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 running a marathon, 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. 

1. How Much You Can Claim

Individuals can claim donations up to 75% of their net income each year.
In the year of death (and the preceding year), this limit increases to 100% of net income.

2. Federal and Provincial Tax Credits

Charitable donations qualify for both federal and provincial tax credits, which vary depending on where you live.

For example, a $1,000 donation could provide an estimated tax credit of:

• $494 in Quebec

• $550 in Alberta

• $361 in Ontario

You can estimate your tax savings using the CanadaHelps Charitable Tax Credit Calculator. While it’s not an official CRA tool, it’s good way to estimate how much your donation will help you to save on taxes.

3. Carry Forward Unused Donations

If your total donations exceed the annual limit that you are allowed to contribute, or if your income is lower in a given year, you can carry forward unused donations for up to five years.
You can also combine donations from several years which helps you to maximize the credit.

4. Combine Donations Between Spouses

Spouses and common-law partners can combine their donations to take advantage of higher credit rates. Since the first $200 of donations receives a lower credit rate, combining donations on one return can result in a larger tax benefit.

5. Donate Only to Qualified Charities

To qualify for a tax credit, donations must be made to qualified donees, which include:

• Registered Canadian charities

• Certain registered municipalities, universities, and hospitals

• The United Nations and its agencies

• The Government of Canada (and certain provincial governments)

You can confirm an organization’s eligibility using the CRA’s Charities Listings database.

6. Donations to U.S. Charities

You can claim donations made to U.S. charities if you have U.S. source income. In that case, you may claim up to 75% of your U.S. income.
Unfortunately, donations to charities outside Canada or the U.S. are not eligible for a Canadian tax credit.

7. Self-Employed and Unincorporated Business Owners

If you’re self-employed or operate as a sole proprietor, your donations are claimed personally rather than as a business expense.
You would list your donations on Schedule 9 of your personal tax return to receive the credit.

8. Incorporated Business Owners

Corporations can also make charitable donations, up to 75% of the corporation’s net income.

While individuals donate from after-tax income, corporations donate from pre-tax income, which can make corporate donations more tax-efficient in certain cases.
Because small business tax rates (around 16–22%) are generally lower than top personal rates (over 50%), it might make sense to review your situation with your accountant to determine which approach gives you the maximum benefit.

9. Non-Cash Donations

Donations don’t have to be in cash. You can also donate publicly traded securities, land, or goods.
The fair market value of the donated property determines the amount of your tax credit.

In most cases, donating publicly traded securities is especially tax-efficient because capital gains on these securities will be exempt from tax.

Bonus: How Tax Software Can Help

Anyone who does their own tax return can take advantage of tax software that automatically handles:

• Calculating your donation tax credit

• Optimizing between spouses

• Tracking and applying carryforward donations

Through this optimization, tax software can help you reduce your tax bill.

Final Thoughts

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

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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