This Is Actually How the Charity Tax Credit Works

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What does it mean when donations are tax-deductible?

Well, we all know what donations are and probably at least a couple of organizations/non-profits we can donate to. There’s probably at least one non-profit that accepts donations in your local community.

Our Federal Government recognizes that these contributions can be used as a deduction. So what does that mean for us as individuals?

Well, this means that these donations made can help Canadians reduce their tax payables. So by contributing to the value non-profits provide, not only are we benefiting them with the necessary funding, but we are also benefiting ourselves.

Then the question becomes, well, what’s the contingency? It can be all rainbows and sunshine now, can it?

I will dive into that shortly because there are a few things to keep in mind.

Yet, these are one of several tax credits that are available for Canadians to claim. If you’re interested in wanting to learn more about other tax credits, just let me know!

Let’s dive into some other sections.

Are donations tax-deductible?

Let me answer this simply as I have. Charitable donations are tax-deductible, so long as they certain donations that are contributed to certain organizations (more on that below). Now instead, let’s review how the whole credit works.

how does donation tax credit work?

There are different types of donations that one can make. These donations may include cash or cash-related contributions, which we typically come to think of when we hear the word donations. Other types of donations may be made through material items, such as clothing or books. Then maybe we would donate a car.

I’m sure there’s someone out there who would accept a donation of any sort.

But purely for this article, I will primarily be focusing on cash-related donations. Yet, I will discuss other types of contributions lower in another section.

Limit on The Amount that can be Claimed:

The Canada Revenue Agency won’t allow you to claim all the amount that you contribute ultimately. This means you can donate all of your earned salaries to receive maximum credit.

Instead, they limit the number of donations eligible for this tax credit to a portion of the individual’s net income for tax purposes. Of this amount, the total amount that is limited to charitable gifts is 75%. Meaning only 75% of the individual’s charitable contributions are eligible for the tax credit.

You can undoubtedly donate as much as you want to charities but won’t reap the full benefit.

Now, this does change for those who have passed—the 75% changes to 100% in the year of death and the preceding year.

how much tax credit do you get for charitable donations?

There is a calculation to determine the amount of credit a Canadian will claim as a tax credit.

I was first introduced to this formula whenever I had taken an income taxation course. So I will explain each part. Here’s the charitable donation tax credit rates/formula:

[{15%)(A)] + [(33%)(B)] + [(29%)(C)] = the amount of credit they are able to claim

A = $200

B = The lesser of:

  • The amount where total donations exceed $200; and
  • The amount, if any, where the person’s taxable income for the year exceeds $214,368 (which is the amount of income taxed at 33%)

C = The amount, if any, where the person’s total donations exceed the sum of the $200 plus the amount determined in B.

It’s a whirlwind of a formula. It can be a complicated calculation to understand, and you may not know it by heart if asked in the middle of the street. Therefore, you can use this page constantly to seek the formula when you need it.

However, this determines the amount one can earn as a tax credit from their eligible donations.

Now, in a typical fashion, let’s do an example to hone this understanding together.

Example:

Serge has had a great year this year. He has net income for tax purposes of $400,000 and taxable income of $390,000; all generated from selling courses on day trading. What a career! Serge felt so generous that he donated $200,000 to some of his favourite local charities during the year.

So, here’s what his formula would look like:

A = $200

B = The lessor of:

  • $200,000 – $200 = $199,800
  • $390,000 – $214,368 = $175,362

C = $24,438 [$200,000 – ($200 + $175,362)]

Now all together:

[(15%)($200)] + [(33%)($175,362)] + [(29%)($24,438)] = $64,986.48

How is this reflected on personal tax returns?

Well, lets’ look at another example below.

I’m just assuming that Serge has only the basic personal amount as a tax credit. As well, most of the information has been taken from the previous example above.

Nonetheless, the charitable tax is a significant way that Serge can reduce his taxes. It accounts for nearly 60% of his total taxes before the credits!

donation tax credit by province

I had to go searching for these tax rates for each province and territory. Shout out to www.taxtips.ca for all of the rates for 2021. It is a great website to learn about the special rates of credits and much more that I recommend checking out for any tax questions one may have.

Here’s a simple table of all the rates:

Province/Territory:First $200Amount over $200
Alberta10%21%
British Columbia5.06%16.80%
Manitoba10.80%17.40%
New Brunswick9.68%17.95%
Newfoundland8.70%18.30%
Nova Scotia8.79%21.00%
Northwest Territories5.90%14.05%
Nunavut5.90%11.50%
Ontario5.05%11.16%
Prince Edward Island9.80%16.70%
Quebec20.00%24.00%
Saskatchewan10.50%14.50%
Yukon6.40%12.80%

The formula for each province or territory would work out like this:

Tax credit = (first rate x $200) + (second rate x (total donation – $200)

charitable donations tax credit carryforward

Yes, there is a carry forward that Canadians can use for the charitable contributions tax credit.

