What are the tax implications of a donation?

Most people give money to charities with intentions that go beyond tax. But there are tax savings when you donate to charities. Here are some of the considerations. 

How do donations save you tax?

Charitable donations allow a taxpayer to claim non-refundable tax credits. These credits can reduce income tax owing. They are non-refundable because you need to have tax payable to save tax when you donate to charity. 

There is a federal tax credit of 15% on the first $200 of donations and up to 33% for a high-income taxpayer. There are provincial and territorial tax credits, as well. The combined credits can save over 50% tax, basically the same as a deduction that reduces taxable income for a high-income taxpayer. 

There is a limit that prevents you from claiming donations that exceed 75% of your net income (100% for certified cultural property). 

Sizable donations that are significant relative to income and tax payable may not save as much tax as intended, however. There is an alternative minimum tax (AMT) calculation that considers only 80% of donation tax credits and adds back 30% of capital gains from donated securities to income (more on donating securities later). This may result in the calculation of a minimum level of tax that must be paid despite having lots of non-refundable tax credits available to reduce tax payable. An AMT carryforward may only save tax in a future year.

Which organizations may not qualify as charities?

Many people give money to online fundraising causes through platforms like GoFundMe, but most GoFundMe “donations” will not qualify to claim on your tax return. They are generally considered personal gifts. So, while the intentions may be charitable, they may not result in tax savings unless it is for a registered charity fundraiser. 

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A charity must provide its Canada Revenue Agency (CRA) charity registration number on the receipt. You can find a list of registered charities on the CRA website.

Canadians can only claim donations to U.S. charities if they have U.S. source income—and only up to 75% of that income. There are exceptions for border commuters, who may be able to claim U.S. charitable donations up to 75% of their net world income, not just U.S. source income.

Most foreign charities will not qualify to claim on your tax return. There are two exceptions:

1. Universities outside Canada that ordinarily include students from Canada that are registered with the CRA
2. Registered foreign charities to which the Government of Canada has made a gift

How should couples claim their donations?

Most income, deductions, and credits claimed by a couple cannot be moved back and forth between their tax returns. There is an exception for donations. 

Legally married spouses and common-law spouses can claim donations made by their spouse on their tax return. Since tax savings are higher on donations over $200, it generally makes sense to pick one tax return to claim all donations. 

A higher-income spouse may save more tax claiming donations because they are more likely to have sufficient tax payable. Some provinces and territories, like Ontario, may also have surtaxes that make it more beneficial for a high-income spouse to claim donations.

How should investors fund their donations?

If someone has non-registered investments that have appreciated in value, these can be a good way to make donations. You can transfer a security “in kind” to a charity—or as is, rather than using cash—and still get a donation receipt. This includes stocks, bonds, exchange-traded funds (ETFs), and mutual funds. 

The receipt will be equal to the fair market value of the security at the time of transfer, but you avoid paying capital gains tax on the appreciation in the value. This can avoid up to 25% tax or more that would otherwise be payable on the capital gain.

Registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) withdrawals can be used to fund a donation. Tax payable on RRSP/RRIF withdrawals generally ranges from about 20% to about 50%. Tax savings from a donation are comparable. As a result, an RRSP or RRIF withdrawal to make a charitable donation could be close to tax neutral. 

Summary

Giving money to support causes that are important to you can feel really good. Not all causes will be eligible to save you tax, and there can be restrictions on the tax savings. 

There are different ways to give to charity, between cash and different types of investment accounts. Planning ahead can help stretch your charity dollars further. 

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