By Shaylyn MacAulay
This year has been unlike any other, but amidst the challenges COVID-19 has presented, many Canadians are taking time to reflect on their good fortune. Difficult times like these allow us to take stock in what’s most important to us like family, friends, safety and health. It’s during these times of reflection and appreciation that many Canadians decide to share their good fortune with others by supporting causes close to their heart through a charitable donation.
We all understand the emotional value of making a donation; it feels good when we’re able to help those around us! But donations also play an important role in tax planning and can provide significant financial value to us as well.
The Federal, as well as Provincial and Territorial governments, offer a
charitable donation tax benefit which allows Canadian taxpayers to claim a portion of their eligible donations on their income tax filing.
“Canada is one of the most tax forgiving countries in the world with the tax credits that they give. Our Federal Government has a long history of encouraging people to give to charities that they care about. They have done so in a number of ways, and one of the most significant ways is through the tax credits that they allow,” says Glenn Stewardson, CFP®, FMA, MFA-PÔ, Financial Planning Advisor with Assante Capital Management Ltd.
Your tax saving will depend on the total amount of your eligible donations, where you live and your income. You can use the
Canadian Red Cross Donation Tax Credit Calculator to help you determine your approximate combined tax credit.
That’s right, the Federal and Provincial/Territorial tax rates are combined and applied against eligible donations to reduce your tax liability. Here’s a look at the combined tax credit rates for gifts over $200* across the country:
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*These rates apply to individuals with a taxable income below $200,000 annually. It does not take into account all possible tax situations.
The federal charitable tax credit rate is 15% on the first $200 and 29% on the remaining donation amount. The
Provincial/Territorial rates vary by province and territory but also offer a higher rate once donations exceed $200. Here’s what that looks like in practice:
A donor located in Nova Scotia has given a total of $5,000 in eligible donations to a number of qualified donees in 2020. Their charitable tax donation credit will total $2,447.58, which means they were able to give a gift of $5,000 while only spending $2,552.42.
| Charitable donation tax benefit on first $200 |
| Federal |
$200 x 15% = $30 |
| Provincial |
$200 x 8.79% = $17.58 |
| Total |
$47.58 |
| |
|
| Charitable donation tax benefit on remaining $4,800 |
| Federal |
$4,800 x 29% = $1,392 |
| Provincial |
$4,800 x 21% = $1,008 |
| Total |
$2,400 |
| |
|
| Total charitable donation tax benefit: $2,447.58 |
This means that many donors can essentially double their gift because they can save up to half (and in some instances slightly more than half depending on their tax situation) when it comes time to file their taxes, explains Glenn.
These tax benefits can be particularly valuable for those whose investments have performed well in 2020.
“My stocks were in an industry that benefited from more people being online. I could contribute stocks that went up while taking the charitable tax benefit without being affected by the capital gains. So the benefit is there for both sides. It’s a way for the government to say, ‘If you give through securities, we won’t count the capital gains against you since they are given to charity,” explains Keith, a Canadian Red Cross donor from Toronto.
When investments rise in value it triggers a capital gain, for which you are taxed unless the investment is transferred to charity. For folks with a philanthropic heart, like Keith, as a financial advisor, Glenn often recommends donating those investments (like shares, for example) to charity, thus unloading the capital gain and supporting a worthwhile cause. The value of the charitable tax benefit only increases for those in retirement. In addition to unloading the capital gain, the charitable tax benefit can offset the taxes triggered by withdrawing funds from an account like a Registered Retirement Income Fund.
Canadian Red Cross donors Jim and Diane from Winnipeg recently learned just how valuable the donation tax credit can be when an unexpected capital gain from an investment fund threatened to significantly reduce their Old Age Security payments. Philanthropy is near and dear to Jim and Diane’s hearts so it made sense to them to transfer these investments to causes they care about, meaning they were able to support these organizations while eliminating the tax burden triggered by the capital gain. “The key is to look forward and know your options, you need to be aware of the fact that this is an option and ask yourself does it fit my situation right now,” says Jim.
According to a
study conducted by the Rideau Hall Foundation and Imagine Canada, the likelihood of reporting tax credits as a motivation for giving increases with age. Glenn explains that the value of tax credits become more apparent and significant as donors reach a point in their lives where they can afford to give larger gifts – which tends to be later in life. Tax planning and tax credits become more important as the gift size increases, but that doesn’t mean that younger donors and donors of smaller amounts can’t take advantage of the charitable donation tax credit.
“Should donors in younger age groups be encouraged to use the charitable tax benefit? For sure. But more importantly, if they don’t use it, they should keep it because you can carry it forward and use it in the future. If I’m only able to afford to give $300 to $400 a year because of my cash flow, I should save those receipts, pile them up and claim them all in in one year,” says Glenn.
The Government of Canada allows you to
carry forward your eligible donations, as well as your spouse’s or common law partner’s donations, and claim them on your return for any of the next five years. Depending on your situation it may be more beneficial to hold on to your donation receipts and claim them all in one tax filing as Glenn suggests.
Whatever your reason for giving this year, whether through financial gifts or gifts of time and support, the Canadian Red Cross thanks you. This year has been a challenging one, but once again Canadians have stepped up in a big way to deliver hope and kindness.
You can use the
Canadian Red Cross Donation Tax Credit Calculator to help you determine your approximate combined tax credit for 2020.
Special thanks to Canadian Red Cross donors, Keith, Jim and Diane for sharing their thoughts on the charitable donation tax benefit, and to Glenn Stewardson, CFP®, FMA, MFA-PÔ, Financial Planning Advisor with Assante Capital Management Ltd. for sharing his professional insights. Glenn is a specialist in philanthropic giving. He teaches tax reduction and estate tax elimination strategies to groups of seniors, sharing the power of philanthropic giving.