Individuals who make charitable donations are entitled to a tax credit in calculating their federal and provincial income tax. Charitable donations will also reduce an individual’s federal and provincial surtaxes, if applicable. Donations by corporations also receive income tax relief, in the form of a deduction in arriving at the taxable income amount on which corporate income tax is calculated.
Donations Made by Individuals
Charitable donations by an individual are eligible for a federal tax credit of 15 percent on the first $200 donated, and 29 percent on any donations made in excess of $200 in the particular year. There is also a provincial income tax saving, since provincial income taxes in all of the provinces (except Quebec) are calculated as a percentage of basic federal income tax.
Once provincial income taxes are taken into account, and if an individual’s charitable donations are more than $200 in a particular year, the effective rate of tax savings on chari-table donations made by a high income individual is 40 to 49 percent. In other words, for every $100 of donations made in excess of $200 each year, the tax saving will be about $40 to $49. Because the rates of provincial income tax vary from province to province, the effective rate of tax savings applicable to charitable donations varies.
Annual Limitations on Amount Eligible for Donation Tax Credit
Claims for charitable donations are generally limited to 75 percent of the net income that is reported in your income tax return. If donations in a particular year are more than the allow-able amount, the excess can be carried forward for up to five years. There is no carryback of unused donations, except in the year of death.
Donations Made Under a Will
Charitable donations that you specify in your will are eligible for the donation tax credit in your final income tax return that will be filed by your executor(s).
Effective January 1, 1996, such testamentary gifts may be deducted from up to 100 percent of the net income amount reported in a deceased’s final income tax return. Thus, a large gift or gifts under a person’s will may have the effect of eliminating the income taxes that would otherwise be payable for the year of death. The removal of the 20 percent of net income ceiling was seen by charitable organizations as a major boost to charitable giving and philanthropy.
