The holiday season is here. This season of giving will see many of us making last-minute donations to charities and organizations which help make the holidays special for every individual and family in our community.
It also represents the perfect time to donate to other charities that are important to you, whether they support medical research, affordable housing, community centers or any of the other causes that are close to our hearts.
In Canada, the Donation Tax Credit is a two-level credit. This means that the percentage received as a credit increases as your donation amount increases. Looking at the federal tax credit, for the first $200 you donate to eligible charities, you will receive a 15% non-refundable tax credit.
For any amount over this initial $200 donation, you will receive a 29% tax credit (for taxpayers with a taxable income of $210,371 this increases to 33%).
As a result, taxpayers will optimize their after-tax position if they are able to make their donations in a single tax year - instead of spreading it out over multiple years.
Example
If you donated $200 in March of 2019 and $200 in January of 2020, you would only receive a tax credit of $30 in 2019. The remaining $30 would be claimable in 2020 giving you a total tax credit of $60 for the $400 donation.
2019 Tax Credit = $200 x 15% = $30
2020 Tax Credit = $200 x 15% = $30
If, instead, you donated $200 in March of 2019 and another $200 in December of 2019, you would receive a federal tax credit of $88 in 2019.
2019 Tax Credit = $200 x 15% + $200 x 29% = $88
If your planned donations for 2019 are below $200, or you are not able to make additional donations until later in 2020, you also have the option of carrying forward your donations up to five years. While this means you won’t be able to take advantage of a credit in the current year, the aggregate amount of multiple years will result in a greater credit overall.
Example
If you donate $150 in 2019 and $150 in 2020 and claim these amounts in the respective tax year, you would receive a federal tax credit of $45 ($22.50 + $22.50) in 2019.
2019 Tax Credit = $150 x 15% = $22.50
2020 Tax Credit = $150 x 15% = $22.50
If, however, you carry forward your 2019 donation of $150 to 2020, you would receive a tax credit of $59 in 2020.
2020 Tax Credit = $200 x 15% + $100 x 29% = $30 + $29 = $59
Lastly, in addition to optimizing your own tax return, you also have the option to combine any eligible charitable donations made by you and your spouse or common-law partner and claim them on a single return (generally they should be claimed on the spouse who earns a higher income). This will further allow you to optimize the tax credit received for your donations, reducing taxes payable.
Example
If you donated $200 in March of 2019 and your spouse or common-law-partner $200 in August 2019, you would each receive a tax credit of $30 in 2019 for a total household credit of $60.
Your 2019 Tax Credit = $200 x 15% = $30
Spouse/Common-Law-Partner’s Tax Credit = $200 x 15% = $30
If, instead, the spouse/common-law-partner with the highest income claims all the donations, your household credit would total $88 in 2019.
2019 Tax Credit = $200 x 15% + $200 x 29% = $88
For more information on claiming charitable donations and which strategy best suits your unique circumstances, please contact Koroll & Company today.
