $78. (300 x 78 = 23 400) For her donation of $23 400, she would get a tax credit in PEI of $10 652 or in Alberta of $11 650.
According to the Canada Revenue Agency “Generally, your tax savings will be equal to the amount of the charitable tax credit calculated.” So Gramma could be getting $10- 12 000 in after tax dollars for her shares. And she’s helping her favourite charity a lot.
To make the claim, she would have to have proper documentation from the charity. The item being donated might have to be professionally appraised.
Overlooked Benefit 2: Donating Saves the Hassle of Finding a Buyer
The Fishers helped a charity, specifically a museum in PEI, when they donated their find. However, they also benefited because it might not have been easy for them to sell the antique money they found at its appraised value. By donating they avoided having to find an auctioneer or dealer to help them sell their find. They also avoided having to pay fees or commissions on the sale.
For valuable items that are more difficult to sell, such as works of art or rare books, donating them to a charity can also save time, effort and fees. You would not have to find a buyer or arrange an auction for the item. Generally, you would also avoid having to pay insurance costs to protect your asset while waiting to make the sale.
Overlooked Benefit 3: Another Bonus for High Income Earners
In some provinces, such as Ontario, the charity tax credit will also reduce the amount of provincial surtax to be paid. Fees such as Ontario’s Health Premium can also be reduced.
Overlooked Benefit 4: Charitable Donations from Estates
If a person dies, and the will permits it, the executor can donate some of their belongings to a charity. The donation can be claimed on the tax return for the Estate of the person who died. The resulting tax credit can be very useful in reducing the tax owed by the Estate.
Is the Charity Tax Credit Refundable?
No. The tax credit is applied against your taxes owing but if the credit is larger than the amount of tax you owe, it is not refunded. The Canada Revenue Agency states, “Generally, your tax savings will be equal to the amount of the charitable tax credit calculated.”
So if you have no or limited tax owing in a given year, you may wish to make a smaller charitable contribution, or defer claiming the charitable contribution till you owe more taxes. You can defer claiming a charitable contribution for up to 5 years. Consult a tax professional to optimize your taxes.
How Do I Know My Cause is a “Registered” Charity?
You can check whether an organization is a Registered charity using the list on the Canada Revenue Agency website at:
Does the Government Agree that the Item I’m Donating is a Charitable Donation?
A list of examples of acceptable donations is provided on the Canada Revenue Agency website at: http://www.cra-arc.gc.ca/chrts-gvng/dnrs/rcpts/dntn2-eng.html
You should get professional tax advice before making a decision to donate a valuable item to charity.
- Can I Claim a Charitable Tax Deduction Credit for a Donation Made Outside of Canada?
- Maximize the Benefit of Your Donations to Charity: Helping Food Banks Feed the Most
Have you optimized your donation to charity by maximizing your tax credit? Please share your experiences with a comment.