Charitable Donation Tax Credit – Part 1 (How it Works)
I’m a big fan of donating or tithing to charity. As I mentioned in my “financial goals for 2007” I’m trying to increase my donations this year to about $1200 ($100/month) from the $500 donated in 2006. Our ultimate goal though is to donate 10% of our gross salary to charity which today would be about $11,000/year or around $920/month.
I’m sure most of you know that in Canada, there is a Donation Tax Credit for all donations made to a registered Canadian Charity. As stated by Margot Bai in her book “Spend Smarter, Save Bigger”, the donation tax credit is the government’s way of ensuring that the we donate with pre-tax dollars. In other words, they don’t want us to pay tax on the money that we donate to registered charities.
Donation Tax Credit
The donation tax credit gives a return equivalent to the lowest marginal tax rate (in your province) x $200 on the first $200 that you donate, and the highest marginal tax rate tax credit on the remainder. Below is a table of the lowest and highest marginal tax rate for 2007 by province/territory:
|NF & LAB||26.07%||48.64%|
For example, if a resident Newfoundlander donates to charity in 2007, the lowest marginal tax rate would be 26.07% and the highest marginal tax rate would be 48.64% (taxtips.ca). If this Newfoundlander donated $1000 to charity that year, he would receive ($200 x 26.07%) + ($800 x 48.64%) = $441.26 as a tax credit for that year.
For those of you NOT in the highest tax bracket, you will actually GAIN by the tax credit given to you by the government. My current marginal tax rate is around 38%. If I donate to charity, I will get a tax credit of 48.64% (on everything over $200), which is almost 10% more than I paid in taxes.
How to Donate
A good number of the larger registered charities have a website that accept donations online. However, there are also a number of charities that do not have an online payment system on their website. If this is the case, then you can use CanadaHelps.org which is a one-stop shop for donating to Canadian charities online. Charities large and small are usually listed with them. They basically take the online payment for charities, keep 3% for transactions costs, and email you an electronic receipt. Thanks to Canadian Financial DIY for pointing out CanadaHelps.org to me.
In the next article (part 2), we’ll talk about some of the strategies that will maximize your donation tax credit return.