Tax Advantages of Donating to Charity

Reference Number
CES - 009

Date
December 1, 1999

Introduction

1. The subject of registered charities under the Income Tax Act is quite vast and, the purpose of this presentation is simply to give you a taste of the regulations surrounding charitable giving - a taste that could motivate some of you to investigate the subject further in the future.

2. Before I continue, I wish to make a few announcements.

• Firstly, the Canada Customs and Revenue Agency (Canada Revenue Agency) began its operation November 1^st, 1999, replacing Revenue Canada in all of its functions. I will save you the details but we are no longer what you call a Department. We are now Canada Revenue Agency, Canada Customs and Revenue Agency.
• Secondly, our Web site on the Internet has been completely changed. Personally, I think that it has been greatly improved and I invite you to use it. It is a tool that is quite easy to use and that is very powerful, in terms of accessing relevant information, especially our publications. But also, it is a place where you can verify the list of registered charities that we have posted on the internet! Our address is www.ccra-adrc.gc.ca/charities. Now, moving on to the more central topic of my presentation: TAX ADVANTAGES OF DONATING TO CHARITY. Tonight, I'm going to provide you with some general information, talk about tax advantages of donating to charity and finally, I will address the issue of gifts-in-kind and some specific tax advantage related to gifts-in-kind.

3. Some of you may know this already, but there are currently more than 78 000 registered charities in Canada that you could donate to.

4. We know that popularly, the terms "charity" and "non-profit organization" are often used interchangeably. However, for tax purposes the two terms have different meanings, a charity is constituted for charitable purposes at law. It is tax-exempt, and it can issue official tax receipts to its donors... if it is registered.

5. As well, the tax advantages resulting from charitable giving are equally advantageous and available if you make a donation to a qualified donee. The following is the list of qualified donees:

• Canadian registered charities;
• registered Canadian amateur athletic associations;
• prescribed universities outside Canada;
• Canadian non-profit organizations that only provide low-cost housing for seniors;
• Canadian municipalities;
• certain gifts to the crown (federal or provincial or a territory, and including crown corporations);
• registered national arts service organizations;
• the United Nations or its agencies; and
• charitable organizations outside Canada to which the Government of Canada has made a donation this year or during the 12 months immediately preceding this taxation year.

What is a gift?

6. Because a charity can only issue tax receipts for gifts they receive, it is important to define the notion of gift. Officially, a gift is a voluntary transfer of property for which the donor receives no benefit in return.

7. For there to be a gift, the following conditions must be met:

• the donor transfers ownership of property (cash, or gifts in kind such as goods or land) to a registered charity;
• the transfer is voluntary; and
• no benefit is provided to the donor, or a person selected by the donor, unless the benefit is of nominal value (the lesser of 50$ or 10% of the gift value. If the nominal value cannot be established, we cannot consider that it is in fact of nominal value).

What are the advantages of donating?

8. You can claim a tax credit or a deduction for your charitable donations by completing the appropriate section of your income tax return. Depending on how you file your return, you either include copies of your official tax receipts with the return, or keep them for possible review at a later date.

9. As individual donors, you will receive a federal tax credit equal to 17% on the first $200 you give to registered charities in a taxation year. You will also receive a credit equal to 29% for any donation amount you make of more than $200. The more you give, the greater the tax credit. The credit is applied directly against your owing, instead of it being deducted from your taxable income.

Example

In 1997, Mary makes a single donation of $1,000 to a registered charity.

She can claim the following tax credit:

17% of the first $200 = $ 34

29% of the remaining $800 = $ 232

The total credit she can apply against the federal income tax she owes is $266.

To simplify, this example assumes that no federal surtaxes apply.

10. The charitable tax credit also reduces surtaxes and provincial or territorial taxes.

11. The exact value of the charitable donations tax credit varies slightly according to your taxable income and province of residence.

12. A corporate donor will deduct gifts made to registered charities from taxable income. This can result in federal and provincial tax assistance of up to 43% of the value of these donations.

Increase In The Annual Limit For Charitable Donations

13. Individual and corporate donors can only claim charitable gifts up to a certain limit each year. In the past, this limit was 20% of net income for the year. For tax years after 1996, this limit is 75% of net income. In addition, the annual limit for charitable donations, including bequests, made in the year an individual dies is 100% of the individual's net income. The limit for the year before the individual's death is also 100%.

Example

Roger died in 1998. Any gifts Roger made to registered charities in 1998, including any bequests made under his will, can be claimed up to 100% of his net income for 1998 and 100% of his net income for 1997.

