Clarifying donations as deductions

There are many misconceptions surrounding using charitable gifts toward a non-refundable tax credit to reduce personal liability.

There are very few Canadian taxpayers unaware that charitable gifts can be used toward a non-refundable tax credit to reduce personal tax liability.  Surprisingly though, are several misconceptions that sprout perennially this time of year.

First is the confusion over what constitutes an eligible source of charitable giving.  Not all organizations are created equally when it comes to charitable status and thus the ability or inability to give charitable receipts for tax purposes.

For example, as much as it’s a worthy cause to give money to a group of students so they can go on a special trip, the group is not a “charitable” organization so your gift is not tax deductible.  Your cancelled cheque to them won’t cut it with CRA … so don’t bring a shoebox full to the tax preparer.

Common eligible organizations include registered charities and foundations, churches, post-secondary institutions, amateur athletic and arts organizations, and of course, all three levels of government – funny, choose to give a gift to an organization that chooses to tax you.

If concerned about the tax deductibility, ask if the organization can write official tax receipts.  The registered charitable number must be on that receipt.

Tax tip:  If you earn the majority of your income in the US, donations to US registered charities can be used on a Canadian tax return.  Likewise if your alma mater is a US college or university, gifts to it are tax deductible in Canada.

The second area that creates confusion surrounding charitable gifting involves what constitutes the eligible amount recorded on a charitable tax receipt.

If a gift is given with nothing given to the donor in return, the whole amount will most likely be the actual amount on the receipt.

However, if something is given to you when you give the gift such as a t-shirt, dinner or spa weekend, the fair market value of that tangible item has to be deducted from the amount of the gift given, regardless of what the charity may have paid (or not paid) for that item.  This could significantly reduce the actual amount of the gift reported for tax purposes.

Lastly, often people donate labour or services to a registered cause and are not aware that this can be a tax deduction for them.  It becomes a charitable gift that can be officially receipted if the service is actually charged to the charity, paid by the charity to that person, and then that amount is gifted back to the charity by the person.  Of course it must be fair market fees for the services rendered.

Final tax tips:  As a reminder, the first $200 of gifts qualifies for a 15 per cent credit while every dollar after that qualifies as a 29% credit.

Generously, CRA allows pooling of charitable giving within a household so gather all the receipts so the $200 threshold only has to be met on one tax return – the highest income earner’s.  Also, CRA permits a five year carry-forward so why not report the donations each year, carry them forward, and then every couple of years make a claim so that the $200 threshold doesn’t have to be met each year.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.  Email him or see all previous columns at ron.clarke@JBSbiz.ca