Charitable Donations for The Average Joe
Canadians are typically known to be extremely generous in giving back and supporting charities and non-profit causes each and every year. Millions of Canadians make donations to their favourite charities by way of a one-time donation or an ongoing monthly or yearly commitment to donate.
There are all kinds of eligible charities that Canadians donate to. These include local religious organizations such as churches/temples/mosques, nationally recognized charities such as World Vision or the United Way, or they can be yearly events, such as the Heart & Stroke Ride to Conquer Cancer.
According to Statistics Canada, roughly 5.7 million Canadians reported charitable donations that they made during the 2010. In dollars, the total amount of charitable donations reported was slightly under $8.3 billion dollars across Canada.
Besides the charitable act of giving itself, there is an additional advantage to donating to charities that are registered with the Canada Revenue Agency (CRA) as “registered charitable organizations”. A portion of the donation amount is eligible to be claimed as a tax credit on the donor’s family’s tax return in the year that the donation was made.
What to Look for and What to Do
There are several key pieces of information and documentation that the CRA needs to see to support donation claims on tax returns. Listed below are several of the key steps to keep in mind:
- Ensure before donating to a cause or organization that the charity is listed as a registered charity with the CRA. Only registered charities are authorized to issue official tax receipts to support a claim for the amount donated.
- Obtain your official tax receipt from the charity. Tax receipts are issued either at the time of donation or at the end of the year to summarize the total donations made for the year on one tax slip. There should also be a registered charitable organization number showing clearly on the tax slip. The slips are either going to be printed and mailed to you, or will be emailed to you and it is up to you to print them out yourself.
- Ensure that your name and address is correctly entered into your tax receipt. Also ensure that the dollar amount of the donation is correct and that the tax year when you made the donation is correct.
- Claim the tax credit within 5 years of the date of donation as written on your tax receipt. DO NOT use the date of issue when the receipt was generated, as this is just the date the receipt was physically printed and mailed out to you.
- You should be combining your donation slips with your spouse or common law partner. Typically, only one of you should be claiming the charity receipts on your tax returns and they should not be split between the two of you. In most cases, the higher income earner out of the two of you will claim 100% of the donation receipts, as that person will benefit the most from the tax credit.
Calculating your Tax Credit
The charitable tax credit is a unique calculation whereby it is not a straight multiplication formula to follow. Instead, the first $200 of the donation receipts claimed is multiplied at the federal tax rate of 15%. The remaining difference is then multiplied at the high tax rate of 29%.
To borrow a simple example from the CRA website:
Sally lives in Ontario and she donated $1,000 overall to registered charities in the 2012 tax year. How much tax credit will Sally receive??
Part 1 – $200 x 15% = $ 30.00
Part 2 – ($1,000 – $200) x 29% = $232.00
Total tax credit $262.00
Things to Keep in Mind
Credits are Non-Refundable
Remember that the donation tax credit is a non-refundable tax credit. What this means is that the tax credit is used to reduce taxes owing only, and it is not used to generate refunds in and of itself. I.E., if Sally (above) already has no taxes owing before applying the $262 of charity credits, she cannot use the $262 to generate a tax refund back to her.
The theory is that the charity tax credit will reduce her taxes owing. In turn, this will increase her tax refund based on the tax withholdings already taken into account on her tax return, and this is how charity donations generate tax refunds.
In our office, we have seen numerous cases of clients donating money to organizations that provided receipts that showed a greater donation amount than what was actually paid. Furthermore, the donation receipts were missing several key pieces of information that showed they are not official receipts of registered charities.
There are many charity scams going on throughout Canada and the scammers typically target new Canadians who are not aware of the various rules required for registered charities.
The following example shows one of the most common scams that these false charities use.
Sally donates $1,000 to a charity that is not registered with the CRA and is actually a scam. The charity’s agent promises to issue Sally a donation receipt for $2,000 for her to claim on her taxes, even though she only will pay $1,000. Should Sally pay the money to this charity?? Unequivocally NO!
Even with the presence of charity scammers, Canadians will continue to donate annual to their favourite charities. To ensure that these receipts are correctly identified and entered in their tax returns, it is recommended that a tax professional prepare the returns for filing with the CRA. A chartered accountant can assist the taxpayer with this key step to correctly report donations made.
With information supplied by the following sources:
- Canada Revenue Agency – http://www.cra-arc.gc.ca/chrts-gvng/menu-eng.html
- Statistics Canada – http://www.statcan.gc.ca/daily-quotidien/111205/dq111205a-eng.htm