9 Tax Facts about Charitable Donations for Individuals and Small Business Owners

Every good act is charity. A man's true wealth hereafter is the good that he does in this world to his fellows. - Moliere. Unfortunately, the Canada Revenue Agency (CRA) has specific criteria for what qualifies as a charitable donation and not all good acts qualify for a tax benefit. Growing a moustache (although not without its costs) or running a marathon, are generally not considered to be a charitable donations according to the tax code. Luckily there are a multitude of charitable organizations that do qualify the donors to receive a tax credit for their donations.  Some facts about the tax credit are discussed below: 

1. Up to 75% of an individual’s net income can be claimed in charitable donations. In the year of an individual’s death up to 100% of their net income may be claimed in donations.

2. Donation tax credits vary by province. A donation of $1,000, assuming that you have met the net income threshold of 75%, will result in a tax credit of $494 in Quebec, $450 in Alberta and $361 in Ontario. A tax calculator can be found at CRA. Although the latest year reflected is 2017, since the rules have not changed, the calculation is still valid.

3. Donations can be carried forward up to 5 years allowing taxpayers with high donations and low taxable income to optimize donations in a future year if it results in a higher benefit.

4. Spouses are allowed to combine their donations, thereby allowing them to optimize their taxes. They may allocate the credit available to the spouse which nets them the highest tax credit.

5. Donations can only be made to qualified donees, which are predominantly registered charities, but also include the United Nations and its agencies and the Government of Canada. The full list is available here

6. Donations to US Charities are allowed if you or your business has US source income. In this case the donation can be claimed at 75% of US income. Donations to non Canadian or non American charities are not eligible for a tax credit

7. Unincorporated small business owners and self employed workers are subject to the same tax rules listed above. Even if the donation is an expense of the business, for tax purposes you must list them as donations on Schedule 9 of your personal tax return where it will receive the same tax credit treatment.

8. Incorporated business owners have the choice to donate personally or via their corporations. Note that corporate donations are also limited to 75% of the net income of a corporation. Small business corporations that earn less than $500,000 in taxable income are subject to tax rates between 16% and 22% (depending on the province) whereas individuals at the highest marginal tax rate are subject to tax rates over 50%. At first glance it would seem that a personal donation would result in a higher benefit than a corporate donation, however since donations are made from pre-tax income through a corporation vs after tax income personally, this is not always the case. A good analysis of can be found here

9. In addition to cash, donations of land, goods and listed securities are also eligible for the tax credit. The fair market value of the property has to be determined, which might trigger a capital gain and result in a higher taxes payable . The fair market value will then be used as the basis of the charitable donation which can offset the additional tax cost..

Although some of these rules might sound complicated, a good tax software will usually automatically deal with the application of the credit, the optimization between spouses and the carryforward of charitable contributions.

The tax incentive for donating to charity is fairly generous (particularly if you live in Quebec) reducing the effective cost of the donation significantly and making the act of giving (to a registered charity) both an emotionally and financially gratifying experience.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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