Tax Season

Tax time 2015: 8 ways to make the most of your charitable donations

If you're not the type of person who gives to charity out of the goodness of your heart, you might be enticed by the generous tax breaks the federal government offers to those who open their wallets for a good cause - or at least a CRA-approved one.

From making use of the first-time donor super credit to watching out for illegal tax shelters

Workers from the charity World Vision distribute aid in northern Cebu, Philippines. If you want to claim a tax credit for your donations to charities, check CRA's websites to ensure they are registered with the tax agency. (Aubrey Belford/Reuters)

Canadians mostly donate to charities out of compassion for those in need — or at least that's what we said when asked about our top reasons for giving in a recent Statistics Canada survey

But those who are less motivated by such noble feelings might be enticed to give by the promise of a tax break. The federal government offers a number of tax incentives for generous Canadians who open their wallets for charity.

People donate to charities because they want to have a sense that their money is going to a purpose they personally believe in, said Adrienne Woodyard, a partner at law firm Davis LLP in Toronto.

"Everyone knows that tax dollars are used to fund a broad range of social programs, but charitable giving allows people to have a much greater degree of control over how their money is used and enables them to leave a legacy behind that may have profound benefits for future generations," she told CBC News.

Here are some things you should know about making charitable donations in Canada.

1. Give generously

Canada has a two-tiered credit system, which means you get a 15 per cent non-refundable federal tax credit for the first $200 of donations for the year (in total, for all charities). Donations beyond that $200 threshold will give you a 29 per cent federal tax credit.

On top of that, each province offers its own tax incentives (amounts vary depending on where you live) that can be claimed in addition to federal credits. 

Cash is king, but there are many other ways to donate to your preferred charity — including artwork, real estate, life insurance policies and even stocks. (Shutterstock)
For example, if you live in Prince Edward Island, you'd get a provincial credit of 9.8 per cent for donations up to $200, and 16.7 per cent for donations above that. So in total, that means you can claim 24.8 per cent for up to $200, and 45.7 per cent for donations beyond $200.

To claim charitable donations, you need to have official receipts that show the charity's Canada Revenue Agency registration number. The most you're able to claim in a year is 75 per cent of your net income. In the year of a person's death and one year prior, the limit for donations is 100 per cent of the deceased's net income. 

2. Combine multi-year donations

If you donate small amounts in the year, you might consider combining two or more years' worth (up to a maximum of five years) of donations to push you over the $200 threshold to take advantage of the higher tax credit.

Once over the $200 level, accounting firm KPMG recommends in its 2015 tax planning guide making that extra contribution in December rather than early in the new year in order to not have to wait until the following taxation year to claim the credits.

3. Share with your spouse

If you and your spouse donate separately, think about combining your donation receipts and claiming them on one return so that you'll get the low credit rate on $200 once instead of twice. 

Some people, if they have certain types of assets then they are making the decision to either gift them to someone, donate them or sell them.- Adrienne Woodyard, tax lawyer

The higher-income spouse should claim all the donations since the credit reduces federal and provincial high-income surtaxes.

The CRA also lets a donation made by one partner to be split between both in any proportion. Partners are also able to put each other's unclaimed charitable donations from previous years toward their returns.

4. Supersize it

Those who haven't ever donated to a CRA-approved charity or haven't claimed a donation tax credit on their tax return since 2007 can claim an additional 25 per cent tax credit (on both tiers) on donations made from March 20, 2013, to Dec. 31, 2017.

The maximum amount of cash donations that can qualify for the first-time donor's super credit is $1,000. The limit applies to an individual donation, as well as a shared claim by a couple.

It's a one-time credit that can only be used once in a pre-2018 taxation year, but multiple donations in one year can be used to calculate the super credit.

5. Choose wisely

So, the tax incentives have convinced you, now it's time to choose your charity.

The government lets you claim tax credits for donations to CRA-registered charities, as well as other "qualified donees," including more than 480 U.S. universities, amateur athletic associations, government bodies and more. 

Check out the agency's Charities Listing, which provides annual information on organizations' finances, activities and operations. 

6. Don't stress over political activity audits

Maybe your preferred charity is one of the few being audited by the CRA over its political activities. Don't stress.

