As the year comes to a close, it’s time to start making last minute tax planning decisions. This may include deciding whether to make a holiday donation. Depending on your situation it may be the perfect time … or it may be best to wait until the new year.
To help you with your decision, here are some important things to consider.
- You’ve Already Made Donations This Year
If you have already donated this year and are thinking about making another donation soon, you may want to do it before the year is over. This is because the charitable donation tax credit increases with the amount of the donation.
For the first $200 in donations, you will receive a non-refundable tax credit of 15% from the federal government plus a corresponding provincial/territorial credit. Any amount that exceeds $200 will be eligible for a 29% non-refundable federal tax credit (33% if you’re in the highest tax bracket).
Example:
If you donated $200 in March of 2020 and another $200 in December of 2020, you would receive a federal tax credit of $88 in 2019.
2020 Tax Credit = $200 x 15% + $200 x 29% = $88
If instead you donated $200 in March of 2020 and $200 in January of 2021, you would only receive a tax credit of $30 in 2020. The remaining $30 would be claimable in 2021 giving you a total tax credit of $60 for the $400 donation.
2020 Tax Credit = $200 x 15% = $30
2021 Tax Credit = $200 x 15% = $30
If your total donations for the year will remain under the initial $200, you may be better off waiting to donate in the new year.
- Carrying Forward 2020 Donations
You may also want to consider carrying forward donations from 2020, instead of using them in the current tax year.
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.
You can carry forward donations for up to 5 years.
Example:
If you donate $200 in 2020 and $200 in 2021 and claim these amounts in the respective tax year, you would receive a total federal tax credit of $60 ($30 + $30).
2020 Tax Credit = $200 x 15% = $30
2021 Tax Credit = $200 x 15% = $30
If, however, you carry forward you 2020 donation of $200 to 2021, you would receive a tax credit of $88 in 2021.
Tax Credit = $200 x 15% + $200 x 29% = $88- Combining Charitable Donations to Optimize Your Tax Payable
You can 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 allows you to optimize the tax credit received for your donations, reducing taxes payable.
- Changes To Donations Of Cultural Property
Donations don’t have to be in the form of cash. You’re also able to donate property. To help encourage the donations of property that is significant to Canadian culture to institutions and public authorities, the government allows taxpayers to claim a charitable donation tax credit on the items.
Prior to March 2019, these gifts had to be of “national importance”. This is no longer the case.
The property does however have to be certified cultural property and the amount of the donation will be based on fair market value. The fair market value is determined by the Canadian Cultural Property Export Review Board.
For more information on tax planning using Charitable Donations, contact us today.
