Tax season 2016: How to avoid scams and make the most of your charitable giving
Beware of abusive tax shelters, fraud and unregistered charities
Kind-hearted Canadians don't always take advantage of this country's generous charitable tax incentives, but criminals do.
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A whopping 82 per cent of Canadians reported giving a total of $12.8 billion to charity in 2013 — the last year Statistics Canada collected data on charitable giving. But just 48 per cent said they planned to claim the donations on their tax returns.
That's because Canadians don't expect a reward for doing the right thing, says charity law expert Mark Blumberg, of Blumberg Segal LLP.
"We're not little puppets," he says. "If you're giving to a charity, it does actually cost you money. So if you're a totally selfish person … you're probably just not going to make a donation."
Canada has some of the most generous charitable tax incentives in the world, he says, and not everyone who takes advantage of that system can be trusted — especially when it comes to soliciting donations.
Here are some tips on how to get the most out of Canada's charitable tax credit while avoiding cash-grab schemes.
Save 'em up or pool with a partner
The more you donate, the bigger the percentage you can claim as a tax credit.
You can claim a 15-per-cent, non-refundable federal tax credit on annual donations under $200, and 29 per cent on donations above $200. That's in addition to provincial and territorial tax incentives, which vary across the country.
If you're the type to make small donations over time, you might want to save them up, which is OK up to five years.
You can also pool your donations with your spouse or common-law partner to reach the $200 mark. The higher-income spouse should claim all the donations since the credit reduces federal and provincial high-income surtaxes.
To find out just how much you to stand to claim, check out the Canada Revenue Agency's charitable donation tax calculator.
Make sure your charity is legit
To get your credit, you'll need an official receipt from an organization registered by the CRA. These can include:
- Canadian charities or national arts service organizations.
- Canadian amateur athletic associations.
- The government, either municipal, provincial/territorial or federal.
- Municipal or public bodies, such as First Nations or parks departments.
- Some foreign universities that accept Canadian students.
- The United Nations and its agencies.
- A foreign charity that has received "a gift from her Majesty in right of Canada."
If you're not sure whether an organization fits the bill, you can check any of the lists above or contact the CRA charities site.
Further, you can check out the financial track record of any registered charity on the CRA's charities list. That will not only tell you which charities are in good standing, but how much each puts toward actual charitable work, as opposed to fundraising or administrative costs.
Beware of scams
Both the RCMP and the CRA list the warning signs of charitable fraud on their websites, while Blumberg's website, Smartgiving.ca, describes common charity scams to avoid. Some common warning signs are:
- Pressure to donate right away.
- Refusal to provide information about charities.
- A name that sounds very similar to an established charity, but isn't quite right.
- Refusal to take a cheque or credit card.
- Using a free email service like Yahoo or Gmail.
- Having an odd phone number, like 123-456-7890 or 777-777-7778.
If something sounds fishy, it probably is.
"Get independent advice on these things," says Blumberg. "Don't rely on the people selling you something who are making money off it to tell you whether it's a good thing or a bad thing. They're going to tell you it's a good thing."
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Watch out for abusive tax shelters
You should never be able to actually profit from charitable giving, so avoid tax shelter schemes that promise benefits that are equal to or greater than their costs.
An estimated $6 million in receipts have been issued as part of these abusive charity schemes over the last seven years in Canada, according to Smartgiving.ca.
Not only does very little of the money collected in these schemes make it into charities' pockets, says Blumberg, but participating can backfire come tax season.
The CRA automatically audits every tax shelter donation, and so far, not one has been found to comply with the Income Tax Act. Each audit has led to a reassessment of tax and interest for the participants.
Refugee sponsorships a 'grey area'
A big chunk of Canadian giving this past year has centred on helping refugees.
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If you donated to a registered Canadian charity or United Nations agency that works to help refugees, you can claim your credit. If you pooled your money to sponsor a family in Canada, there is no tax break for that.
Where it gets complicated is when the two intersect. If you donated to a charity raising funds to sponsor a specific family, Blumberg says it's not clear how the CRA will interpret it.
"That's where we're in a bit of a grey area," he said.
1st-time donor? Go big
In 2013, Canada introduced the first-time donor's super credit.
If you haven't claimed a tax credit for a donation since 2007, you can can claim an additional 25 per cent both federally and provincially on donations made between March 20, 2013 and Dec. 31, 2017, up to a maximum of $1,000.
The limit applies to individual donations, as well as a claim shared by a couple.
Don't just give money
Blumberg says donating publicly traded securities is a good way to help charities while maximizing your own benefit.
This entitles you to a tax credit on the full value of the shares. However, if you sell the stocks and then donate the cash, you'll get a credit on the value of your donation but also get taxed on any capital gains.