Written by Joel Bray, CFP CLU MFA-P
Vice President, Relationship Management, Cardinal Capital Management
Canadians are typically a very generous group when it comes to supporting charities. In 2021, more than 968,000 Canadians gave more than $465M to 31,700 charities (source: Canada Helps Giving Report 2022). Beyond helping causes that are important to you and creating an impact, there are also great tax incentives to help your community thanks to donation tax credits.
What is a donation tax credit and how much can I claim?
At the end of a tax year, typically you or your accountant will calculate how much money you owe to CRA. A tax credit will help to reduce taxes owed while a tax deduction (i.e. RRSP contribution) reduces the amount of income subject to income tax.
Your charitable donations credit can significantly reduce taxes payable, but only up to 75% of your net income. Except in the year of death or the preceding year, when 100% of net income can be claimed by donations. The good news is, with proper estate planning, if you still have unused donations, you can carry them forward for up to five years.
How are the tax credits calculated?
In Alberta, we are fortunate to receive more than 50% of our donation amount back as a tax credit! Let’s look at an example of a person donating $100,000 with no advantage (see below):
Federal 33% + Alberta 21% = 54% of $100,000 = $54,000 tax credit
* Example assumes the donor exceeded $200 in donations this year and they’re in the highest federal tax bracket (income above $221,708).
What can I give?
The regular donation credit is calculated on the value of qualified gifts, which can include cash, securities, insurance policies, private company shares, ecological land or other types of property.
If you receive something in return for your gift, it is considered an advantage, and depending on the value of the advantage, this amount must be subtracted from the amount you donated, allowing you to claim the difference.
Tips & year-end tax planning
- Donation(s) must be received by Dec. 31, 2022, to be applied for that taxation year
- If you’ve donated $200 (or less) in a calendar year, perhaps carry it forward to combine with future donations to maximize the higher 29-33% tax credit rate.
- Combine and file donations with one spouse’s return to have more attributed at the higher rate.
- If your donations exceed your allowable net income, consider transferring to a spouse so they can utilize the tax credits. New 2022 law will allow you to apply this back to 2017 and moving forward.
- Consider earmarking your tax refund annually to donate to charity
While there are numerous ways to give, it is essential to create a strategy that includes who you want to give to and how much. It is important to work with your charity and an advisor to determine the best way to maximize your gifting intentions, as cash may be the easiest and best understood means, but it also may be the least tax effective way to give.
About Joel Bray
A highly-respected financial advisor, Joel has become a leader in his field shortly after embarking on his career in 2006. He educates his clients to be both accountable and adaptable while partnering with them to build a financial future that they can enjoy.
Joel’s passion for charitable giving convinced him to pursue his Master Financial Advisor in Philanthropy (MFA-P) designation and become a member of the Canadian Association of Gift Planners. He encourages his clients to include supporting charities in their personal, corporate, and/or estate financial plans while building strong relationships with charities that are close to their hearts.