Tax credits for charitable donations

Donations made to registered charities, registered Canadian amateur athletic associations, Canadian municipalities, the federal government or a provincial government are eligible for a tax credit. As a general rule, donations to US charitable organizations qualify for the credit, provided you also have US-source net income that is taxable in Canada.

Donations can only be claimed after they are paid— pledges don’t count. Unused claims may be carried forward for up to five years and donations made in the year of death may be carried back one year. For donations of ecologically sensitive land after February 10, 2014, the carry-forward period is extended from five to ten years.

The general annual limit on charitable donations as a percentage of net income is 75%. However, the limit on gifts by individuals in the year of death (and the prior year) is 100%.

Donations must be supported by official donation receipts. If you’re filing your return electronically (see topic 161), you are not required to file these receipts with your return, but you must keep them on hand in case the CRA asks to see them.

For many years the federal credit was 15% on the first $200 of donations claimed in the year and 29% on the amount in excess of $200. In December 2015, legislation was introduced to increase the 29% rate with respect to donations to 33% on the lesser of the amount of donations made in excess of $200 and the individual donor’s taxable income over $200,000, effective with donations made after 2015.

Example: Assume that Bill’s taxable income in 2016 is $220,000 and he makes $30,000 in charitable donations. The new 33% donation tax credit rate will apply to $20,000 of the donations made (the amount equal to Bill’s taxable income over $200,000), while the 29% rate will still apply to the remaining $9,800 of donations (above the first $200). The 15% rate on the first $200 of donations will remain.

After factoring in provincial tax savings, donations in excess of $200 will save you anywhere from 40.2% to 54%, depending on your income level and province of residence. The 2013 federal budget introduced a new temporary First-Time Donor’s Super Credit which permits First-time donors an additional 25% federal tax credit on up to $1,000 in donations. This one-time credit may only be claimed once in the 2013 to 2017 taxation years. You are considered a “First-time donor” if neither you nor your spouse claimed a charitable donation tax credit in any of the five previous years.

Example: The last time you made a donation to a registered charity was in 2006. In 2016, you make a $500 donation to the Canadian Cancer Society and your taxable income that year is less than $200,000. Your federal donation credit is $242 [($200 x 15%) + ($300 x 29%) + ($500 x 25%)]. When the provincial credit is added, your tax savings can be considerable.

Tax Tip : If you and your spouse or common-law partner donate more than $200 in any one year, the tax credit will be larger if one of you claims the entire amount. That way, only one $200 amount is credited at 15%.

Donating property instead of cash

Subject to special rules (see “Art and other charitable donation arrangements”), if you donate capital property to a registered charity, you can elect to value the gift at any amount not less than its adjusted cost base and not more than its fair market value (FMV). The amount claimed as a donation must also be reported as your proceeds of disposition of the property.

If you donate “eligible property” to a charity, you’re entitled to additional tax relief. Eligible property includes securities, such as shares and bonds listed on a prescribed stock exchange, as well as mutual fund units. For such donations the taxable portion of the gain is reduced to nil. This tax relief also extends to qualifying donations made to private foundations.

Art and other charitable donation arrangements

For several years, there was a tax arrangement whereby taxpayers would buy a series of works of art for, say, $200 each, and immediately donate them to a registered charity or university and receive a donation receipt for a much higher appraised value. Although these “buy low, donate high” gifting arrangements have effectively been stopped by the courts, which generally reduced the donation amount to the cost of the property donated, the government did finally introduce rules to try and put a stop to these planning strategies.

The FMV of a gift of property is deemed to be whichever is less—the actual FMV or the donor’s cost of the property where the property is (i) donated under a gifting arrangement that is a tax shelter; (ii) donated within three years of its acquisition; or (iii) acquired by the donor within the past 10 years in contemplation of making the donation. Special rules apply if the donated property was previously acquired by a person related to the donor. There are certain exceptions to this rule where property is donated as a result of a taxpayer’s death and for donations of certain types of property, such as inventory, real property located in Canada, Canadian cultural property, ecological property and qualifying public securities. Donations of certified cultural property made after February 10, 2014 as part of a tax shelter gifting arrangement are not exempt from this rule.

Many tax shelter promoters state that they have obtained an advance income tax ruling from the CRA. While the Rulings Directorate will rule on certain aspects of proposed transactions, it will not rule on such issues as the existence of a business, reasonable expectation of profit and the FMV of a property or service. Therefore, if you’re considering investing in a charitable donation tax shelter, you should be aware that an advance ruling is not a guarantee of the proposed deductions.

You should also be aware that a tax shelter identification number is only used for identification purposes. It doesn’t mean that the tax shelter transactions have been approved by the CRA as being legitimate. Previously, a tax shelter identification number didn’t have an expiration date. However, for applications filed after March 28, 2012, a tax shelter identification number will be valid only for the calendar year identified in the application filed with the CRA. Tax shelter identification numbers issued prior to this date expired at the end of 2013.

Over the past several years, the government has gradually introduced more and more rules to deter the promotion of abusive charitable donation planning arrangements. Although not as prevalent as in the past, new arrangements continue to be marketed. However, you should be cautious of all arrangements that promise a donation receipt in excess of the cash donated. There is the added risk of losing the benefit associated with the actual cash donation. To qualify for a donation credit, a gift must be made voluntarily with no expectation to receive anything in return. In most of the charitable donation arrangements being looked at by the CRA, it would be difficult to argue that the donation would have been made were it not for the expected tax savings.

There is also now the added risk of having to pay disputed amounts to the CRA even if you’re planning to challenge a CRA assessment on a charitable planning arrangement. The CRA is now permitted to collect 50% of disputed income taxes, interest and penalties in situations where a taxpayer is in the process of objecting to an assessment that involves the CRA challenging a charitable donation shelter.

Other receipting guidelines for charities

In general, a charitable organization can issue a tax receipt for the amount of a gift made to the charity. In some cases— for example, when the donor receives some benefit as a result of making the donation—the actual amount of the gift may not be clear. To help resolve some of the uncertainty in this area, the CRA has issued guidelines to describe how the amount of the gift should be determined in various fundraising methods commonly used by the charitable sector, such as fundraising dinners, charity auctions, concerts, shows and sporting events, golf tournaments, etc.

Example: Your favourite charity holds a fundraising dinner for which tickets are sold for $250 each. A comparable meal could be purchased for $100. Each donor is entitled to receive a charitable donation receipt in the amount of $150. There may be further adjustments where the event has door prizes or provides attendees with other complimentary gifts.

Example: Your favourite charity holds a fundraising dinner for which tickets are sold for $250 each. A comparable meal could be purchased for $100. Each donor is entitled to receive a charitable donation receipt in the amount of $150. There may be further adjustments where the event has door prizes or provides attendees with other complimentary gifts.

Donations from state supporters of terrorism

For donations made after February 10, 2014, the CRA may refuse to register a charity or revoke a charity’s registration where it accepts a donation from a foreign state listed as a supporter of terrorism for purposes of the State Immunity Act.