Donations

While we generally donate to charities because we want to help others, there are tax incentives we should be aware of and make use of. In order to do so, we also have certain responsibilities in respect of such donations.

A charitable donation is a "voluntary transfer of money or property without any expectation of return". It may be in the form of cash or a gift in kind such as securities, certified cultural property, life insurance policies, real estate, residual property, etc. Donations may also be made at the time of death via the taxpayer's will. A gift in kind is generally valued based on its fair market value at the time of disposition. There are special rules for donating capital property, in particular the ability to select a value between the cost and the fair market value. Despite the need for and importance of volunteers, volunteering one's time or services does not qualify for tax credits.

The donor is responsible for ensuring the recipient of the donation is a qualified donee. Qualified recipients include:
- Canadian Registered Charities;
- Certain universities outside Canada;
- Registered Canadian amateur athletic associations;
- Tax exempt housing corporations resident in Canada that only provide low-cost housing for seniors;
- Canadian municipalities;
- Certain gifts to Canada, a province or a territory;
- Registered national arts service organizations;
- The United Nations or its agencies; and
- Charitable organizations outside of Canada to which the Government of Canada made a donation in the tax year, or in the previous tax year.

Individuals who make charitable donations are entitled to a federal tax credit at a rate of 16% on the first $200 of donations and 29% for donations in excess of $200. For most provinces and territories, the tax rate that applies to the lowest income bracket will apply to the first $200 of donations and the rate that applies to the top income bracket will apply to donations in excess of $200.

Qualifying donations are generally limited to 75% of an individual's net income for the year, plus 25% of capital gains from gifts and 25% of recapture from depreciable property gifted. The 75% limit is increased to 100% in the year of death.

Each form of donation has different tax implications for both the donor and the donee. Cash is the most commonly-used form; but the donation of securities may be a preferable option for some donors. The federal government has cut in half any capital gains owed on donations of qualifying securities (generally meaning a security listed on a stock exchange and mutual funds). If the donor is already planning to sell such securities and donate cash, it could be beneficial to donate the securities directly. The donor would be taxable on 1/4 of the capital gain (rather than 1/2) and the value of the donation itself would not change.

Tax credits for donations made may be claimed in the year of donation or carried forward up to five years. For some, it may be worthwhile accumulating donations so as to minimize the 16% federal credit (on first $200 of donations) and maximize the higher credit. It is also advisable for spouses to combine their donations and claim them all on one return. If reported separately on their respective tax returns, each must exceed $200 before obtaining the higher tax credit. By claiming together on one return, that $200 at 16% occurs only once.

To obtain general information on donating, including a feature to search the listing of Canadian Registered Charities, check the Canada Revenue Agency's Charities Directorate page.

Caren MacLeod
Scott Rankin & Gardiner
www.srgg.com