There are probably very few among us who have not given to one or more charities. Some of us make regular donations. Others donate only when the mood or cause makes the gift important. In every case, the Income Tax Act (ITA) rewards us when we make a charitable contribution by allowing us to claim a tax credit on our income tax return.
In this article I will review the basic income tax advantages and pitfalls in charitable giving including gifts of ecological lands, artwork and publicly traded securities.
While the contents of this article are as accurate as possible, it will only skim the surface. The ITA rules are complex and you must consult your professional advisor before making a charitable donation involving anything more than cash.
As with anything involving the ITA, definitions are important. For the purposes of this article, the following definitions or short forms will be used:
- “CRA” means Canada Revenue Agency.
- “Gift” will be used interchangeably and with the same meaning as donation.
- “Marginal rate” means the highest income tax rate which affects an individual’s personal income tax calculation based on that person’s declared net income.
- “Securities” means shares or Canadian mutual fund units traded on a designated publicly traded stock exchange.
What is a tax credit?
As far as payment of income taxes are concerned, a tax credit is better than a
deduction from income. There are two steps in calculating your income taxes. The first is calculating your net income by adding up your income from various sources and then deducting your allowable deductions from that number. The second step is multiplying that net income number by your applicable Federal and Provincial income tax rates to obtain your income taxes payable.
A deduction from income therefore simply reduces the amount of your net income before multiplying it by your marginal rates. A tax credit reduces the amount of income taxes payable after the multiplying has occurred!
Charitable tax credit
The ITA (as well as most, if not all, provinces) rewards charitable giving in a “tough love” sort of way. It does this by allowing a tax credit for a charitable donation but only allowing a tax credit at the lowest ITA rate of 15 per cent (regardless of the personal marginal rate of the taxpayer) on the first $200 of charitable donation. Once a person has made charitable contributions of more than $200 in any calendar year, the ITA then allows a tax credit at the highest ITA rate of 29per cent (regardless of the personal marginal rate of the taxpayer—for the purposes of this article, the provincial tax rates applicable to a taxpayer will not be considered) on the balance.
Jane has a net taxable income of $60,000 and makes a charitable donation of $100. Jane’s top marginal federal tax rate is 22 per cent but she will only have a federal tax credit of $15 (15 per cent of $100).
Jane has a net taxable income of $60,000 and makes a charitable donation of $400. Jane’s top marginal federal tax rate is 22 per cent but she will have a federal tax credit of $88 (15 per cent of the first $200 plus 29 per cent of the next $200).
By Jane increasing her charitable donations by four times ($100 to $400), her tax credit will increase by almost six times ($15 to $88).
How much can I give?
Except for donations of cultural or ecologically sensitive land, total donations are eligible for a tax credit provided they do not exceed 75 per cent of a person’s net income. If a person’s total donations in any calendar year exceed 75 per cent of net income, the excess can be carried forward for up to five years.
If Bill has net taxable income of $30,000 and he gives $40,000 in charitable donations in 2008, he may only claim $22,500 (75 per cent of $30,000) in charitable donations in 2008 but may carry forward the balance of $17,500 ($40,000 – $22,500) for a period of five years. Assuming he does not make any charitable donations in 2009 but has the same net taxable income of $30,000, he could use the entire balance of the 2008 donation ($17,500) to calculate his charitable tax credit for 2009.
What does CRA consider a charity?
There are several types of organizations that will allow a donor to obtain a charitable tax credit:
- Registered charities. These are organizations that have been registered with CRA. Care must be taken as a tax credit will only be allowed by CRA if a donation is made to an organization which has been registered and which maintains its registration (e.g., charitable registration number) in the then current taxation year with CRA. Mainstream charities, such as the Canadian Cancer Society, the Community Foundation of Ottawa, the United Way, the Heart and Stroke Foundation, YM/YWCA, hospital foundations, churches/temples/synagogues, colleges and universities would qualify.
- The United Nations and its agencies.
- Canadian municipalities.
- Some foreign universities. CRA maintains an extensive list of foreign universities outside Canada whose student body normally includes students from Canada. This list is readily available from CRA’s website or from its publications. In addition to those foreign universities listed, contributions to other universities may be deducted where the donor or a member of the donor’s family is or has been enrolled at the university.
Gifts of ecologically sensitive land or easement
A donation of ecologically sensitive land or an ecological easement/covenant over land will be eligible for a charitable tax credit provided:
- The donation is to a registered charity having CRA approved environmental conservation or protection objectives. The Nature Conservancy Canada and the Rideau Waterway Land Trust are two such charities.
- The land or easement/covenant and its value must be certified by CRA as being ecologically sensitive.
If you do make such a gift of ecologically sensitive land or easement/covenant, the value of the donation for tax credit calculation can be 100 per cent of your net income in the year of donation and not 75 per cent as in the case of a normal donation.
Gifts of art
For several years, newspapers periodically contained articles on donations of art to
charities. Generally speaking, a piece of art would be marketed and sold by a company to a buyer at one price. The art would then be appraised at a higher value for the buyer who would then donate the art to a charity and receive a charitable donation receipt for the higher value. The charities were the unwitting facilities for these programs and would often receive some form of benefit from the original company for taking part in accepting the donation. CRA has essentially closed this type of donation through a series of legislative amendments that make donations of artwork to charities very difficult and exceedingly technical.
Gifts of securities
Over the past several years, CRA introduced and refined a series of new rules—first on a trial basis and now on a permanent basis—which allows an individual to donate publicly traded securities to a charity on a very beneficial basis. The capital gains taxes normally arising (and payable by the individual) on such a disposition is deemed to be nil for tax purposes and, at the same time, the donor still receives a charitable donation receipt for the full value of the securities with the corresponding available charitable tax credit. The devil, however, is in the details and an individual who is interested in making a donation of securities to a charity should contact the intended recipient charity to receive a more clear understanding of the mechanics of such a donation.
Dead or alive
Consider making a charitable donation in your Will—not only for the benefit that you will give to the charity or charities of your choice—as the increased charitable tax credit in the year of death (100 per cent of net income rather than 75 per cent) is available on your terminal (year of death) income tax return. Any excess that cannot be used on your terminal return can then be available (again 100 per cent of net income rather than 75 per cent) for the tax return in the year preceding your death. The same capital gains exemption also applies if securities, rather than a cash donation, are bequeathed.
Gifts by spouses
CRA has adopted a policy (although there is not legislative authority) that allows one spouse to claim all of the charitable donations made in a taxation year by both spouses. This better enables the $200 threshold to be met and gives the claiming spouse the possibility of a greater tax credit than would otherwise be possible.
Charitable giving is an emotionally rewarding experience. The fact that the ITA makes the reward tangible through a charitable tax credit simply makes a charitable donation hard to resist. Charitable donations take many forms. A cash donation is the most simple. Donations of securities or real estate are more complex and should only be made after obtaining assistance from your professional advisor and from the chosen charity (or charities) as to how such a gift can be made.
John Peart is a partner with the Ottawa law firm of Nelligan O’Brien Payne LLP and a member of its Estate Planning Group. John is certified by the Law Society of Upper Canada as a Specialist in Estates and Trust Law and is a member of theInternational Society of Trust and Estates Practitioners.
[This article was originally published in the September 2009 issue of Fifty-Five Plus Magazine.]