The holiday season is a popular time to reflect on the past year and donate to the causes you care about. These types of donations don’t just help people and organizations in need; they confer a potential tax benefit on the giver.
Here’s a look at the tax benefits of charitable giving and how to qualify for a charitable tax credit to lower your taxable income.
Credits for charitable donations
Taxpayers who donate to qualified organizations can claim a tax credit of up to 75% of their net income. In most cases, these credits fall within a range of 20% to 49% of the amount you donated and can only be used to reduce the amount of taxes you pay and not as a tax refund.
You are eligible for a tax credit no matter how much you donate. Exactly how much you are eligible for depends on where you live, how much you gave, and your income. You’ll unlock much higher tax credit rates for any portion of a contribution that exceeds $200. On the federal level, your credit is 15% on the first $200 in donations and 29% for anything more than $200. Provinces have similar credits, which are between 4% and 24%, so what you qualify for may vary depending on which part of the country you live in.
How to claim a charitable tax credit
To claim the tax credit, you will need to report it on your federal and provincial tax return. To be eligible, donations must be made to qualified Canadian organizations, including registered charities and certain public organizations, such as an amateur athletic organization or a housing corporation providing low-cost housing.
You can claim these donations only once, but you do not necessarily need to claim them in the same year you contributed. You can carry them forward for up to five years (or 10 for a gift of ecologically sensitive land made after February 10, 2014).
This means you can essentially “bunch” your charitable contributions for up to five years for a significant tax credit one year, instead of smaller ones where you make your claims year by year. However, you do have to claim tax credits for the gifts you carried forward from a previous year before you can claim credits for gifts you give in the current year.
You’ll need an official receipt for all donations to claim them on your taxes. Most organizations will issue this to you at the time of your contribution. If you decide to carry forward contributions, make sure to keep a record of the eligible amount you are claiming this year and the amount you are carrying forward.
Another strategy to optimize your charitable tax credits is to combine your eligible donations with a spouse or common-law partner into one tax return. By pooling your donations together, you’re more likely to receive higher tax credit rates beyond the $200 threshold.
Keep in mind that charitable tax credits can only be used to reduce your taxable income and will not produce or increase your refund. For example, if you try to use your charitable tax credits during a year in which the amount of tax you owe is less than what your credits are worth, then you won’t receive the full possible benefit. In this case, it would make more sense to hang onto those credits and carry them over to a year when you have a higher tax bill.
Any charitable contribution to an organization in need is an act you can feel good about, and with a bit of planning and the right strategy, you can give to the causes that are important to you while also easing your tax burden.