Canada Revenue Agency spokesman Philippe Brideau says the agency will honour donation receipts from charities whose registration has been revoked as long as the organization had CRA approval at the time the donation was made. (Sean Kilpatrick/The Canadian Press)
CRA spokesman Philippe Brideau says charities can continue issuing receipts while they are under review for as long as they remain registered. The CRA will honour any receipts issued during this time even if the registration is later revoked. 

If you're worried that the charity you support engages in political activities, Toronto-based fundraising consultant Cathy Mann suggests reaching out to them to get a better understanding of the context in which it's operating.

Make sure the organizations are staying true to their mission, she said. If the mission is to create social change, that might involve some political activity. The CRA generally allows registered charities to spend up to 10 per cent of all their resources on political activity — groups with annual budgets of less than $50,000 can even spend up to 20 per cent.

Charity lawyer Mark Blumberg said most charities don't even engage in political activity. The sector, in total, spends about $20 to $30 million on political advocacy, but it produces about $230 billion in revenue.

"Charities [could be spending] a thousand times more money on political activities if each of them spent their maximum 10 per cent," he said.

7. Give more than cash

There are many other things to donate to a charity besides cash.

"Some people, for example, if they have certain types of assets, then they are making the decision to either gift them to someone, donate them or sell them," said lawyer Woodyard, who specializes in tax planning and tax dispute resolution.

You can give physical items (CRA calls them "gifts in kind"), such as artwork and real estate, which are normally valued at their fair market value. On these, your tax credit would be the same as if you gave cash.

Woodyard said it's a "win-win situation" because you can give to your preferred charity and save yourself the trouble of making arrangements to sell the item or property on the private market,

You can also donate a life insurance policy.

Artworks, stocks and property can all be given as charitable donations. (Arnd Wiegmann/Reuters)
"If a policy is donated during the life of the insured, the insured will typically be considered to have made a gift equal to the cash surrender value of the policy," she said. If you continue to pay premiums on the policy, each payment is considered an additional donation that entitles you to a tax credit. 

You can also name a charity as a beneficiary of your policy. That way, said Woodyard, your estate will be entitled to a tax credit based on the total payable under the policy, "an excellent way to reduce the taxes that would otherwise be payable by the estate." 

Giving publicly traded stocks is another way you can donate, which will entitle you to get 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.

Donations that don't qualify for tax credit include donations to individuals, charities based outside of Canada that don't have qualified status and gifts in the forms of services and others. 

8. Beware of tax shelters

Tax shelters are schemes that promise tax benefits and deductions that are equal to or greater than their cost. Organizations that identify as shelters are given tax shelter identification numbers. However, that doesn't mean people who participate in them are entitled to the tax benefit, according to the CRA.

Mass marketed gifting tax shelters include schemes where people receive a charitable donation receipt with a higher value than what they gave. The CRA says it has audited every mass marketed tax shelter arrangement and found none to comply with the Income Tax Act.

Watch out if you're promised a receipt for an amount that is more than your contribution. 

If you're being presented with a plan that purports to allow you to profit by way of a tax refund from the donation you're making, it's probably too good to be true.- Adrienne Woodyard, tax lawyer

"If you're being presented with a plan that purports to allow you to profit by way of a tax refund from the donation you're making, it's probably too good to be true. The CRA is virtually guaranteed to challenge it," said Woodyard.

She said the tax agency is likely to reject your credit based on the inflated amount, and you also might not be entitled to get a credit on the actual amount you donated. What's more, she says, the CRA might impose a penalty for participating in the arrangement. 

In the 2014 federal budget, the government instituted new rules aimed at eliminating tax shelters for gifts of certified cultural property or artifacts that inflate their value. As of Feb. 10, 2014, the value of a cultural property gift made through a tax shelter arrangement is limited to what the donor paid for it in the first place.

The CRA can take years to assess shelters, said Woodyard, so even if you've submitted your claim and it went through, the agency can contact you several years down the road and demand you pay back the refund, plus interest.

If you're presented with a donation arrangement that doesn't feel right or the numbers seem off, Woodyard recommends you do your due diligence — run it by an accountant or lawyer.

"Going into something like this blindly will almost never benefit [you] and can result in some very unpleasant surprises in the future," she said. 


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