The Price of Kindness: Charitable Contributions

All references to a spouse include common-law partners. All references to the ‘Act’ or the 'ITA' mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ or the 'ITR' mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised. Please contact us to discuss the contents of the article herein.

Good morning, Toronto! It is no secret that many Canadians are generous. As the year draws to a close, many people may be considering donating to their local food bank, nonprofit, or charitable organization. Today, we kick off a new series that will examine the treatment of charity within the Canadian tax system. Today's article will address charitable giving within the personal tax system, with the following articles discussing how charitable giving is incentivized and how charity is used as an effective tool to eliminate taxes.

Within Canada, the terms ‘non-profit organization’ and charity are often used interchangeably to describe a charitable organization that serves the community. However, Canadian law recognizes that there is a distinct difference between the two. A non-profit organization (NPO) is an organization that operates for purposes other than generating a profit. Generally, NPOs operate for social welfare, civic improvement, pleasure, and/or recreation purposes. On the other hand, a charity is an NPO that is registered with the CRA’s Charities Directorate. All charities are NPOs, but not all NPOs are charities.

While the Act does not define the definition of a ‘gift’, extensive litigation has prompted the courts to clarify its meaning. In Queen v. Friedberg, before the Federal Court of Appeals, it was clarified that a gift must meet all of the following:

• Be made with donative intent (given voluntarily without the expectation of material benefit); AND
• The property is voluntarily transferred by the donor; AND
• The transferred property was owned by the donor at the time of gifting; AND
• There is no benefit or consideration given to the donor for the property.

Further, many Canadian's assume that a gift made to either an NPO or a charity entitles them to a donation receipt. In actuality, a donation is only receiptable if it is made to a qualified donee (organizations that are empowered to issue donation receipts), as defined in ITA §149.1(1). Common examples of qualified donees include all charities, Canadian amateur athletic associations, and the United Nations (and associated agencies). Political organizations (such as parties) are not qualified donees and are treatly seperately for taxation purposes. While some NPOs are qualified donees, the vast majority are not. Thus, gifts that are made to an NPO that is NOT a qualified donee will NOT qualify for an official donation receipt.

A donation receipt is only issued for the eligible amount of the gift. The Act defines this to be the FMV of the property on the day it was donated, LESS any 'advantage' (value of goods or services provided for the donation) given to the donor.

The federal charitable donation is a non-refundable tax credit that is calculated in two tiers. The first $200 of eligible donations receives a federal tax credit equivalent to the lowest tax bracket (currently 14.5%), while amounts above $200 receive a 29% credit. For taxpayers whose taxable income is in the top federal bracket (above $253,414), the tax credit on donations above $200 increases to 33% for the lesser of:

• The amount of income taxed at the top bracket; OR
• The amount of the donation.

Any eligible amounts that do not qualify for the 33% rate are simply credited at 29%. In Ontario, the process is simplified: a tax credit of 5.05% on the first $200 of eligible donations and 11.16% on the balance.

Despite these calculations, donations do not need to be claimed in the year that they are made. Donations can be carried forward for up to five years. This may be useful when large donations are made, as, for example, donations claimed cannot exceed 75% of net income in a given tax year. Finally, spouses can choose to share donations and allocate the credit between themselves accordingly.

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Too complicated? No worries! KLee Tax specializes in filing tax returns and tax advisory for individuals, businesses, and corporations. Whether you are working your first job, running a business, or an NPO looking to make a difference, you can be sure that KLee Tax will be there for your tax needs, when and where you need us.

Contact us below for a consultation or to discuss the contents of this article!