The Charitable Donations Tax Credit Explained
Many of us like to help others. Charitable donations can be a great way to improve your community and give those in need a helping hand. On top of that, you can also receive a tax credit for your good efforts. While most of us don’t give just to get a tax benefit, it’s a nice bonus that you can take advantage of.
What Charitable Donations Qualify for a Credit?
First of all, you need to make sure that your donations are going to registered charities. If you want to claim the credit, the charity needs to be registered.
The first $200 of charitable donations you claim are eligible for a 15% federal tax credit and any amount over that receives a 29% federal tax credit. The government clearly wants to encourage you to give generously. Where you have some room to make this work to your advantage, without donating more than you would have, is that you do not need to claim your donations in the current year, as you can claim up to 5 years later.
So let’s say your total donations each year are $200. If you claim this amount each year, it would give you a $30 tax credit every year totaling $180 over 6 years. If you were to save all your receipts and file on the 6th year, your eligible donations would total $1,200. This would provide a tax credit of $320: $30 on the first $200 and $290 on the remaining $1,000. In this example, by holding your receipts for 6 years, you get an extra $140 back on the total donations. You could max this out a bit more by making extra donations before December 31st of the final year, possibly with the donations you would have made in the following year.
By saving your receipts you can optimize the tax credit you receive on charitable donations you make to registered charities. However, you do need to realize that your credit is non-refundable. That means that you can only use it to reduce your tax owed. Once you hit $0, you don’t receive the benefit.
It’s also worth noting that you can also receive a tax credit on your provincial return. The tax credit rate might be different from the federal rate, so make sure that you understand that works in your province. You can also boost your tax efficiency by saving on capital gains taxes by donating public traded securities.
Documenting Your Charitable Donations
As always, it’s important to document your donations. The CRA wants to know that you really did make those donations. When you file electronically, you need to keep your receipts from registered charities with your copy of your return. Keep this information for five years. If you file by paper, you need send in your receipts along with your Schedule 9. Make sure that you keep copies, though, since you want to have your own records of your donations. If you are carrying forward, you will need to include a note that explains the portion you are claiming this year.
If you carry forward your charitable donations, you want to make sure you keep very good records, since you don’t want to miss out next year, or accidentally claim a portion of your donations twice. A dependable filing system can ensure that you protect yourself while getting the best possible tax efficiency.