Many people in Ontario have charitable causes that they care deeply about. Supporting these causes is a meaningful way to give back and make a positive impact on others. In Ontario alone, there are more than 30,000 registered charities. These organizations are funded through a combination of government contributions and donations from residents.

To encourage charitable giving, the government provides tax credits to individuals who make donations, allowing taxpayers to deduct their charitable contributions from their taxable income. There are specific rules that apply to the tax treatment of donations, and by using smart strategies when giving to charity, you can both maximize your tax credit and extend the reach of your donation to better support the causes you value most.

Let’s explore how the rules for charitable donations work and some practical ways to make your donation dollars go further.

In this article: 

• Understanding the Tax Credit Structure
• Donating Things Other Than Cash
• What About Life Insurance?
• We Don’t Donate to Charities Solely for the Tax Credit….
• Final Thoughts

Understanding the Tax Credit Structure

Residents of each province in Canada pay income taxes at two levels: federal and provincial. When you make a donation to a registered charity, it generates a non-refundable tax credit.

As a side note, a non-refundable tax credit is one that will not be reimbursed if your total credits exceed the amount of tax you owe. For example, if you have $3,000 worth of these credits but owe only $2,000 in taxes, you will reduce your tax payable to zero but will not receive a refund for the remaining $1,000.

Why is this important? To maximize your tax return, it helps to know that you are not required to claim charitable donations in the same year you make them. You can claim them in any of the five years following the donation. This allows you to spread out your charitable credits to reduce taxes in future years instead of losing any excess credit amounts.

Now, let’s look at how the credit amounts work:

• Federal Tax Credits:
  • 15% for the first $200
  • 29% on amounts above $200 (this goes up to 33% if your taxable income is more than $214,368)
• Ontario Tax Credits:
  • 5.05% on the first $200
  • 11.16% on amounts over $200

For example, if you donated $1,000 in Ontario, you would receive a tax credit of $361.38 that can be applied against your taxable income. Each year, there are limits on how much of your net income you can claim credits for.

To ensure your charitable donation tax credits are handled correctly, reach out to the experts at Strata Accounting. They can help you stay within CRA guidelines while still maximizing your tax return.

Donating Things Other Than Cash

There are ways to support charities and still receive tax advantages by donating assets other than cash. Your financial advisor and tax professional can help determine whether these strategies make sense for your personal situation. Here are a few examples:

• Donating securities or other assets that have grown in value: For example, if you own a stock that has appreciated significantly and, after consulting with your tax team, determine there’s no reasonable way to sell it without triggering capital gains tax, you can choose to donate the stock directly to a charity. This approach benefits you in two ways. First, you avoid triggering the capital gains tax, and second, you still receive a donation receipt for the full market value of the stock you donated.
• You may also be able to donate items such as artwork, jewelry, or vehicles and receive a donation receipt for the fair market value of the asset. Once again, consult your tax advisor to ensure this strategy makes sense for your situation.
• Have your financial advisor help you set up a Donor-Advised Fund: This type of investment plan allows you to deposit cash or assets now, claim the tax receipts immediately, and then decide over time which charities to support through grants. One major advantage of this kind of fund is that your contributions can grow over the years, and the growth itself is also donated to charitable causes. As time passes and your original deposits are distributed, your support continues through the fund. This approach can even create a lasting legacy, allowing you to support the causes you care about long after your lifetime.

What About Life Insurance?

Life insurance can be a highly valuable source of funding for charities. Many charitable organizations even include information about this on their websites, showing how much they appreciate this type of support.

There are two main ways to use a life insurance policy to benefit a charity. The key factor in deciding which method to use often depends on when you would like to receive the tax receipt for your donation.

• If you want the donation receipt immediately: To achieve this, you can donate an existing life insurance policy to a charity by transferring ownership of the policy to them. In doing so, you receive a donation credit for the fair market value (FMV) of the policy. It’s important to note that this value is not always the same as the policy’s cash value. Depending on your age and health, the FMV can be higher, but an actuarial evaluation is required to determine this. If premiums are still due on the policy, the charity becomes responsible for paying them. However, you can arrange to continue making the premium payments yourself and receive a donation credit each year for those payments. When you pass away, the charity (if named as the beneficiary) receives the death benefit. No additional receipt is issued for this amount.
• If you want the donation receipt to help with estate taxes: If you are concerned about the amount of income tax your estate will owe on your final tax return, you can use life insurance to help offset this. In this case, you keep ownership of the policy and name the charity you wish to support as the beneficiary. There are no ongoing tax receipts for the premium payments, but when the policyholder passes away and the charity receives the proceeds, a donation receipt is issued for the full amount the charity receives.

In both examples, the charity receives the death benefit payment from the policy, resulting in a significant donation upon the passing of the insured. This creates a lasting legacy that can continue to make an impact for many years into the future.

We Don’t Donate to Charities Solely for the Tax Credit….

We may not give to charity for the tax credit, but we certainly appreciate the benefit that comes with it. With that in mind, there are several ways to optimize your donation strategy to maximize tax efficiency. In addition to the strategies already mentioned, you might consider ideas like these to further enhance both your tax relief and charitable impact:

• You can focus on making less frequent but larger donations. Instead of giving small amounts each year, consider saving your funds for a few years and making one larger contribution. This approach allows you to qualify for higher tax credit percentages and can help reduce your taxes more effectively.
• You can also try to time your donations strategically. If you know that your taxable income will be higher than usual in a given year, consider making your charitable contribution during that time. When combined with the previous strategy, this approach can help you maximize the tax relief from the funds you use to support your chosen charity.
• You can combine donation amounts. If both you and your spouse make charitable contributions, you can claim the total amount on the higher income earner’s tax return. This approach helps maximize the overall tax relief for your household.

Final Thoughts

Supporting your favourite charities is a noble endeavor. There are countless worthwhile causes that rely on donor support to continue providing people and animals with the help they need to live their lives. The fact that there are tax advantages for contributing to these organizations is simply the icing on the cake for those who already value giving back to their community.

If this sounds like you, take the time to talk with your team of professional advisors to see whether any of the strategies mentioned here could help improve your tax efficiency. The team at the Strata Group of Companies is a great place to start if you don’t already have someone you’re working with, given the strong collaboration between Strata Wealth & Risk Management and Strata Accounting. The experts there take the time to understand your goals and the causes you care about, helping you find the most tax-efficient ways to give.

If there are causes close to your heart, this is definitely a conversation worth having.