December is the season of giving. Gifts, baked goods, kind greeting and charitable donations. It’s convenient that Christmas lines up with the end of the tax year. Why? Both provide an incentive to make donations to charities.
You probably know that you get a tax credit when you make a donation. But do you know just how generous that tax credit is? Very generous. In fact, if you do some quick math just before you hit the “Donate” button of your charity of choice, you might add a bit more money to that donation amount.
The donation tax credit is just that – a credit. Don’t confuse it with a deduction. A tax deduction is an amount you take off your income so that you have lower taxable income and pay less in taxes. A deduction benefits higher income people more than lower income people because higher income folks pay a higher tax rate than lower income people. Examples of tax deductions include RRSP and pension contributions, rental expenses, business-related expenses, and childcare expenses
A tax credit on the other hand is an offset to the taxes you owe. It’s calculated as a percent of whatever item you’re getting a credit for. This means that everyone gets the same benefit (mostly). Examples of tax credits include the medical expense tax credit and the donation tax credit.
While we’re at it, let’s define “non-refundable tax credit”. This kind of tax credit offsets taxes you owe but if the credit is greater than the tax you owe, you won’t get a refund. A refundable tax credit on the other hand allows you to go into “negative taxes” territory and get a refund. The donation tax credit is a non-refundable tax credit.
Now that we have that boring stuff out of the way, let’s answer the question, “How does this affect me?”
When you make a donation to a charity, you get both a Federal and Provincial tax credit. For simplicity, I’ll use my province, Ontario, as an example. The Federal tax credit is 15% on the first $200 of your donation and 29% on the rest. So for a $1,500 donation, that’s $407. The Ontario tax credit of $155 is calculated as 5.05% on the first $200 and 11.16% on the rest. Combined you’ll get a $562 reduction in your tax bill. That’s a 37% benefit.
Ontario actually has the lowest donation tax credit. If you live in Alberta, you’ll get a hefty $800 tax credit and our friends in Newfoundland get $707. You can use an online calculator to do the math for you.
If I make a $1,500 donation and get $562 back in taxes, my donation actually costs me $938. Now I have a choice: should I make a bigger donation? If I feel like I can afford $1,500, maybe I should give $2,550 which amounts to an out-of-pocket cost of around $1,500.
Whether you choose to do that or not, the donation tax credit makes giving a lot more attractive.
Here are a couple of more things that make it financially rewarding.
If you are married or have a common-law partner, you can pool your donations and have one person claim the credit. This means that only the first $200 of the combined donations is taxed at the low rate instead of both of your receiving only a low credit on the first $200.
You can also choose to claim the donation in a future year, adding up to five years’ worth of donations together to claim in one year.
Here’s another idea: donate stocks or mutual funds. This might sound like something only the super wealthy do, but actually many people would benefit. If you bought some Apple stock at $41 dollars five years ago and still own it today at $198, you might have some pretty serious capital gains. If you hold this outside of a registered account like an RRSP or TFSA, you’ll have to pay tax on half of your gains when you sell your stock. However, did you know that you can actually donate this stock to a charity and avoid paying any tax on the capital gains? And on top of that, you get the donation tax credit based on the market value of the shares. For anyone who has a big capital gain and was planning on making a donation anyway, this can be a great idea.
I had a look to see if the charity I donate to every year, The Canadian Women’s Foundation, accepts donations of stock. Yes, they do. Ditto other charities I checked with like Red Cross and Doctors Without Borders. It looks like a pretty simple process.
Looking at the calendar, I see it’s December 14 today. It’s easy to lose track of the date at the best of times – at this time of the year, time slips through our fingers. So if you’re thinking of making a donation of offset some of your taxes in 2023, you’ll need to get on top this. The deadline to donate is December 31 for this tax year.