The real Santa ‘Clause’: Tips on applying the charitable tax credit

Every year, we’re truly amazed by the magnitude of charitable giving done by our clients around the holidays (and during the rest of the year as well, of course). While there’s no doubt these donations are given from a place of generosity and gratitude, the accompanying charitable tax credit is a nice bonus for any donor.

That being said, knowing when and where the tax credit applies to your donations can be understandably confusing. Let’s take a look at some of the common questions we get about this credit and break down how it works so you can make sure your charitable dollars are going the furthest they can this holiday season:

Refresher

The charitable tax credit is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don’t owe any tax, you don’t get a refund. Generally, your tax savings will equal the amount of the charitable tax credit calculated; however, there are a few exceptions. Some important features of the credit to keep in mind are:

• If you are required to pay provincial income surtax, then your actual savings will be more than the charitable tax credit calculated, as the credit will reduce both your base income taxes and provincial surtax.
• If you donated publicly traded securities, you may increase your tax saving by reducing your capital gains tax.
• In any one year, you may claim donations made by December 31 of the applicable tax year, any unclaimed donations made in the previous 5 years and those made by your spouse or common law partner in the current year or previous 5 years.
• With certain exceptions (such as the donation of certified cultural property), which may be claimed up to 100% of your net income, you can claim eligible amounts of donations up to 75% of your net income. Net income means income after the deduction of RRSP contributions, carrying charges, etc. but before the deduction for losses of other years, security options deductions, and the capital gains deduction.

How much is the tax credit?

We get asked this all the time, no doubt because it can seem a bit complicated at times. Here’s our answer:

• The federal credit is 15% on the first $200 and 29% on the balance, except to the extent taxable income exceeds about $217,000 then 33% applies;
• The provincial credit in BC is about 5% on the first $200 and about 17% on the balance, except to the extent taxable income exceeds about $223,000 then 20.5% applies; therefore,
• For all intents and purposes, the combined federal and BC credit is 46%, or as high as 54%, of the amount of donations.

Donations can take the form of money, securities, ecologically sensitive land, certified cultural property, capital property, personal use property (e.g., paintings, jewellery, stamps, coins), and inventory (e.g., art, antiques, rare books).

Who/where can I donate to?

The scope of qualified donees is quite broad and includes a variety of organizations. The most common donees include:

• Registered charities
• Registered Canadian amateur athletic associations
• Registered national arts service organizations
• Registered housing corporations resident in Canada set up only to provide low-cost housing for the aged
• Registered municipalities in Canada (they may be able to redirect funds to a not-for profit-organization that is not otherwise a registered charity)
• Registered municipal or public bodies performing a function of government in Canada

More information and a full list on qualified/registered donees is available on the CRA website.

Does the credit apply to donations to US charities?

Gifts to US charities may also qualify for the tax credit. Generally, if you have US-source income, you can claim a gift to a US charity if the charity meets the following conditions:

• It is generally exempt from U.S. tax; and,
• It could qualify in Canada as a registered charity if it were a resident of Canada and created or established in Canada.

You can claim the eligible amount of your US gifts up to 75% of the net US-source income you report on your Canadian return. Your claim will not be restricted to net US-source income if your gift is to a US college or university at which you or a member of your family is or was enrolled, or if your gift is to a registered US university. Similar rules may apply if you are a cross-border commuter.

Like most tax situations, the rules for claiming tax credits on charitable donations are complex and can be misleading. If you plan on making any donations on behalf of yourself or your business, don’t hesitate to contact your DMCL advisor to ensure you know you’re putting your well-earned money towards a good cause (for everyone involved).

Article written by Don Furney, CPA, CA