According to Statistics Canada, 22M Canadians donate to charitable and non-profit groups each year. Income tax considerations are secondary to many, but it is a fact that tax policy encourages charitable giving. So how much does a charitable donation save in tax? With the tax credit system, it varies from province to province. Alberta is one of the more generous provinces and on donations over $200, the tax saving is 50% of the amount of the donation.
You can easily substitute your own province using the charitable donation credit estimator on the CRA website. Just enter your province of residence and amount of donation; and it calculates amount of credit (i.e. tax savings).
The following are some common questions on donations I have received over the years. I have compiled my answers and comments using 2018 Alberta rates.
Am I better off to accumulate donations and claim them in one year?
Technically the answer is “yes” because you get an increased tax credit for donations over $200. However, the difference is minimal (about $50) so most taxpayers find it more practical to just claim all their donations every year.
Do I get tax advantage if I increase my charitable donations in a high-income year?
It depends on what you call a tax advantage. Of course, the donation reduces your tax when you claim it but generally it makes no sense to postpone charitable donations to claim in high-income years. For example, if you make donation of $10K, you get the same donation credit of $4,950 regardless of your income level.
Should I combine charitable donation receipts with my spouse and claim on one return?
Yes, CRA administrative policy allows couples to combine their donation receipts. Therefore, technically it does make sense to include all receipts on one return to minimize the reduced credit on donations under $200. However, again since the difference is minimal (see above), sometimes taxpayers will split the donations so they can both get refunds.
Can I donate to a poor family in my neighbourhood and get a tax receipt?
Regardless of the worthiness of the cause, you must donate to a federally registered charity to receive a proper tax receipt. You can donate to a specific program within a charity, but you cannot specify the individual or family to receive help.
Can I get a charitable receipt for donations to foreign charities?
Not generally, but there are exceptions, such as specified foreign universities and the United Nations and its agencies. There is a list of eligible foreign charities on the CRA website. If the foreign charity has a CRA registration number, you are good. Also, if you have US income, you can claim US charitable donations but note the restrictions.
How can I identify a charity scam?
There is no one right way but CRA has a lot of good information on their website. You can search out charities to see if they have a charitable registration number. Charities are required to provide this number when they issue tax receipts.
If you want to dig further, you can even access a charity’s financial information. For instance, it will show how much is spent on programs as opposed to administration. However, remember that charities self-report this information.
Crowd funding has become popular and supported some good worthwhile causes. However, it is also open to abuse so unless you know the people personally, be cautious here.
Can I get a receipt for donating my time?
There are strict rules that charities cannot issue receipts for services rendered. Of course, you can ask the charity to pay you for your time and then donate the funds back. But the money received is income to you.
I have a retail business and frequently donate merchandise out of inventory to charities that provide tax receipts. How do I claim these?
Again as in the previous question, once you receive the tax receipt, it is the same as selling the item. You can record the amount of the receipt as a sale which increases your income; and then claim the charitable receipt as a donation. The two basically offset. Probably a more practical approach is just to ignore the receipt. The cost of the item donated will be included in your cost of sales and you get the deduction that way.
I have a business and donate to various community organizations. Do I claim these as business expenses or donations?
Although there have been situations when donation receipts were claimed as business expenses, these are unusual. If you receive a tax receipt, normally it should be considered a charitable donation. If the organization is community related and you do business within the community, I would claim as business expense.
Is it more tax-effective to donate through my company or personally?
I will not bore you with the math, but the short answer is “it depends”. At lower personal tax rates, there is an advantage to donating personally. So, the most practical approach is to donate personally if you have the cash. But if you need funds out of your company to make donation, then better consider the tax cost of doing the withdrawal.
Hopefully this will help you to support your favourite causes and maximize your tax situation. If you have any experiences in this area, I would be interested in hearing about them.