The tax benefits of giving

People make donations for all sorts of reasons. For some it is the mission of the organization, while for others it’s how their gift will have an immediate impact. Some are motivated because of the people involved or because of the way they feel after making a gift. The reasons for giving are endless and deeply personal. What appeals to one person might have absolutely no impact on another.

What is often overlooked – and is not likely the top motivator – is the tax benefit derived from making a gift to a charity. The truth is, many people overlook the tax advantage when making a gift, and may not know that they are eligible to claim their gift when preparing their income tax return.

According to the Canada Revenue Agency, only 19 per cent of tax-filers claimed charitable gifts in 2021, down from nearly a third of filers just 15 years ago. And yet, giving can have a very favorable impact on one’s income tax, as the government provides generous tax credits to donors.

The tax credits are non-refundable but help reduce the amount of tax owing by about 40 per cent for the average tax-filer. Of course, if you do not owe any tax then the credit does not apply to you, though I cannot think of too many circumstances in which one would not owe any tax.

To calculate your tax credit, you need to determine the eligible amount based on your province of residence. There are two charitable tax credit rates for both the federal government and the provinces and territories. Any eligible amount you give above $200 qualifies you for a higher rate. The following example shows the available credit for a donor in the Diocese of Toronto who gave the average annual offertory gift in 2021 ($1,775):

1. The federal charitable tax credit rate is 15 per cent on the first $200 and 29 per cent on the remaining $200. The federal tax credit is therefore (15 per cent × $200) + (29 per cent × $1,575) = $486.75.
2. The provincial charitable tax credit rates for Ontario are 5.05 per cent on the first $200 and 11.16 per cent on the remaining $200. Therefore, the provincial tax credit is (5.05 per cent × $200) + (11.16 per cent × $1575) = $185.87.
3. The combined charitable tax credit is $486.75 + $185.87 = $672.62. This equals 37.89 per cent of the total gift amount. This tax credit is increased to 41.4 per cent if you pay provincial surtaxes.

The tax credits provide an incentive to give and encourages generosity. For those oriented toward altruism – the idea that giving should be done freely without any expectation of return – the tax credit can be used as an additional gift, such that they might give extra to compensate for the tax credit gained. Or they could choose to not submit their receipts at all.

All cash gifts qualify for these tax credits, including gifts of marketable securities. Normally a capital gains tax is applied to investment held outside of RRSPs or Tax-Free Savings Accounts. This tax is waived when securities are gifted, and the tax credit will still apply. For those disposed to use this method of giving, significant tax is thus reduced. Many of the largest gifts received by the Church come in the form of marketable securities, as they provide an effective way to grow and manage one’s personal wealth.

Regardless of what vehicle the donor chooses to make in support of the ministry of the Church, there are important tax implications to your giving. They might actually encourage you to give a bit more.