Optimize your Donations to Charity: Take Advantage of Taxes

While rounding up those pesky charity receipts for our taxes, some of my duty-free brain cells started wondering whether we had been optimizing our donations to maximize the benefit to ourselves and those we are trying to help.

Written: 2013
Reviewed: 2023
Revised: 2023

This cluster of articles tells about how we have used our limited time and dollars do the most. But I’d be even more interested in hearing what others have thought up. Consider the donation of your suggestions as yet another good work you can perform!

Calculate your Charitable Tax Credit and Donate More for the Same Cost

In Maximize the Benefit of your Donations to Charity: Helping Food Banks Feed the Most, I talked about the importance of the charitable tax credit. If you donate to a registered Canadian charity, they can issue you a receipt that you apply as a credit against your federal and provincial income tax.

Here are some examples for 2012
Province of Donation: Newfoundland
Amount Donated / Combined Federal and Provincial Charitable Tax Credit
$50 / 11.35
$150 / 34.05
$250 / 66.55
$400 / 130
$1000 / 383.80
$5000 / 2075.80

The Canada Revenue Agency website states: “Generally, your tax savings will be equal to the amount of the charitable tax credit calculated.”

So in 2012 if we donate $500 to a registered charity in Ontario, we will get a combined tax credit of $160.58. So we could actually donate $660.58 instead of $500 and (after we get our taxes submitted) it would end up costing us the same amount but giving the charity $160.58 more!

Using the tax credit to increase the amount you donate will help optimize your donation.

The Charitable Tax Credit is Non-Refundable so Consider Carrying Forward Donation Receipts

Be aware that the tax credit is a non-refundable one. That means you can use it to reduce your payable tax to 0, but you can’t use it to increase your tax refund.

So if you are, say, a student and have no tax payable for the year, then it probably doesn’t make sense to claim the charitable contributions as you will not receive any actual cold hard cash back into your bank account.

Charitable contributions can be accumulated over several years and then claimed. As of 2012, you can carry them forward for use in the next four years. Check with the Canada Revenue Agency site for details, as these rules change from time to time.

So for our student who does not have to pay any taxes, it would be wisest to keep the charitable receipts until the student’s income is higher and there is tax to be paid. This is optimizing the benefit of the donation to the student, not to the charity, but that’s ok too.

Also, if times are tough and your donations are very low, say close to $200 per year it might make more sense to keep the receipts and claim a larger amount once every few years.

For example, in 2012 if you claim $200 per year in Alberta for three years, you would get tax credits of about $50 + 50 +50 =$150. If you keep the receipts for 3 years and submit all $600 in the final year, you would get a tax credit of about $250. You’d actually get about $100 more just by being patient. That would optimize the benefit to you. Then you could give that $100 to charity if you wanted to optimize your donations, too.

Combining Partners Charitable Contributions to Maximize the Tax Reduction

Strangely enough, the Canada Revenue Agency does allow spouses (including common law spouses) to combine their receipts for charitable contributions in any way they want. So if one spouse has a much higher taxable income than the other, and a much higher amount of tax payable, that spouse can claim all of the charitable contributions. Usually the government does nothing to make it worth getting married. This is one of the few tax perks I’ve discovered so far!

Even if you have very low incomes and taxes it may be valuable to have one person claim all of the receipts. The first $200 of donation qualifies for less of a credit than each $ after that 200. So if a couple donate $402 to registered charities, and each claims $201 on their taxes, they will receive tax credits of (in Ontario in 2012) $40.50+$40.50 = $81. If one person claims the full $402, the credit will be $121.22. It’s worth doing the math before deciding who claims the donations and how much they claim.

Giving Away Your Big Stock Winners to Help Charity and Cut Your Taxes

Say you bought CNR shares in your non-registered account a year ago for $76 each. (Actually, it was 11 months ago, but who’s bragging?) Now they are worth $94.50 each. That means if you sold them today, you’d have a capital gain of about 18.50 after paying the commission to the brokerage. You would normally have to pay tax on half of that gain. That means adding 9.25 to your taxable income for each share. And you had 1000s. (Hey it could have happened!)

But say you also wanted to donate money to your favourite charity. You could sell the stock, pay the taxes, and use what’s left to make a donation.

OR you could donate the stock directly. Yes, it means your charity has to be able to accept a donation of stock. But a surprising number of charities, large and small, are able to do that.

If you donate the stock to charity, under the 2012 rules, you would get a receipt from the charity for the value of the stock today. And you could claim that same value of the stock today on your taxes as if you had made a cash donation. AND (and this is the amazing part) AND you do not have to claim the capital gains or pay tax on the capital gains.

Yes, you read that right. You would not have to pay any capital gains tax on the shares you donated to charity. Way cool!

Now obviously this is only a benefit to people who intended to donate to charity anyway. The tax credit for the donation is not equal to 100% of the donation. However, for those who were planning to donate to charity, this is a much more tax efficient way to donate than to sell shares and pay capital gains tax and then donate cash and get a (smaller) charitable tax credit.

So donating shares with a capital gain optimizes your taxes while providing the same value of donation to your charity. And if you donate the money you would have paid in taxes on the capital gain, well, that’s double optimizing.

Donating makes even more sense if the stock was in a Dividend Reinvestment Plan for decades and you didn’t keep track of the changes to your adjusted cost base with each quarterly DRIP that dropped its way into your account. Figuring out what your actual capital gain is now, years later, could be a major pain in the keester. But if you donate the shares, you will never have to know what the gain was. The charity will get the present value of the stock. And you will get a receipt for the donation of the present value of the stock. And “Poof!” no one cares what happened to that capital gain. It has disappeared off the radar of the Canada Revenue Agency. Neat, huh?

Continuing in the Spirit of Giving
Other articles also address the idea of maximizing donations. If you’re intrigued (or just like clicking things) please consider:
Maximize the Benefit of your Donations to Charity: Helping Food Banks Feed the Most

Further Information
Canada Revenue Agency: Donations and Gifts

Join In
Do you maximize your contributions because you optimized your income tax credit? Have you donated a capital gain to the benefit of you and your favoured cause? Or do you have other suggestions for optimizing the benefits of charitable contributions? Please share your experiences with a comment.