The airwaves and your mailbox are probably filling up with messages of altruism — or they will be soon. The holidays are on their way and so are charities’ pitches for donations.
And many of us will heed the calls. The latest World Giving Index puts Canada in sixth place globally in overall generosity. The survey tracks donations of money, time and random generosity to strangers. Compiled by the United Kingdom’s Charities Aid Foundation, a registered charity, the index ranks Canada 11th in terms of donations, above the United States (13), but below high-giving countries such as Myanmar (1), Australia (3), New Zealand (5), the UK (7) and Ireland (10).
According to the most recent Survey of Giving, Volunteering and Participating by Statistics Canada, 82% of Canadians age 15 and older gave money to charities in 2013. Overall, Canadians gave $12.8 billion to charitable or non-profit organizations that year.
And in a new twist, technology continues to change the donation landscape, at least when it comes to Millennials. A recent Charitable Giving study by Capital One Canada found that Millennials are more likely to donate to charities that offer digital payments (53%), and are more likely to trust charities with a strong digital presence (50%).
Many people do respond to year-end appeals, which is why many charities make them. And of course, many donors claim the available tax breaks. If you count yourself among the philanthropic Canadians, there are a few issues to understand before you click “Donate Now” or write a cheque.
At the top of the list is whether your charity of choice is registered. Only charities or qualified donees that are registered with Canada Revenue Agency (CRA) can issue the receipts you need to claim tax breaks.
Once you’ve chosen a charity, there are other issues to consider. Here are seven of them:
1. Donations are credits, not deductions. You’ve probably heard that you can take deductions for your charitable donations. In reality, your gifts qualify for a nonrefundable tax credit.
You aren’t required to claim donations in the year you make them. You can reach back as far as five years to use unclaimed donations and carry them forward for as long as five years.
In addition, the CRA has ruled that as an administrative practice, taxpayers can initially choose which spouse or common-law partner will report a donation or gift and can subsequently transfer any carry-forward balances from one to the other.
While you may not think you donate enough to merit a strategy, keep in mind that even small amounts can add up to significant tax savings over time. Generally, you can get a credit for all donations to registered charities for as much as 75% of your net income. In the year of death (and going back one year), the limit is 100% of net income. The limit also is 100% of net income for certain gifts, such as ecologically sensitive land and cultural property.
In addition, if you haven’t donated before, you’ll get a supplemental credit: the First-Time Donor’s Super Credit. This adds 25% to the rates used in calculating the credit for as much as $1,000 in donations.
The tax break currently is available through 2017 for individuals and their spouses who haven’t claimed a tax credit since 2007.
It is calculated as the total of the:
- Lowest income tax rate for a year multiplied by the first $200 of charitable donations, and
- Highest income tax rate for the year multiplied by the portion of the donations claimed that exceeds $200.
2. Give publicly traded shares and stock options. If you donate certain types of capital property to a registered charity or other qualified donee, you may be eligible for an inclusion rate of zero on any capital gain realized on the gifts. Qualifying property includes:
- Shares of the capital stock of a mutual fund corporation,
- Units of a mutual fund trust,
- Prescribed debt obligation (for example, government savings bonds),
- Ecologically sensitive land (including a covenant, an easement, or in the case of land in Quebec, a real servitude) donated to a qualified donee other than a private foundation where conditions are met, and
- Shares, debt obligations or rights (for example, security stock options) listed on a designated stock exchange.
For donations of publicly traded securities, the inclusion rate of zero also applies to any capital gain realized on the exchange of shares of the capital stock of a corporation, subject to certain conditions. In cases where the exchanged securities are partnership interests, a special calculation is required to determine the capital gain.
If you didn’t receive an advantage for your donation, the full amount of the capital gain is eligible for the inclusion rate of zero. If, however, you received or are entitled to an advantage, only a portion of the capital gain is eligible for the inclusion rate of zero. The remainder is subject to an inclusion rate of 50%.
Check with your charity about how to make such gifts. For more information, consult with your tax advisor.
3. Combine spousal donations. Donations made by one spouse or common-law partner can be claimed by either one. To maximize the credit, lump your donations together for a larger credit.
Also, some or all of your donations may be carried forward for up to five years. This may allow you to take advantage of the higher credit for donations exceeding $200. Consider carrying forward donations made in low-income years, or in years when other credits are used. If donations exceed the 75% net income limit, save some for future years. When it comes to the Super Credit, you and your spouse or common-law partner can share the claim, but the total combined donations claimed can’t be more than $1,000.
4. Donate in kind. The CRA allows tax credits for gifts of property, but not for services. Common items include:
- Valuable art,
- Household goods, and
5. Donate special items. There are special rules for donations of cultural gifts, and for artists who donate their work. Talk with your advisor.
6. The system is two-tiered. To encourage donations, the federal and provincial governments have set up a two-tiered tax credit system. First, you add up your donations and then:
- The first $200 qualifies for a tax credit at the lowest tax rate. When the federal and provincial programs are combined, you cut your taxes by about 25% of the amount of the donation (the exact amount varies by province).
- Any amount exceeding $200 qualifies for a credit at the highest tax rate. For this donation, you save about 45% in taxes, depending on your province.
7. Receipts are essential. Keep your receipts and be sure they are signed on behalf of the organization and have the charity’s name and registration number, date, serial number, amount donated and donor’s name. They also should have the URL of the CRA (www.cra-arc.gc.ca/charities).
If you file your taxes the old-fashioned way, on paper, your tax advisor may ask for your receipts. If you file electronically, save them in case the CRA asks for them later.
Receipting carries certain administration burdens, so a charity may choose to issue receipts according to certain criteria or not to issue receipts at all. Some registered charities set minimum donation thresholds for receipting. Others don’t provide receipts during certain fundraising events, but don’t hesitate to ask for one.
If you donated to an employee charitable trust, or through your employer as an agent of a registered charity, your T4 slip (Statement of Remuneration Paid should show your total donations for the year. In these situations, the CRA accepts your T4 slip as your official receipt for income tax purposes.
If you plan to donate this or any other year, and you have questions, consult with your advisor to help ensure that you maximize the benefits.