Charitable Donations Tax Credit

You might have figured out by now that the Government incentivizes behaviour with tax treatment. In other words, if they want to encourage something they will reduce taxes associated with that behaviour (like saving for retirement). If they want to discourage something they might apply extra taxes (sin taxes like on cigarettes).

Well, giving to charity is something that they would like to encourage so they provide a special Charitable Donation Tax Credit which can help to reduce your tax bill. The first $200 dollars receives a tax credit which is basically equivalent to the lowest combined marginal tax bracket in your province. Every dollar above that limit will generate a credit which is basically equivalent to the highest combined tax bracket for your province. There is a limit as to how much you can claim which is 75% of your net income for a given year except in the year of your death and the year before your death in which case it is 100% of your net income.

Frugal Trader from The Million Dollar Journey has a great summary of the Charitable Donation Tax Credits by province for both contributions under $200 and over. Click here to see his post on the subject and his neat and tidy chart.

If we look at Ontario, we will see that the first $200 donated will generate a 21.55% tax credit, or $200 x 21.55% = a tax savings of $43.10. The NEXT $200 would generate a tax credit of 46.41%, or $200 x 46.41% = a tax savings of $92.82. I only used the example of the next $200 to show the commensurate tax savings over the first $200 – you could donate much more than that if you want of course! :)

The donation must be made to a registered Canadian charity OR a qualified Donee – you can click here to CRA’s list of qualified donees and search through the database of registered charities. 

The Charitable Donations Tax Credit can be claimed by either spouse, and it can also be carried forward for the following five tax years. We’ll explore some basic strategies to take advantage of these rules in the next post, and as a prelude to a long series on charitable giving strategies that I’m writing for a charity to help them with fundraising.