Tax credits & charitable donations. A full meal deal?

• Author: Bodie, J. Scott

As governments have become more focused on deficit-cutting over the last six years, Canadian charities have been forced to become more aggressive in seeking donations from both individuals and corporations. To assist charities in this search for funds, the federal government has introduced a number of changes to the Income Tax Act (Canada) (the "Act") which are designed to make charitable giving more attractive to potential donors from a tax perspective. Let's look at an overview of the current tax treatment of charitable donations and bequests.

In order for a taxpayer to receive any tax benefits from a donation, the donation must meet the following requirements:

1 it must be made to a registered charity; and

2 it must be made voluntarily with no expectation of return.

A registered charity is an organization which has applied for and received a registration number from Revenue Canada, Charities Division. From the organization's point of view, the main benefit of becoming a registered charity is that it provides the organization with the ability to issue receipts which will enable its donors to claim a reduction of tax. Such receipts must have the organization's registration number clearly marked on it. If it does not, the donation will not qualify for favorable tax treatment.

Moreover, if the donor receives any benefit as a result of making a gift, the donor will not receive any tax benefit from the donation. For example, if a taxpayer buys a ticket to a fund raising dinner put on by a registered charity for $100 and the cost of the meal is $40, the taxpayer may receive a tax receipt only for $60 and not the full price of the ticket, as the donor receives a benefit from paying the first $40 in the form of a meal.

Individuals who make donations to registered charities are entitled to a federal tax credit at a rate of 17% for the first $200 of donations and 29% for donations in excess of $200. A tax credit allows a taxpayer to offset a tax liability. For example, assume that in the 1999 taxation year a taxpayer donated a total of $2000 to registered charities. Assume further that before taking these donations into account, the taxpayer's total federal liability for the 1999 taxation year is $10,000. The tax credit on the first $200 donated would be $34 ($200 x 17%) and on the next $1,800 would be $522 ($1,800 x 29%) for a total of $556. Therefore the taxpayer's total tax liability for the 1999 taxation year would be reduced by $556 to $9,444.

...