Tax planning for year-end charitable donations (November 2020) - Akler Browning LLP

November 26, 2020by AB0

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made.

Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year — there are no exceptions.

There is, however, another reason to ensure donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2020) over $214,368, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2020 will receive a federal credit of $88 ($200 ×15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2020 and January 2021, the total credit claimable is only $60 ($200 ×15% + $200 × 15%), and the 2021 donation can’t be claimed until the 2021 return is filed in April 2022. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It is also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2020 don’t reach the $200 level, it is usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2015, 2016, 2017, 2018, or 2019 tax years can be carried forward and added to the total donations made in 2020, and the aggregate then claimed on the 2020 tax return.

When claiming charitable donations, it is possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax — currently, Ontario and Prince Edward Island — it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable.

Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. Information on the charitable donations tax credit is available on the same website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.

 


The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

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