Q. Can you share any thoughts on what is an appropriate amount to give to charities annually? I have often heard it expressed in terms of a percentage of household income. Also, are there any tax credits for charitable giving that, as a middle-income Canadian family with household income of $150,000 annually (evenly split between me and my spouse), we should be aware of for the 2019 tax year? And how could I make full use of those credits?
–Michael and Margaret
A. Before answering this, I thought it might be useful to look at some of the trends in charitable giving. According to Canada Helps, a portal through which you can donate online to any Canadian charity:
- In 2006, 25% of all households made contributions, but by 2015 that number dropped to 20% of all households.
- Canadians give an average of 1.7% of their income to charities.
- 30% of all donations are made in December.
- Big charities receive the bulk of government funding.
Michael and Margaret, it is wonderful that you want to donate to charities and have asked this question, which may also encourage others to donate to the charities of their choice.
To answer your question: Yes, there are tax credits available when giving to registered charities. I’ll cover the basics, as they apply to you, then discuss the strategies and, finally, give some thoughts on donation amounts.
The Federal and Provincial governments provide a non-refundable tax credit for charitable donations. The federal tax credit is based on this formula:
- 15% of the first $200 donated; plus
- 29% of the remainder over $200 on taxable income;
- and the limit for donations claimed is 75% of your net income.
Here’s an example. Applying the formula to a $1,000 contribution results in a federal tax savings of $262. Here’s a breakdown of the calculations:
The first $200 of donation x 15% tax credit = $30
The remaining contribution over $200 = $800 x 29% = $232
The total tax credit = $262.
Remember a tax credit is a direct saving in tax, so in the example above you will save $262 in federal tax. Again, you will also have a provincial tax credit to apply.
I’m sure you noticed that there is a larger tax credit available on the contributed amount over $200. Therefore, it makes sense to increase the total amount of your donations, if you can. To do that the Canada Revenue Agency (CRA) allows you to:
- Combine your donation with your partner’s donation. Only one of you can claim the credit, and it doesn’t matter who claims the credit as the tax savings are generally the same for either spouse.
- Combine all donations made within the last 5 years. You don’t have to claim the donation in the tax year it is made. In fact, you may decide to claim total donations only once every 5 years.
Using the $1,000 donation example above, if you claimed each year you would save $262 x 5 = $1,310 in federal tax over 5 years. If you save your receipts to claim the total amount of your annual donations until the fifth year, you would save an additional $112 in federal tax over the 5 years. Here are those numbers:
The first $200 of donations x 15% tax credit = $30
The amount remaining over $200 = $4,800 x 29% = $1,392
Total tax savings $1,422
Those are the two main strategies for a middle-income family.
If you happen to own company shares, there may be an advantage to transferring them to a charity, rather than making a direct contribution from your cash flow. You can read more about that here.
How much to donate?
There are articles suggesting you start with 1% of your family income, and others suggesting 10%. This is a question only you can answer, and I think it would be a balance between what you feel you should donate and what you can afford to donate.
How to donate?
Just like investing, the best approach is to set up automatic payments so that you plan out your donations; it’s easier to budget around a smaller monthly donation than a larger annual donation. This approach benefits the charity as well, by giving them a stable monthly cash flow that they can plan around, versus trying to anticipate what they may or may not receive in December.
Thanks again for this question, Michael and Margaret. You have me, and hopefully others, re-thinking their charitable habits.
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.
MORE ABOUT CHARITIES:
- Canada’s top-rated charities 2020: Overview
- Canada’s top-rated charities 2020: By sector
- Canada’s top-rated charities 2020: Top 100
- Canada’s top-rated charities 2020: Methodology