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By Nizam Shajani, CPA, CA, MBA
November 27, 2020
Tis the season to be giving. And donations to charities should be top of mind. Here are a few points to consider from a tax perspective to being nice this year.
In Canada there are significant tax incentives for a qualified donation to a qualified donee. A qualified donee can be a registered charity, the Government of Canada, a province or a municipality. The Canada Revenue Agency has a current listing of registered charities and other organizations that are qualified donees. In order to support a claim, a donor must have a charitable donation receipt with the charity’s registered number on the receipt.
Individuals who make a charitable donation receive a non-refundable tax credit rather than an income deduction. In Alberta, the combined federal and provincial NRTC is calculated as 25% on the first $200 of donations and 50% on amounts in excess of $200. The credit does not apply to donations in the year that exceed 75% of net income. Instead these amounts are available for carry forward for up to 5 years.
It should be noted that because a tax credit is received, the same benefit accrues to a person no matter their income or effective tax rate.
There are some gifting arrangements that are promoted as tax shelters where it is represented to the donor that the tax benefits will equal or exceed the net costs of entering into the arrangement. A gifting arrangement where the donor incurs a limited recourse debt related to the gift will also be a tax shelter. A limited recourse debt is one where the borrower is not at risk for the repayment.
It should be noted that the Canada Revenue Agency audits every mass-marketed tax shelter arrangement and withholds tax refunds until the audit is complete. To date no arrangement has been found to be compliant with the Income Tax Act. To be safe, consider the registered charities list when you make sizable donations.
Remember to consult with your professional advisor to confirm the significant benefits of making charitable gifts and donations and the potential risks of a gifting arrangement that may be viewed as a tax shelter by the CRA.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2020 Shajani LLP