The Charitable Donation Tax Credit Explained

Posted on March 15, 2021

Did you know that two-thirds of the people living in Canada donated to charity last year? Whether the donation was big or small, these people were making an impact on those around them.

If you were one of those people or you're thinking about adding one more to that roster in the future, you're going to want to know how those charitable donations affect your taxes. You may be asking the question, "how much do charitable donations reduce taxes in Canada?"

Lucky for you, we are here to answer that question. In addition, we will answer other questions about the charitable donation tax credit.

Are Donations Tax Deductible in Canada?

The short answer is yes. Canada's tax credit system is considered very generous. No matter what kind of donation you make, it's likely that you'll be able to get some sort of tax credit.

However, as with anything related to taxes, it gets a little bit more complicated when you start talking about what kind of deduction/credit you get towards your taxes. Let's talk a little bit more in-depth about the Charitable Donations Tax Credit.

Do I Qualify for the Charitable Donation Tax Credit?

Anyone can qualify for the Charitable Donations Tax Credit (CDTC) as long as they've made a donation to a qualifying donee. Here, Canada defines "donation" as any gift that someone gives without any consideration in return.

This means that your donation does not have to be money.

You can donate money, stocks, property, cultural gifts, and more. However, if you receive something in return for that donation, you must subtract the value of the return gift from the amount that you donated. Then, this amount (the difference) is what you can claim.

We should note that the CDTC does not include the donation of time. However, we do realize that a lot of people can only donate their time. In this evaluation, we will be focusing on donations that are counted by the CDTC.

What Is a Qualifying Donee?

You may be wondering what a qualifying donee is. Luckily, the Government of Canada has laid out specific guidelines for qualifying donees.

In short, a qualifying donee is a registered charity or public organization. When you donate to one of these places, you should make sure that you receive a receipt in return. This is going to be crucial to claiming the CDTC.

The CRA (Canada Revenue Agency) has a database full of charities that are registered and legally able to give receipts for charitable donations. You can also call the CRA to ensure that the charity is legitimate. The number for that is 1-800-267-2384.

Are Donations to Animal Shelters Tax Deductible?

If you're an animal lover and have made donations to animal shelters, you can definitely claim these on your taxes. Animal shelters depend on donations to run smoothly.

Feel free to donate all you want to legitimate charities, even if they're for animals.

How Much Do I Need to Give to Charities to Affect My Taxes?

Any amount in charitable donations is accepted for deduction purposes. This means that you can give as little as five dollars and still receive some kind of benefit back.

Although, we should note that - while donating five dollars is helpful to the charity that you're donating to - it doesn't do much in terms of taxes. The more you donate, the more you get back.

So, while a small donation is great, we do recommend that you stretch your donations if you're looking to get the most out of the Charitable Donations Tax Credit.

How Do I Claim My Donations in Canada?

In order to claim the CDTC, you need to report it on both your federal tax return and your provincial tax return. By providing your financial information - including your income and your donations - both the federal and provincial governments will calculate how much you could get in credits.

Let's talk about what the standards for the CDTC are. 

How Much Do Charitable Donations Reduce Taxes in Canada?

The amount that you'll get back differs depending on your income and the amount of your donation.

For your federal tax return, you'll be able to get a credit of 15% on the first $200 in donations and 29% on any donation after that. If you're in the highest tax bracket, you could get 33% back on your donations.

For your provincial tax return, you can get between 4% and 24% back on your donations.

The CRA provides a tool for anyone who wants to calculate their potential for tax credits on their charitable donations. Use this if you're wanting to organize your financial information and figure out exactly how much you could get back.

How Does the Charitable Donations Tax Credit Affect My Taxes?

Because donations and gifts are nonrefundable tax credits, you have to claim any other credits you have first. If all of these credits bring your net total to zero, you cannot use the Charitable Donations Tax Credit to get a tax refund or increase an existing refund.

However, if you still have taxes to pay, you can use all of or a portion of the amount that you get in credits.

If you can't use the credit this year, you can always use it next year. In fact, you can claim a donation for up to five years after it happened. However, you can only claim it once.

Can I Transfer My Donation Credits to My Spouse?

If you can't claim your charitable donations, your spouse or common-law partner can claim them. The Charitable Donations Tax Credit is flexible.

It's best to transfer the credits if you claiming them makes no difference in your tax due to other deductions or low income. If you can only claim some of the deductions, you can transfer the remaining amount to your spouse. This means that you have the ability to transfer some or all of the donation to your spouse.

Having this control over the charitable donation can help you and your spouse determine the best way to optimize your returns.

