Optimizing the Donation Tax Credit
Donations received by a registered charity by December 31st can be claimed as charitable donations for that year. A receipt must be issued by the charity.
Search the Canada Revenue Agency ("CRA") charities registry web page here to ensure that your charity is a registered charity.
The Donation Tax Credit is calculated as follows:
- 15% on the first $200 of donations
- 29% on donations over $200
- 33% on donations to the extent that the individual has taxable income that is taxed at 33% (ie. over $200,000)
How to Optimize your Donation Tax Credit
Given that a higher rate (29%) is used for donations over $200, when a taxpayer has a spouse or common law partner and the combined donations are greater than $200, the donations for both spouses should be combined and claimed on one tax return.
If donations are claimed separately, each person would need to clear the $200 threshold at 15%, before being able to access the 29% tax credit rate.
How to REALLY Optimize your Donation Tax Credit
Donations do not need to be claimed in the year they are paid; they can be carried forward for up to 5 years. This means that you can claim five years' worth of credits in Year 5 and get more back at 29%.
For example, you donate $100 every year to your preferred charities.
If you claim the donation tax credit every year, you would get back $15 ($100 x 15%) every year. In Year 5, you would have received $75 ($15 x 5 years) in total credits.
If you waited until Year 5 to claim the donations, you would receive $0 every year until Year 5, when you would receive $117 ($200 x 15% + $300 x 29%). That's $42 more!
Combine this with the amounts that your spouse has donated and you've effectively doubled the tax credit that you can get back.
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