What are the tax consequences of a donation? – Money sense

How do you save taxes with donations?

When donating to charities, a taxpayer can claim non-refundable tax credits. These credits can reduce income tax liability. They are non-refundable because you have to pay taxes to save taxes if you donate to charity.

There is a 15% federal tax credit on the first $200 in donations and up to 33% for a high-income taxpayer. There are also provincial and territorial tax credits. The combined credits can save more than 50% taxbasically 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 goods).

However, significant donations that are significant in relation to income and tax payable may not save as much tax as intended. There is an alternative minimum tax (AMT) calculation that takes only 80% of gift tax credits into account and adds 30% of capital gains from donated securities back to income (more on donating securities later). This may result in the calculation of a minimum level of tax that must be paid, despite the fact that there are many non-refundable tax credits available to reduce the tax payable. An AMT transfer can only save taxes 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” are not eligible to be claimed on your tax return. They are generally considered personal gifts. So even if the intentions are charitable, they may not lead to tax savings unless it is a registered charity fundraiser.

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

Canadians can only claim donations to US charities if they have US-source income – and only up to 75% of that income. There are exceptions for cross-border commuters, who can claim US charitable donations of up to 75% of their net worldwide income, and not just US source income.

Most foreign charities are not eligible for a claim on your tax return. There are two exceptions:

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1. Universities outside Canada that normally have students from Canada registered with the CRA
2. Registered foreign charities to which the Canadian government has made a donation

How should couples claim their donations?

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

Legally married spouses and spouses in a civil partnership can claim gifts from their spouse on their tax return. Because tax savings are higher for donations over $200, it is generally wise to choose one tax return to claim all donations.

A spouse with a higher income may be able to save more donations because there is a greater chance that sufficient taxes will have to be paid. Some provinces and territories, such as Ontario, may also have allowances that make it more beneficial for a high-income spouse to claim donations.

How should investors finance their donations?

If someone has unregistered investments that have increased in value, these can be a good way to make donations. You can transfer a security “in kind” to a charity (or as is, instead of using cash) and still receive 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 will avoid paying capital gains taxes on the increase in value. This allows you to avoid up to 25% tax or more that would otherwise be due on the capital gain.

Withdrawals from a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) can be used to fund a donation. The tax payable on RRSP/RRIF withdrawals typically ranges from about 20% to about 50%. The tax savings from a donation are comparable. As a result, a withdrawal from the RRSP or RRIF amount for a charitable donation could be nearly tax neutral.

Summary

Giving money to charities that are important to you can give you a very good feeling. Not all causes qualify to save you taxes, and there may be limitations on tax savings.

There are different ways to give to charity, between cash and different types of investment accounts. By planning ahead, you can stretch your charitable dollars even further.