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Tax Benefits of Charitable Donations

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Introduction

There are many good reasons to give to charity, including concern for others, belief in a cause, and community involvement, but did you know that 23% of Canadians who donate to organizations do so to receive a tax credit?

For those who donate to charity, Canada provides a significant tax credit scheme. Canadians are a giving lot, whether it’s donating food to the food bank, volunteering at a shelter, or taking part in a walkathon. Your gift may result in a tax deduction in addition to the wonderful feeling of knowing you’ve made a difference. If you’ve been intending to, now is a perfect opportunity to start giving to your favourite charity.

Up to 33 percent of the total amount you give to charity at the federal level may be eligible for the charitable donation tax credit. Depending on your province of residence, you may also be eligible for an extra sum of up to 24 percent of your gift.

So, understand the tax credit in more detail. 

What are Charitable Tax Credits?

The federal government of Canada permits you to claim non-refundable charity tax credits for gifts you make to registered charities.

A tax credit is a decrease in the amount of taxes you owe to the provincial and federal governments of Canada. When it comes to charity tax credits, this implies that a portion of your gift gets returned to you in the form of a tax refund rather than more money added to your next paycheck.

Who qualifies for the Donation tax credit?

A gift that receives no payment in return is referred to as a donation. You can donate money or anything else of value, such as real estate, stocks, gifts that promote culture and the environment, etc. If you receive something in exchange for your gift, such as concert tickets, the value of what you got must be deducted from the donation amount, and you can only claim the CDTC for the amount that is left over.

How can I claim my donations?

Report it on your federal and provincial tax returns to get your credit. Generally speaking, your federal tax credit will be equal to 15% of your first $200 in donations and 29% of your subsequent gifts. If you are in the highest tax band, the credit might increase to 33 percent under specific conditions. Similar credits, which range between 4 and 24 percent, are likewise shared by all provinces. The CRA offers an online tool to compute your credit, including the provincial component.

What tax consequences does the contribution credit have?

Tax credits for donations and gifts are not refundable. This implies that you must first use your other credits. You won’t be able to utilize your charitable contributions to start or boost your tax refund if that sum is enough to make your tax payable zero. You may utilize all or a portion of the gift amount if there is still tax due. You may carry over unused donations for up to five years, but keep in mind that you may only claim donations once.

The benefits of giving donations: 

Federal and provincial tax incentives add up

Donate securities, eliminate the capital gains tax and get a larger tax credit.

The most effective way to donate to charity is through securities. You can avoid paying capital gains tax when selling publicly traded assets (such as stocks, mutual funds, bonds, etc.) to your favourite charity by donating them directly, and you’ll still get a tax return for their fair market value on the day the security is received by our broker. Additionally, the full value of the securities is given to your charity.

Consider carrying donations forward for larger charitable tax credits

Not every donation you make needs to be claimed in the year it was made. When you make a donation of more than $200, you are immediately qualified to carry it forward and deduct it from your taxes for any of the following five years. Due to this flexibility, you could be able to claim a bigger tax deduction in the future for the unclaimed carry-forward component.

Conclusion 

In this blog, we have covered an important topic, the tax benefit of charitable donations in Canada. The federal government of Canada permits you to claim non-refundable charity tax credits for gifts you make to registered charities. A tax credit is a decrease in the amount of taxes you owe to the provincial and federal governments of Canada. Up to 33 percent of the total amount you give to charity at the federal level may be eligible for the charitable donations tax credit. Tax credits for donations and gifts are not refundable. This implies that you must first use your other credits.

The most effective way to donate to charity is through securities. You can avoid paying capital gains tax when selling publicly traded assets (such as stocks, mutual funds, and bonds) to your favourite charity.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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