Donations
In Canada, charitable donations are not only a way to contribute positively to society but also a means to receive tax benefits. The Canadian tax system encourages individuals and corporations to donate by offering generous tax incentives. Understanding how donations can reduce tax liabilities is key for both effective financial planning and maximizing the impact of charitable giving.
When an individual or a corporation makes a donation to a registered charity or other qualified donees in Canada, they receive a tax receipt. For individuals, this receipt can be used to claim a tax credit on their personal income tax return, while corporations can claim a tax deduction.
The tax credit for individual donors is particularly attractive. For the first $200 of charitable donations, the federal tax credit rate is 15%. For amounts exceeding $200, the federal tax credit increases to 29%. Additionally, most provinces and territories also offer provincial tax credits, which when combined with the federal credits, can result in a substantial reduction in the overall tax owed.
The more you donate, the greater the tax benefit. There is a limit, however; in a single year, you can claim donations up to 75% of your net income, with some exceptions allowing up to 100% in specific cases like donations made in the year of death.
One key feature of the Canadian system is the flexibility it offers in terms of when to claim the donation credit. Donations can be carried forward for up to five years if it's not advantageous to claim them in the year they were made. This allows donors to maximize their tax benefits by claiming the credit in a year when they are in a higher tax bracket.
Moreover, donations of securities, such as stocks or mutual funds, to a registered charity come with an added benefit. If you donate publicly traded securities directly to a charity, you pay no capital gains tax on any appreciation of those securities. This makes donating securities often more tax-efficient than selling them and donating the cash proceeds.
For corporations, the scenario is slightly different. Donations can be claimed as a deduction against business income, reducing the corporation's taxable income. The limit for corporate donations is generally 75% of net income, with some flexibility in specific cases.