REFERENCE GUIDE CHARITABLE GIVING

REFERENCE GUIDE CHARITABLE GIVING 

In order to promote and encourage charitable giving, the Income Tax Act of Canada (the “Act”) allows a tax credit to be claimed for eligible charitable gifts made by an individual either during a taxation year (and in the five preceding years if not previously claimed), by will or beneficiary designation, or by the individual’s estate after the individual’s death. This federal tax credit is added to the other non-refundable personal credits, and the total is then deducted from the taxes otherwise payable by the individual, resulting in a lower income tax bill. 

The Act also allows a tax deduction to be claimed for eligible charitable gifts made by a corporation, which can be used to deduct taxes otherwise payable by the corporation, resulting in a lower income tax bill for the corporation. 

Generally, the tax credit available for charitable gifts does not fully offset the amount donated to charity, so there clearly must be a charitable motive underlying the gift. However, once a decision to give to charity is made, the gift may be structured to maximize the resulting tax benefits. 

The full reference guide below outlines some of the important tax rules regarding charitable giving, as well as some of the various giving options available.

Donations by Individuals 

An individual is considered to be a first-time donor if neither the individual nor the individual’s spouse or common-law partner (if applicable) has claimed and been allowed a donation tax credit for donations made after 2007.

Transfer of Credit to Spouse 

Charitable donation tax credits may be transferred between  It is therefore advantageous for spouses to combine their donations in the tax return of one spouse if the total amount donated is over $200, since it will result in more of the donations being eligible for the higher tax credit. 

Eligible for Charitable Giving

In order to be eligible for a donation tax credit, a gift must be made to a registered charity, Canadian amateur athletic association, national arts service organization, housing corporation resident in Canada set up only to provide low-cost housing for the aged, Canadian municipality, municipal or public body performing a function of government in Canada, registered universities outside Canada that are prescribed universities, the student of which body ordinarily includes students from Canada, Her Majesty in right of Canada, or a province or territory, or registered foreign charitable organization to which Her Majesty in right of Canada has made a gift, and the United Nations or an agency of the United Nations.

If obtaining a charitable tax credit is important, it is advisable to review with a professional whether or not the intended recipient organization or institution is an eligible charity for the purposes of the donation tax credit.

For Donation Tax Credit Limits and Charitable giving options and their tax implications, please refer to reference guide below.

Donations by Corporations 

When a corporation makes a charitable donation to a registered charity, it is entitled to a tax deduction in the amount of the donation up to a maximum of 75% of the corporation’s net income for the year. The 75% limit may be increased by up to 25% of the amount of the donation where the property donated is capital property or depreciable capital property giving rise to recapture. There is a five-year carry forward available for any amounts over these limits that a corporation is unable to deduct in the year of the donation. 

Alternatively, a corporation may be able to claim a business deduction for donations made to a registered charity where some type of public recognition is given to the corporation by the charity (the donation treated as an advertising expense). 

Enhanced tax benefits are available when a corporation donates publicly listed securities or an ecological gift. When a corporation donates these types of property, the tax on any capital gain arising from the disposition of the property to the charity will be eliminated and the corporation will be able to add 100% of the capital gain arising from the disposition to its capital dividend account (the amounts which can be flowed out to the corporation’s shareholders on a tax-free basis). These benefits are in addition to the tax deduction that the corporation can claim as a result of making the donation. Thus, the tax benefits for a corporation when donating these types of property are attractive. 

Conclusion 

With the wide variety of charitable giving options available, and the detailed tax rules that apply, charitable-minded individuals and corporations should consult with knowledgeable professionals to plan and implement their charitable giving, to ensure that they make the most of their contributions for themselves and their favourite charities.