What's the Maximum Amount I Can Claim as a Charitable Tax Deduction?

The average person can donate up to 75% of their net income. However, this changes if you're a member of perpetual poverty.

If you do fall under this categorization, you can donate your entire earned income and claim it as a deduction. You can do this by stating it on line 25600 on the Income Tax and Benefit Return. 

Is There Anything Special for First-Time Donors?

Luckily, there is. It's called the First-Time Donor's Super Credit. It applies to the following situations:

  1. First-time donors
  2. Those who haven't claimed a tax donation in the last five years

The credit gives the individuals that meet either criteria an extra 25% on their tax credit. This applies to up to $1,000 in donations made by an individual alone or a couple when combined.

All of this adds up to 40% on the first $200 donated and 54% for amounts above $200.

What Is the Best Strategy When Claiming Charitable Donations?

Most financially savvy people save up their donations for a few years. Then, after they've accumulated a certain amount in donations, they claim all of them on a single year's tax return. 

Because the CDTC amounts to a higher return for donations above $200, we recommend that you accumulate at least that much over time. However, you should keep in mind that donations are only claimable for five years after you make them.

That means that you can claim charitable donations every five years and have a lowered tax amount during those years. It's like a gift to yourself every five years.

That is if the amount of donations doesn't add up to more than 75% of your income. Plus, your return cannot be negative. This means that you cannot use your credits to give yourself a greater return than you currently have.

Can I Make a Charitable Donation Through a Corporation?

If a corporation makes a donation and received a tax deduction, the deduction can go against their income in the amount of the donation that was made. This lowers the corporation's taxable income, therefore, it lowers the corporation's tax liability.

Just as individuals, the corporation does not need to claim the entire donation in the year that it was made. Donations can be claimed for up to five years after the donation was made.

In general, corporations can claim deductions for charitable donations up until the total amount reaches 75% of the corporation's net income for that year.

What Happens When I Gift Publically-Traded Securities?

As we discussed earlier, donations do not have to be in the form of cash. A corporation that wants to make a donation may sell securities to get the cash they need to make a donation. This still counts as a charitable donation.

The corporation will have a capital gain if the fair market value of the securities is more than its adjusted cost base. This means that the corporation will have to pay a tax on a portion of the capital gain. Currently, this portion is set at 50%.

The other 50% is then added to the corporation's capital dividend account. Then, the corporation should receive the cash from the sale. It can then donate the cash to the qualified donee that it's chosen.

The amount donated is then deducted from the corporation's taxable income.

If a corporation has securities with large capital gains, the corporation can donate the securities directly to the qualified donee. In this case, the corporation would deduct the full fair market value of the securities that they donated to the qualified donee from its total income. This reduces the corporation's overall taxes payable.

What Are the Differences Between Donating Through a Corporation and Donating Individually?

When a corporation makes a donation, it's entitled to a tax deduction against its income. However, when an individual makes a donation, they are entitled to claim a tax credit. The tax credit is what reduces the taxes that you owe.

The main difference between donating through a corporation and donating individually is that a corporation receives a deduction while an individual receives a tax credit. In the end, both means come out to lower taxes for both parties. However, the path to the lower taxes is slightly different since a deduction is different from a tax credit.

If you are trying to decide between donating personally or donating through your corporation, we can honestly tell you that there isn't a significant tax difference between either action.

If you are at or near the highest marginal tax bracket, the tax credit from a personal donation on a donation with a value above $200 is worth the same amount of money as that donation made by a corporation. This is because it is equal to the corporate donation tax deduction plus the personal tax savings. The personal tax savings come from not having to withdraw money from the corporation before paying the amount that is to be donated.

As we discussed, you can also donate publicly-traded securities with gains made over time. If you are looking to optimize your tax situation by donating securities, we generally recommend that you donate the securities that have gathered the largest capital gains. This is whether or not they are held personally or by your corporation.

By doing this, you are maximizing the illumination of capital gains that your corporation is holding.

Where Can I Learn More About My Taxes in Canada?

Well, how much do charitable donations reduce taxes in Canada? The answer is that it truly depends on all of these factors that we've discussed.

Everything from your donation amount to your tax bracket affects how your charitable donation tax credit is counted. So, you should refer to this guide whenever you're looking to file your taxes.

Understanding all of these rules and policies isn't easy. We get it. That's why we at Insurdinary have create a section completely devoted to helpful articles like this.   Have a look!

Our blog is filled with financial information like this. If you need more help with your taxes, we've got you covered.

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