9 Tax Facts about Charitable Donations for Individuals and Small Business Owners

Every good act is charity. A man's true wealth hereafter is the good that he does in this world to his fellows. - Moliere Unfortunately, the Canada Revenue Agency (CRA) has specific criteria for what qualifies as a charitable donation and not all good acts qualify for a tax benefit. Growing a moustache (although not without its costs) or supporting your charity case brother-in-law, are generally not considered to be a charitable donations according to the tax code. Luckily there are a multitude of charitable organizations that do qualify the donors to receive a tax credit for their donations.  Some details about the tax credit are discussed below: 

  1. Up to 75% of an individual’s net income can be claimed in charitable donations
  2. The first $200 of donations receive a tax benefit at the lowest tax rate in the province of declaration (except Quebec where the first $200 qualifies for a 20% tax benefit).  Donations in excess of $200 qualify for a tax credit at the highest tax rate, regardless of your income level.  A donation of $1,000 in Quebec will result in a tax credit(or reduction of taxes payable) of $494.  Note that these are non refundable tax credits i.e. they only apply to income taxes paid or payable. 
  3. Donations can be carried forward up to 5 years.
  4. Spouses are allowed to combine their donations, thereby allowing them to increase the credit available.
  5. Donations can only be made to qualified donnees, which are predominantly registered charities, but also include the United Nations and its agencies and the Government of Canada.  The full list is available here
  6. Donations to US Charities are allowed under certain circumstances listed here
  7. Unincorporated small business owners and self employed workers are subject to the same tax rules listed above.  Even if the donation is an expense of the business, for tax purposes you must list them as donations on Schedule 9 of your personal tax return where it will receive the same tax credit treatment.
  8. Incorporated business owners have the choice to donate personally or via their corporations. Since a corporate donation is treated exactly as any other expense, the choice largely depends on the respective tax rate of the corporation vs their personal tax rate.  Small business corporations that earn less than $500,000 in taxable income are subject to tax rates between 16% and 20% (depending on the province) whereas individuals are subject to tax rates up to 45%.  For individuals who expect to pay higher taxes it makes sense to claim the donation personally. For example $1,000 donation would result in a tax credit of $494 in Quebec ($361 in Ontario – see donation tax calculator).  The same donation, for a corporation that is eligible for the small business rate, results in a tax reduction of only about $200.  Each set of circumstances is different, however in the majority of cases where the taxpayer’s income threshold is high enough and a corporation eligible for the small business tax rate, it is better to donate personally.
  9. In addition to cash, donations of land, goods and listed securities are also eligible for the tax credit.  The fair market value of the property has to be determined (which might trigger a capital gain) .  The fair market value will then be used as the basis of the charitable donation.

The tax incentive for donating to charity is fairly generous (particularly if you live in Quebec) which reduces the effective cost of the donation significantly, making the act of giving (to a registered charity) both an emotionally and financially gratifying experience.

This article was included in Canadian Finance Carnival #64