The Hidden Tax Benefits of Charitable Giving

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DonateThere’s no question that the best part of charitable giving is that feeling you get when you give back. Whether it’s donating to a cause you believe in or an organization that holds sentimental value to you, charitable giving is a soul-warming experience unlike any other.

That’s part of why the average individual donation in Canada is about $446 a year. In total, that means about $10.6 billion dollars is donated by Canadians every year. Many people who have extra money to give back find some way to do so. There are plenty of charitable and non-profit organizations that rely on those donations to meet their goals.

The Canadian government also supports charitable giving in a major way. They’ve set up distinct tax benefits for people who give back and want to encourage as many people as possible to help their fellow human. Because you’ve done something good for others, the government wants to make sure you’re rewarded in some form. In order to take advantage of these tax benefits, it’s important to understand how they function as part of the process.

What Is Charitable Giving?

Before we get into the nitty-gritty of how the Canadian government rewards people who partake in charitable giving, you have to know exactly what it is.

A donation is defined as a gift for which no consideration is given in return. Essentially, it’s money or anything else of value you give and get nothing in return. This excludes donations in the form of something like a raffle draw where you end up winning a trip that has a monetary value attached to it. If you receive something of monetary value in return for that donation, it must be subtracted from the amount you donated, and you can only claim the difference.

The important thing to remember here is that a qualified donee must be a registered charity or public organization that can issue tax receipts. You need to get a receipt from one of these charities or organizations and ensure they’re legally entitled to hand them out. If they’re not, you won’t qualify for a tax credit.

After confirming that your donation is, in fact, eligible for a tax credit, you then get to calculate the amount of that credit you’re planning to claim.

Calculating Your Charitable Tax Credit

As of 2016, your donation amount can only go up to 75% of your net income. The one exception to that rule is gifts of certified cultural property or ecologically sensitive land. If you've made one of these types of donations, you may be eligible to claim a donation of up to 100% of your net income.

Once you’ve determined how much you want to claim, you have to report it on your annual tax return. At the federal level, your credit will be 15% of the first $200 of donations and 29% on any amount above that. All Canadian provinces have their own credits, all of which are more or less the same and can vary from 4-24%.

If you’re a first-time donor, you’re entitled to even more credit. You’re able to claim an extra federal tax credit of 25% on your first $1,000 worth of donations. Unlike the 15% for the first $200 that you'd normally get, first-time donors get a tax credit of roughly 40% on their first $200 and 54% on any amount above that. The only catch is that they must be cash donations.

With some good financial planning skills under your belt, you can even stretch the amount you get back. For instance, consider holding on to your tax credit for a future tax year if your donation is under $200. You can actually combine donations from up to five years earlier to amount to over $200 and enjoy a 29% tax credit instead of 15%.

Have you recently donated to a charity or organization and aren’t sure how to navigate your tax credits? Our trusted team of advisors can help you make informed financial planning decisions for your future. We recommend that you consult a tax expert regarding your unique situation. Please contact us if you would like us to make a recommendation!

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