Donating to charity is not only philanthropic, but it can also help you potentially save money when it comes to income taxes. The secret is to get a donation tax receipt.
Why? The Canada Revenue Agency (CRA) gives you back a portion of the amount donated. You get money back provided you don’t owe a tax debt to the CRA.
Canadians are certainly charitable as a whole, but it’s also a savvy way to keep more money for themselves and out of the pockets of the government.
With the right strategy in place and some help from a tax specialist, you can effectively reduce your federal and provincial taxes by a significant amount with your donations. Here’s how.
What Is A Donation Tax Credit?
A donation tax credit reduces the amount of taxes you have to pay the government. When you donate to a registered charity, you get back a portion of your donation as a non-refundable tax credit.
Approximately 23% of Canadians who make donations to charities do it for tax credits to reduce their taxes owing and boost their tax returns.
How Much Of Your Donations Can You Claim?
For the first $200 you donate, you can receive a 15% tax credit, as long as the charity is registered. On amounts over $200 in donations, you can get a 29% tax credit. The most you can claim on a donation credit is 75% of your annual net income.
Under certain rules, the tax credit can reach as much as 33% if you’re in the highest tax bracket.
How Does A Donation Tax Credit Affect Your Taxes?
You can apply donation tax credits directly to your taxable income. However, it’s important to understand that donations are non-refundable tax credits, which means other credits must be claimed first before you can claim your donation tax credit.
Moreover, if the amount of your other credits is enough to bring your tax payable down to zero, you won’t be able to use your donations for a tax refund.
But if you do have some tax payable even after other credits have been accounted for, then you can use the donation amount.
Any unused donations can be carried forward for up to 5 years, but can only be claimed once.
What Is A Donation Tax Receipt?
When you donate to a registered charity, you will receive a donation tax receipt. The Income Tax Regulations in Canada require that these receipts be identified as official donation receipts for income taxes.
In other words, you’ll need a receipt from the charity acknowledging your donation when you file your taxes. Thus, it’s important to ensure that your charity of choice is properly registered.
How Do You Get A Donation Tax Receipt?
Official donation tax receipts for charitable tax credits can only be issued by registered charities or other eligible donees in Canada.
Registered Charities
A registered charity is a charitable organization or foundation registered with the CRA that is exempt from paying income taxes. These charities receive a unique Registration Number from the CRA and can issue donation tax receipts to donors. Registered charities must be located in Canada and operate specifically for charitable purposes.
Qualified Donees
A qualified donee is an organization that is permitted to issue official donation receipts to individuals and corporations for charitable donations. These donees can include any of the following registered entities:
- Charities
- Certain Canadian amateur athletic associations
- Journalism organizations
- Housing corporations in Canada that provide low-cost housing for the elderly
- Municipalities in Canada
- Universities outside Canada with the majority of students from Canada
- UN and its agencies
- Charities outside Canada given a gift by His Majesty in right of Canada
Do All Donees Give Donation Tax Receipts?
Only qualified donees may issue official donation tax receipts. Qualified donees include registered charities or certain public organizations, such as an amateur athletic association.
Donees must receive their donations by December 31st for them to send out official donation receipts for that tax year.
Don’t agree with your Notice of Assessment? Consider filing a Notice Of Objection.
What Must Be Included In Your Donation Tax Receipt?
Donation receipts must include specific pieces of information when used for income tax purposes, depending on whether the donation was a cash gift or a non-cash gift:
Cash Gifts
- Statement showing that it is an official donation receipt for income tax
- Charity’s name and address
- Unique serial number
- Registration number from the CRA
- Location of receipt issuance
- Date the gift was issued and received
- Donor’s full name and address
- Gift amount
- Description of any benefit received by the donor
- Qualifying gift amount
- Signature of an authorized individual from the charity acknowledging the gift
- Name and website address of the CRA
Non-Cash Gifts
- Date the gift was received
- Description of the gift
- Name and address of the appraiser (if applicable)
Can You Get A Donation Tax Receipt For Volunteer Work?
Yes, but only under specific circumstances.
For instance, only tangible property donated as gifts can be eligible for a donation tax receipt. Gifts in the form of volunteer services do not qualify unless there is a clear reciprocity.
In addition, charities may issue an official donation tax receipt for income tax purposes if they pay for the service, and the donor then returns the payment in the form of a gift to the charity.
In this case, not only has a service been provided and payment received for the service, but a gift has also been given to the charity.
The Right To Reimbursement Can Help You Deduct Your Gas When You Volunteer
You can also write a written direction letter to the charity to confirm a right to reimbursement. This lets you direct the registered charity to issue a receipt rather than provide reimbursements for out-of-pocket expenses.
That means you might be able to write off your gas expenses when volunteering. It might also apply to other expenses too.
Can I Transfer My Donations To My Spouse Or Common-Law Partner?
Yes, you can potentially transfer your donations to your spouse if claiming them will not impact your balance owing or tax refund. Doing so may help you maximize your donation credit when done right.
Charitable donations can be pooled for both spouses to earn a bigger credit. The rate for the provincial tax credit increases with higher donation amounts. For example, in Ontario, the 2023 donation tax credit rate for the first $200 is 5.05%, then increases to 11.16% for amounts over $200.
Rather than each partner donating a smaller amount to the same charity, the funds can be combined and the donation can be claimed on one partner’s tax return to take advantage of a higher donation tax credit rate.
What If You Can’t Pay Your Taxes?
If you fail to pay your income taxes, interest on the outstanding amount will continue to accrue. A donation won’t help much here. You may also be subject to additional penalty fees. In severe cases, a tax lien may be placed on your property, which will make it difficult to sell your home until you’ve settled your tax issues.
If you’re finding it difficult to pay your taxes, there are some options to consider:
CRA Payment Arrangement
If you can’t come up with the funds needed to pay your taxes in one payment, you may be able to set up a payment arrangement with the CRA. Rather than making one lump sum payment, you can make installment payments spread out over time.
The payment amounts and time frame within which to fully pay your taxes are based on your ability to pay. Much like a loan, you’ll continue to make payments until your debt is paid in full, along with accumulated interest.
Get A Personal Loan
You can also apply for a personal loan and use the funds to cover your income tax payments. If you can snag an interest rate that’s lower than the interest you would be charged by the CRA for failing to pay your income taxes, a personal loan may be worth it, especially if you can’t make an alternative payment arrangement with the CRA.
The lower the rate, the better. Just be sure to shop around to find the best rate on a personal loan.
A Donation Tax Receipt Can Help You (And Others)
If you have the financial means to do so, it’s always a good gesture to give back in some way. Choosing a charity to donate to can be a great way to help others out, but it can also be a way to keep more money in your pocket come tax time. As long as your donation qualifies, you can use your donation tax receipt to claim the charitable tax credit to save on your taxes.
