Most people make charitable contributions because they want to make a difference, but they don’t realize how their tax burden may be lowered as a result. How and when you donate can result in a bigger gift for both you and your charity.
If you’re looking to make a difference with a charitable contribution to your favorite cause, it’s a good idea to take a look at the tax rules that can help boost both how much you give and what you get in return.
And while a tax break isn’t the reason people tend to donate, it makes financial sense to take advantage of the ones available.
“Making a charitable donation is the easiest and most effective way for Canadians to save money on their taxes, without exception,” said Brad Offman, founder of Spire Philanthropy, a management consultancy specializing in corporate-charitable partnerships, who is also a member of the Association of Fundraising Professionals.
“Obviously you’re doing it because you’re helping the community and you want to help the charity that you want to support, but the ancillary effect is that it really has a very positive impact on your tax situation.”
There are several strategies to keep in mind when donating, and experts say being aware of them will ensure both you and your charity get the most out of your gift.
Pool Your Donations
Not all donations are created equal, and in Canada, the more you give, the more you get back.
“I’m not convinced people fully understand how much they do get back,” said Rick Robertson, associate professor of managerial accounting at Western University’s Ivey Business School.
“Once you give more than $200, the value of that credit increases considerably, and gets close for higher income individuals to being 50 per cent.”
Donations can be carried over for up to five years, so if you’re donating under $200 each year, you’re best to hold on to those tax receipts and add them all up at the end of the five years to qualify for the higher-level refunds.
“If you claim just $200 a year, in Ontario, for example, you’d just get a 20 per cent tax credit, but if you claim the full $1,000 at the end of the fifth year, you get a low credit of 20 per cent on the first $200, but on the other $800, you’re getting credit at the high rate, and that can be as high as 50 per cent,” said Jamie Golombek, Managing Director of tax and estate planning with CIBC Wealth Advisory Services.
If you have a partner or a spouse, you can also put all your donations together to reach the higher credit level on any given year.
That’s possible even if the donation is in the name of the other spouse.
Make Your First Time Count
If you’re a first time donor, you can take advantage of the first-time donor super credit, an additional 25 per cent federal credit that you can receive one time if you haven’t made a donation since 2007.
“This could be, for example, a student, just graduating from university or from high school even, that’s never made a donation, or at least never claim one because they never had to pay any tax,” Golombek said.
It’s applicable to donations of up to $1,000, and available in Canada until the end of 2017.
Shares, securities or mutual funds that have gone up in value can also be donated in-kind to charity.
That means that instead of selling a stock or fund you no longer want and donating the proceeds to charity, you simply gift them the stock, which the charity can sell for cash.
In return, you get not only a tax receipt from the charity for the fair market value of the shares you’re donating, but you also pay no capital gains tax on their appreciation. That’s not insignificant, given that depending on your tax bracket, the capital gains tax can add up to as much as 25 per cent.
“That’s a tremendous opportunity for individuals that want to make a more substantial gift to charity and who already have stocks, bonds or mutual funds that have gone up in value and they don’t want to pay the tax,” said Golombek.
While charities may prefer cash, most are set up to receive securities – which they often sell the same day to avoid the possibility of any market risk.
“Charities really will try to support you in terms of what’s the easiest way for you to give,” he said.
Consider the Timing
Given that tax credits come after you file your tax return at the end of April, donating in December means you can get money back just a few months later, as opposed to having to wait up to 15 months if you wait until January and donate as part of the new tax year, Robertson said.
You may also want to keep an eye on the calendar if you are close to that $200 limit – donating additional gifts to charity on December 31st or January 2nd may make a big difference when it comes to the bracket you qualify for.
Registrations and Record Keeping
Anytime you donate, you want to make sure you’re donating to a registered charity that’s doing work you care about.
The Canada Revenue Agency keeps a list of all registered charities on its website (http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html)
But above all, Robertson says, make sure you’re donating for the right reasons.
“You have to have charitable intent – the government helps you but you’re still decreasing your wealth,” he said.
“Check the organization out (and) limit the number of organizations you give to but give more to them. Choose the ones you care about and try to make a difference.”
And when you do get that tax return, he adds, remember to spend it wisely.
“It’s not free money, it’s your money. It was always yours, so you have to have a little bit of a financial plan.”