It works as most other carry forwards do. Those who don’t use the total amount of credit available to them in the current year can carry that forward to the following year.

So to use a brief example, let’s say Serge had a $50,000 tax credit related to his charitable contributions throughout the year. However, his taxes payable is only $25,000 after the other credit have been applied.

Therefore, he only needs to use half of the tax credit. It allows him to carry forward the other half of the credit to future years.

The carry forward period is generally five years, but for ecological gifts, which are typically gifts of land to the government, they can be carried forward for ten years.

how to get a tax credit for donations

Whenever you donate to specific charities, they likely will offer you tax receipts or official donation receipts. A tax receipt is what you will want for your records and for your tax advisor/accountant (if you have one) to ensure you can claim the proper amount of the personal tax returns.

But, to make it clear cut, you have to make an eligible contribution to receive the tax credit. I’m sure donating some clothing or cash to someone you know may not necessarily count as an eligible contribution.

Entities that are likely to deem donations as eligible are:

  • Registered charities
  • Registered Canadian amateur athletic associations
  • A registered news organization
  • A Canadian municipality
  • The Canadian government
  • Universities outside of Canada that typically enrolls Canadian student

donation of items for tax deduction

So now, what exactly are the items that one can donate to receive this credit? Well, these are broken down into a series of gifts that will be highlighted here down below:

Total Charitable Gifts – all eligible amounts donated by an individual to registered charities, a registered Canadian amateur athletic association, a Canadian municipality, the United Nations or agency thereof, a university outside of Canada that typically enrolls Canadian students, and a charitable organization outside of Canada which Her Majesty in right of Canada has made a gift in the year or preceding year.

Total Crown Gifts – the aggregate of eligible amounts donated to Her Majesty in right of Canada or a province

Total Cultural Gifts – aggregate of all eligible gifts of objects that the Canadian Culture Property Export Review Board has determined meets the criteria of the Culture Property And Import Act.

Total Ecological Gifts – eligible gifts of land certified by the Minister of the Environment to be ecologically sensitive land, the conservation and protection of which is vital to the preservation of Canada’s environmental heritage

Well, that’s a handful, now. But how much exactly does it tell us?

It tells us that land and cash or cash-related items are acceptable to donate and receive some tax credits.

However, other capital property can be donated for the chance to earn a tax credit. What does capital property consist of?

Capital property can consist of many different items, such as tangible items that would include vehicles, boats, or buildings. Yet, it can consist of intangible things that could include patents, trademarks, copyrights, etc.

One can also donate publicly traded securities to charities. I know. I wasn’t aware of this as well.

But what about clothes? Well, that’s an answer, unfortunately, I can’t determine for sure.

I would have to imagine that they wouldn’t be a tax credit for donating clothes. This would likely be because it would be difficult to place a fair market value on the donated clothes, as there would need to be a value to determine the credit.

The treatment of credits resulting from the donation of capital property is treated a bit differently than cash. I can try to explain it if you’re interested in reading more, so reply below if you’re interested.

If not, then I’ll save you the despair and maybe difficulty.

Do you pay tax on tax credits?

No, this would be at the point of having tax credits. Tax credits are not always going to reduce one’s taxes payable by a significant amount.

As we can see through tax credits like those earned through charitable contributions can undoubtedly help reduce a majority or even all of the taxes payable.

Yet, unless you pay taxes on charitable contributions, which I know isn’t typically paid on donations, there’s very little if any taxes you’ll pay on tax credits.

It’s not like because one uses a tax credit, there will automatically be an added tax to ensure one pays some tax.

first time donor’s super credit

The first-time donor’s super credit was available to those who donated money after March 20, 2013. It was up to a maximum amount of $1,000 in one and only one taxation year from 2013 to 2017. Since it is no longer a thing and no longer applies to those who donate $1,000 currently.

During then, first-time donors were given an extra 25% on their first $1,000 donated.

Concluding Remarks:

Some may not be aware of a tax credit available until they donate and are asked if they want a tax receipt.

I can’t say I knew of this tax credit before learning about this credit before I took the course mentioned earlier.

Most of this information came from two textbooks. Both books are Byrd and Chen’s Canadian Tax Principles 2020-2021 Edition which came in two volumes. These both are excellent books for learning about the Canadian tax principles that provide enough detail and examples to hit each rule or principle home.

If you’re interested in purchasing the book, I will leave a link below. Just know that it’s not an easy read and is a textbook, so you may find it boring.

The bottom line to this article is that donating has more than just one benefit. It can even improve tax returns, not only just the lives of people.

But what do you think about this tax credit?

Let me know your thoughts down below.

Thanks for reading.

Disclaimer: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial and tax advisor for any investment decisions and decisions that affect tax returns. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “This Is Actually ”How The Charity Tax Credit Works and “Canadian charitable donations tax credit” serves as educational content, not investing or tax advice.

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