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Make the most of your charitable donations on your tax return

Donating to charity isn't just good for others, it can be good for you financially, too. (Thinkstock)

While Canadians may be scrambling to get their taxes done, there’s a break they can still catch – while helping make the world a better place.

Charitable donations don’t just benefit the organizations you support; they also help reduce the amount of money you owe to Revenue Canada.

It seems that many Canadians are opening up their wallets to help charities, with just over 25 per cent claiming donations as of April 4, according to TurboTax.

The average donation amount was $1,135 – $100 higher than the amount claimed by the beginning of April last year.

The most generous residents, by provinces and territories, are those in Nunavut, who have claimed the highest average donation amount so far, at $1,509.34. That is followed by those in Alberta ($1,384.64) and Manitoba ($1,244.81).

By city, people in Montreal have handed over the most, with an average donation amount as of April 4 of $1,732.57, followed by Iqaluit ($1,653.32) and Regina ($1,332.02).

Charitable donations are a non-refundable tax credit that go against taxes due and can help reduce your tax obligation. Simply put, the more you donate, the more you can reduce the amount of tax due.

“Making meaningful donations can save you taxes and be rewarding at the same time as it supports causes that are close to your heart,” says David Lee, financial advisor with BlueShore Financial. “By making a difference, this can be a win-win,”

Canadians receive a 15 percent federal tax credit for their first $200 of donations and 29 percent for any amount over. Once you add in provincial credits, your tax savings could be between 40 and 50 percent depending on what province you live in, explains Caroline Battista, senior tax analyst at H&R Block.

“You can combine your donations with your spouse so that the $200 threshold is only applied once,” Battista says. “You can claim them either in the year you make the donation or in any of the five subsequent years, which can give you more bang for your buck.”

Big boost for first-time donors

Many people may not be aware of the First Time Super Donor Credit, which is only available until 2017. You’re considered a “first-time donor” if neither you nor your spouse claimed a charitable donation tax credit in any of the five previous years. First time donors can get a one-time opportunity to claim an additional 25 per cent federal tax credit on up to $1,000 in donations.

“This would provide younger individuals an extra tax incentive to make meaningful donations. I recommend individuals take advantage of this temporary tax credit while it's available,” Lee says, noting that people should go over their own circumstances with a tax or financial advisor. “In addition to the federal non-refundable tax credit, individuals may be entitled to provincial non-refundable tax credits.”

Generally you can claim all of your donations up to a limit of 75 per cent of your net income.

“There is an exception for ecological or cultural gifts, for which there is no limit,” Battista says. “The limit for gifts of capital property is 100 per cent of the property’s taxable capital gain.”

When to claim?

There are things to consider when it comes to deciding when to claim a deduction and when to carry it forward,

“If you owe taxes this year, the credits from charitable donations will help you offset your tax bill. But they are a non-refundable credit, so if you don’t owe any tax you should hold on to them to use in a later year,” Battista says.

Donations can be carried forward for up to five years and combined to provide you with a larger tax credit.

“For example, you might consider combining a few years’ worth of donations to push you over the $200 threshold to take advantage of the higher tax credit,” Lee says. “Married couples should pool their charitable receipts together and claim all donations on the higher income spouse’s tax return.

“I would also recommend to carry forward when no federal taxes are payable,” he adds. “If applicable, you may use the donations to help reduce provincial taxes to zero.  Definitely carry forward the deduction if the donations were made in years of low income and no taxes would be paid.”

High income earners – those who earn over $200,000 – may wish to consider making donations now to reduce their taxes as there is greater tax incentive compared to prior years. 

“Starting in 2016, individuals in this tax bracket will be required to pay federal income tax at a rate of 33 per cent; this is an increase of 4 per cent,” Lee says. “The federal government has provided a matching tax incentive for those who make charitable donations, which makes it more meaningful.”

He suggests that those who regularly make charitable donations over $200 annually should claim in full.

Keep criteria in mind

Always make sure you get a proper receipt that has the date, the charity’s registration number and the donation amount, Battista says.

And note that you’re not allowed to claim donations to a business or non-profit society that is not registered with the CRA.

“If an organization is not included in the CRA’s Charities Listings, it cannot issue official donation receipts,” Battista says. “And without an official donation receipt, you cannot claim that donation on your return. So make sure the receipt you get has a Registered Charity Number if you intend to claim it.”

Another point? Donations do not need to be cash. You can donate insurance policies and investments such as publicly traded securities (such as stocks and bonds) you currently own. 

“If these investments have appreciated in value, then you may eliminate capital gains with such gifts to charity,” Lee notes. “In this situation, it is better to donate ‘in kind’ rather than to sell the securities and donate the cash proceeds.  This is a great way to get a tax benefit with no capital gains.”