Charitable giving and taxes

Canadians have a long tradition of giving back to their communities by donating to charity – while enjoying the associated tax benefits. In 2021, for example, just under five million Canadian tax filers reported and deducted donations of more than $11.8 billion.[1]

But are you making the most of the tax-saving opportunity when you contribute to your favourite cause? These tips may help you give more for less.

1. Check the registered charity list

Only organizations registered with the Canada Revenue Agency (CRA) can legally issue tax receipts. Altogether, the CRA has registered more than 86,000 charities,[2] so there are lots to choose from. Check that the ones you plan to support are on the list.

2. Make sure your gift qualifies

According to CRA guidelines, a gift to charity qualifies for a tax deduction when it’s a voluntary transfer of property without valuable consideration. In other words, the donor cannot expect something in return. The following are examples of qualifying gifts:

Cash
Gifts in kind (typically stocks, bonds and real estate)
Certified cultural property (works of art, historical or other cultural artifacts)
The proceeds of a life insurance contract

Gifts that don’t qualify include those that result in a personal benefit, gifts of personal time or services, and gifts with nominal value such as used clothing, old furniture or outdated computer parts.

The CRA also has specific criteria regarding the donation of property. For example, if a donor wants to give a building to a charity, the advantage to the donor can’t exceed 80 per cent of the value of the property transferred to the charity. If, for example, a building has a fair market value of $300,000, but it also has a mortgage of more than $240,000 that the charity will assume (advantage to the donor), the gift may not qualify.

Charities are allowed to give small gifts of appreciation to donors without reducing the tax-deductible amount of a donation. These gifts must generally not be worth more than $75 or 10 per cent of the donation’s value (whichever is less), though there are some exceptions.

3. Pool and defer gifts to maximize tax savings

The first $200 in qualifying donations you report on your tax return earns you a non-refundable federal tax credit of 15 per cent. Amounts above that get you a credit rate of 33 per cent to the extent your income exceeds the top marginal federal tax bracket; otherwise the federal tax credit rate of 29 per cent will apply on donations above $200. You’ll also get a non-refundable provincial/territorial tax credit that varies by jurisdiction.

For those who are married or in a common-law relationship, it might make sense to pool donations to maximize the amount that qualifies for the higher credit rate. In addition, since you can carry forward donations for up to five years (10 years for ecological gifts), it may also be a good idea to wait and claim all receipts once every five years.

4. Consider giving something other than cash

Using cash, a cheque or a credit card is a fast and easy way to donate – but a “gift in kind” may be much more tax-effective. Consider donating:

Stocks, bonds and other publicly listed securities
Segregated fund contracts
Real estate and other capital property
Certified cultural property, including art and historical artifacts
Ecological property that helps preserve Canada’s environmental heritage
Depreciable property such as equipment
Other assets of discernable value like the inventory of a business

With these donations, you’ll get a tax receipt for the fair market value. In the case of publicly traded securities and segregated fund contracts, you’ll also be exempt from paying capital gains tax if the asset is worth more today than it was when you bought it. With the other types of in-kind assets, capital gains taxes will apply. It’s important to seek professional tax advice if you’re considering donating a gift in kind.

5. Incorporate gifts into your financial planning

When you start considering charitable gifts as part of your overall financial plan, you can work with your advisor to uncover additional ways to give generously and save taxes.

For example, you may want to designate a charity as the beneficiary of your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). This can be an effective tax-planning strategy when there is no spouse to inherit the RRSP/RRIF, because the donation tax credit can eliminate taxes due when the value of the registered plan is reported as income at death.

You can also consider a charitable gift annuity that provides you with a guaranteed level of income for life and can provide an immediate gift to charity if you choose – all from the same source of capital. In this case, the donor receives a tax receipt equal to the amount donated less the cost of the annuity and is taxed only on the interest portion of each annuity payment received.

In addition, insurance can be a tax-effective way to fund gifts to charity. You can set up a permanent life insurance policy on your life, naming the charity as the owner and beneficiary. You pay the tax-receipted premiums and, on death, the proceeds of the policy pass directly to the charity, providing a substantial gift you may not have been able to make otherwise.

Speak with your advisor

Maximizing tax savings when donating to charity requires a bit of time and effort – but it’s well worth it because paying less tax means you can donate more, invest more or leave more as a legacy for your family. Speak with your advisor and accountant about which strategies work best for your situation.

What is fair market value?

The CRA defines fair market value (FMV) as the highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.

This term is commonly used in real estate and tax matters. For example, a homeowner’s property taxes are generally based on the FMV of their property.

Source: Determining fair market value of non-cash gifts

[1] Statistics Canada, “Charitable donors, 2021,” The Daily, March 14, 2023, catalogue no. 11-001-X, https://www150.statcan.gc.ca/n1/daily-quotidien/230314/dq230314c-eng.htm.

[2] https://www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/ministerial-transition-2021/issues/charitable-sector.html

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