As your income grows, so does your tax burden, and you start seeking opportunities to save on taxes. One effective means for saving on tax is through charitable donations. Canada is a country that has a generous tax credit for donors. The Canada Revenue Agency (CRA) allows you to donate up to 75 percent of your net income to a qualified charitable organization and claim the Charitable Donations Tax Credit (CDTC) of up to 33 percent at the federal level. The CDTC is progressive: 15 percent on the first $200, 29 percent on donations above $200, and 33 percent in some cases where you are in the highest tax bracket. In addition, there is a provincial credit in the range of 4 to 24 percent.
This article will discuss the Charitable Donations Tax Credit (CDTC) and how you can leverage this benefit to maximize your tax savings.
Things You Should Know About Charitable Donations
Before you jump to claim the Charitable Donations Tax Credit (CDTC), you should know some essential details to make the most of this benefit. By definition, a donation is a gift for which you get no consideration in return. If you are getting something in return for your donation, maybe tickets to a show, you will have to deduct the value of tickets from your donation amount.
You can donate in cash or in kind. The donation-in-kind can be
- Publicly traded securities like shares, mutual fund units, ETFs, and insurance.
- A property or land that is a cultural or environmental heritage.
You can claim the CDTC if you are donating to a qualifying charity that can give you a tax receipt for your donation. You can cross-check whether your charity is qualified on the CRA’s list of registered charities and are eligible to issue official donation receipts.
Keep this donation receipt safe as you will need it when claiming the Charitable Donations Tax Credit (CDTC). Charitable donations are at the top of the CRA’s list for post-assessments, and the agency won’t accept a copy of the donation receipt. So instead, you will have to provide the original tax receipt.
Things You Should Know About Tax Benefits from Charitable Donations
The Charitable Donations Tax Credit (CDTC) is a non-refundable tax credit, which means you can only use it to bring your tax bill to zero and not claim any tax refund. Also, you cannot use charitable donations to show a loss. For instance, you have a tax liability of $2,000, and your CDTC comes to $5,000. You can only use that credit to bring your tax bill to zero. You cannot claim a tax refund for the remaining $3,000. But the CRA offers you two options for the unused donation credit.
- You can either carry forward the unused donation for up to five years.
- Or you can transfer all or some of your unused donations to your spouse if you do not have a significant tax liability due to low income or other deductions.
But remember, you can claim the CDTC only once.
How to Make the Most of the Charitable Donations Tax Credit
Let’s review a few scenarios to understand the CDTC better.
Amy and her spouse, Paul, donate $200 each to a local charity. The Charitable Donations Tax Credit (CDTC) is 15 percent for the first $200. If they report the CDTC separately, each of them will get a 15 percent tax credit, which comes to $30 (15 per cent*$200) each. So, the total tax credit they get for their $400 donation is $60.
The CRA allows you to transfer your donation to your spouse. It also offers a 29 percent tax credit on donations above $200. Amy and Paul can leverage this clause. The one who has a higher tax liability can show the donation as $400 and claim a CDTC of $88 (15 percent for the first $200 ($30) plus 29 percent on the next $200 ($58)).
Joan is self-employed, and every year she donates $500 to a qualified charity. Tax deductions reduce her tax liability significantly, so she doesn’t claim Charitable Donations Tax Credit (CDTC). But in 2022, she gets a big contract and business scales up. Her net taxable income after all deductions comes to $80,000. Joan can pool the last five years of donations, totalling $2,500 ($500*5 years), which is less than 75 percent of her current net income and claim it under CDTC. Joan can reduce her tax bill by $697 ($200*15 percent + $2,300*29 percent).
The Dual Benefit of Donation-in-Kind
In the above scenario, we saw tax benefits on cash donations. But donation-in-kind is more beneficial. For example, if you donate property, the CRA considers the donation amount as the property’s fair market value (FMV) at the time of donation.
In a typical scenario, the appreciated value of the property is your capital gain. But because you donated the property, the gain is nil for tax purposes. As a result, you not only save on capital gains tax, but you can also claim the non-refundable CDTC on the FMV of the donated property.
Contact McCay Duff LLP in Ottawa for Trusted Tax Advice
There are various ways charitable donations help save you money on your taxes. Every situation is different and demands a customized solution. The team of tax experts at McCay Duff LLP can analyze your situation and help you maximize your tax benefits from donations. Contact us online or by telephone at 613-236-2367.