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:
| Province | Low | High |
| Alberta | 25.5% | 39.00% |
| British Columbia | 21.20% | 43.70% |
| Manitoba | 26.40% | 46.40% |
| New Brunswick | 25.18% | 46.84% |
| NF & LAB | 26.07% | 48.64% |
| Northwest Terr. | 21.40% | 43.05% |
| Nova Scotia | 24.29% | 48.25% |
| Nunavut | 19.50% | 40.50% |
| Ontario | 21.55% | 46.41% |
| PEI | 25.30% | 47.37% |
| Quebec | 28.94% | 48.22% |
| Saskatchewan | 26.50% | 44.00% |
| Yukon | 22.54% | 42.40% |
For example, if a resident Newfie 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 Newfie 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.
16 Comments, Comment or Ping
1. lyndonmaxewell
In Singapore, we do have a good number of charity drives running annually too. Seems like you have calculated on how to “kill 2 birds with one stone”. :) That saying, by donating to the charities, and saving back on the tax credit resulting from it.
Mar 7th, 2007 @ 4:26 am
3. Eric
Can you elaborate on this? What do you mean you actually gain from making a contribution?
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.
Apr 29th, 2008 @ 4:18 pm
4. FrugalTrader
Hey Eric, my wording may have been confusing. What is it that you’re stuck on?
Apr 29th, 2008 @ 4:30 pm
5. Eric
Thanks for your prompt response.
When you say 10% more than I paid in taxes, what is it you mean? Do you mean that you are 10% ahead by giving compared to not having given anything?
The other clarification would be in regards to donating shares. You can contact me directly at windharness at hotmail .com
We are a non-profit that just received our charity number and we are trying to mount an effective campaign. I would be great to hear from you.
Apr 29th, 2008 @ 4:48 pm
6. FrugalTrader
Hi Eric, sorry, i wasn’t clear in my post. What I meant to say that that when you give to charity, the government wants you to give with pre tax dollars, thus the tax break. However, they give you the tax break on first $200 at the lowest marginal rate, but anything greater than that gets a bigger tax break at the highest rate. So what I was saying was that if you are lower than the highest tax bracket, you would get back more money than you’ve paid to the govt in the form of taxes. That is provided that you give more substantially more than $200 in the year.
Feel free to contact me via the contact form above.
Apr 29th, 2008 @ 7:58 pm
7. Eric
Thanks FrugalTrader.
Do you know of a table that, by province and tax bracket, provides a breakdown of the credits received for say a $100 donation?
I.e.: A quebec resident in bracket X gives $1000, how much will he receive in tax credits?
Regards,
E.
Apr 30th, 2008 @ 11:22 am
8. FrugalTrader
Eric, the table in the article should give you an approximate answer. For charitable donations, it doesn’t matter what tax bracket you are in. You get a tax credit based on the tax brackets of the province. The first $200 are given a tax credit equivalent to the donation x lowest marginal rate. After $200, it’s the donation x highest marginal rate.
Read over the article again and try a few calculations.
Apr 30th, 2008 @ 2:11 pm
9. Cannon_fodder
I think I understand Eric’s confusion and he was not alone. It sounded as though, for example, I am in the lowest tax bracket and I donate more than $200 then I would actually receive more than $200 back from the government meaning a net gain for me.
I think the closest you can get to an almost no cost charitable donation involves Super Flow Through Shares. I read an example that showed it would be possible for the charitable organization to receive $10,000 in SFTS for a net cost of $800 to a person in a 45% tax bracket .
Apr 30th, 2008 @ 2:50 pm
10. Meredith
Thank you so much for this information!
Jul 20th, 2008 @ 2:31 am
11. Jonathan Vlietstra
The problem is that a lot of people actually think you can save money by donating, but as far as I can see that is not true. Granted you get a large portion of the donation back off your taxes, but you cant lose sight of the fact that to get $460 back (as an example) you have to give $1000 away. You are still down $540 than you would be if you did no donation. The true benefit of donating that I can see, is that the chairity gets a lot more than what you lose – ie: it costs you $540 to give them $1000. Please correct me if I am wrong.
Jul 24th, 2008 @ 8:28 pm
12. FrugalTrader
Hi Jonathan, yes you are correct, donating to charities is not a money making scheme. Think about it this way, the money donated to charities is with pre-tax dollars. Whatever money you donate, the government will return to you the tax you paid on that money.
The way I look at a charitable donation is that the tax return is a side benefit for the good that you are doing.
Jul 24th, 2008 @ 11:27 pm
16. basketbal coach
Hi – just a not – I finished my tax return and your charitable rates table is incorrect for BC, The low rate was 15% on the first 200$ and only 29% on the rest of my donation.
Feb 26th, 2009 @ 9:03 pm
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