The Government of Canada has announced an extension of 2024 charitable donations to February 28, 2025. For more information, check out the Press Release here.
Charitable donations play a significant role in Canadian society, contributing to a wide range of causes that benefit communities across the country and around the world. In Canada, the government encourages charitable giving through various tax incentives, making it financially advantageous for individuals to support nonprofit organizations. Understanding how charitable donations, including donations of public shares, are treated under Canadian tax laws can help maximize the impact of ones giving while benefiting from potential tax deductions.
Tax Incentives for Charitable Giving
Under Canada’s Income Tax Act, individuals who donate to registered charities can receive tax credits. The Canadian tax system provides a non-refundable tax credit for individuals, which directly reduces the amount of taxes owed. The tax credit is structured progressively, meaning the more one donates, the greater the benefit.
For total donations under $200, the federal government offers a tax credit of 15% of the amount donated. For total donations over $200, the tax credit increases to 29%, or 33% for those in the highest tax bracket (incomes over $246,752 as of 2024). The provincial tax credits vary by province, adding another layer of benefit for donors, further enhancing the incentive to give.
The Importance of “Registered Charities”
To qualify for these tax incentives, the donation must be made to a registered charity. A registered charity in Canada is an organization that has been approved by the Canada Revenue Agency (CRA) and is eligible to issue official donation receipts for income tax purposes. These charities must operate within specific parameters, such as providing charitable services, conducting activities that align with the public good, and maintaining transparency with their finances.
The CRA maintains an online database where Canadians can verify whether an organization is registered. Donors should ensure that they are donating to a registered charity to receive the tax benefits associated with their contributions.
Donations of Publicly Traded Shares
In addition to cash donations, Canadians can donate publicly traded shares or other securities to registered charities. Donations of publicly traded shares come with unique tax advantages that can be significantly more beneficial than donating cash or other assets. When individuals donate securities such as stocks, bonds, or mutual funds that have appreciated in value, they are not required to pay tax on any capital gains. This is a key benefit of donating public shares, as it can help avoid the tax implications of selling those shares.
Typically, when someone sells an appreciated asset like stock, they must pay tax on the capital gain, which is the difference between the sale price and the original purchase price. However, if the securities are donated directly to a registered charity, the capital gains tax is entirely eliminated[1]. This means that the donor can deduct the full fair market value of the shares on the date of the donation, while also avoiding any tax liability on the appreciation.
Furthermore, like other charitable donations, gifts of public shares qualify for the charitable tax credit, providing donors with additional financial incentives. The combination of a tax credit for the donation and the avoidance of capital gains tax makes donating public shares a highly tax-efficient strategy for charitable giving.
Carrying Forward Donations
In certain cases, donations can be carried forward for up to five years if they exceed the annual limits. For example, if a donor gives a large sum to charity but cannot use the full tax credit for that year due to the donation limits, they can carry the excess forward to future years. This provision allows donors to maximize their tax benefits over time, making it easier to plan large charitable donations.
Conclusion
In summary, charitable donations are an essential part of Canadian society, and the tax incentives provided by the government make it easier for individuals and corporations to give. By contributing to registered charities, donors not only support important causes but also enjoy significant tax benefits. Donations of public shares, in particular, offer unique advantages by eliminating capital gains taxes and providing additional deductions. These incentives encourage ongoing generosity and can make charitable giving a key component of a financial plan.
Article originally posted at The Accounting Place – https://theaccountingplace.ca/taxes/charitable-donations-taxation/ For further information regarding your personal situation, please contact your Financial Advisor.
[1] Potential Alternative Tax Implications – Contact The Accounting Place for details