Carrying Forward Charitable Gifts

14. There is a limit to the amount you can claim each year for the gifts you make to registered charities. However, you can carry forward any unused charitable gifts and claim them for up to five more years, as long as you only claim an amount, or portion of an amount, once.

15. You should claim your oldest gifts before claiming gifts you made in a current year.

Example

Gabrielle owns a parcel of land that has been in her family for several generations. In 1998, she decides to give it to a registered charity. Her annual income is $60,000. The fair market value of the land is $80,000.

When filing her tax return for 1998, she can claim up to 75% of $60,000 ($45,000) as a charitable donation. Her resulting tax credit is based on this amount (17% of the first 200$ and then 29% of the remaining 44,800$= 34$ + 12,992$ =13,026$.)

She can carry forward the remainder of her charitable donation claim, $35,000 ($80,000 - $45,000), and use it in her tax return for the 1999 tax year or for the following four years.

Gifts-in-Kind

16. When dealing with gifts-in-kind, remember that we have several publications on the subject.

17. A gift in kind includes such items as capital property, depreciable property, personal-use property including listed personal property, a leasehold interest, a residual interest, a right, a licence, a share, a chose in action and inventory of a business. A gift in kind, however, does not include a gift of services.

18. Note that the fees payable for the appraisal, if any, are at the donors expense.

Appraisals

19. Collectors often approach appraisers, dealers, and other people who are knowledgeable about particular objects to obtain appraisals for income tax purposes.

20. You may need to get one or more appraisals to establish the fair market value (FMV) of a gift. Use this figure to calculate your capital gain or loss, and the tax credit you can claim on your return.

21. The appraisal has to be an estimate of the object's FMV on the date you donated it. The receipt issued by the institution that accepts your gift has to represent the true value of the gift at the time you donated it. Also, if you owned the object on Valuation Day (December 31, 1971), you may need to get a valuation reflecting the value on that date. For more information on Valuation Day, consult Interpretation Bulletin IT-139, Capital Property Owned on December 31, 1971 - Fair Market Value.

Who should appraise a gift?

22. You may obtain a FMV evaluation from a dealer, appraiser, or other individual who is familiar with the market for the object you are donating. If you need an appraisal and the FMV of your gift is $1,000 or less, a qualified staff member of the institution receiving your gift can appraise it.

23. In addition, if you are having difficulties finding an independent appraiser, or if it involves an unreasonable expense, qualified staff members of the institution accepting your gift can appraise it, even though the FMV might be more than $1,000.

What is fair market value (FMV)?

24. The Income Tax Act does not define FMV. The generally accepted meaning, however, is the highest price, expressed in a dollar amount, that the property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.

25. We consider the value of a property to be best based on an arm's length sale and purchase of a similar property at or near the same date.

Donation date

26. The donation date is the date the donor legally transfers ownership to the donee. This may not be the date of physical delivery, since an object may be on loan to the institution before the donation date. This is particularly sensitive when dealing with donation of stocks as their value tends to fluctuate.

Receipts

27. For donations of gifts in kind, the institution will issue a receipt stating the FMV of your gift once the object has been appraised. When you claim a donation on your return, please remember to attach official receipts to support your claim. If you included such receipts with a previous return, attach a note to tell us in which return the receipts are located. The receipts can be in your name or your spouse's name. Where the property gifted was held jointly by a husband and wife, other than as partners in a partnership, whether the gift was made by the husband, wife or both parties, they may choose which ever allocation is most advantageous to them for the purpose of a claim by each of them under the deducting provisions.

Special Types of Charitable Gifts

28. The following is a list of different types of gifts that have some special treatment.

Gifts of capital property

29. Capital property is usually defined as any property of value that you buy for investment purposes, or to earn income. Common types of capital property include securities such as stocks and bonds, as well as land, buildings and equipment you use in a business or rental operation.

Tax incentive for gifts of publicly traded securities

30. When you donate capital property, we consider you to have disposed of that property for its fair market value. This deemed disposition may result in a capital gain. In the past, 75% of the capital gain resulting from this transaction was taxable. However, the amount of the capital gain that has to be included in income is now halved for certain gifts of capital property.

31. Individuals and corporations who donate publicly traded securities will only have to include in their income and pay taxes on 37.5% of the capital gain on these gifts.

32. Best known publicly traded securities are:

• shares, debt obligations, or rights listed on prescribed stock exchanges (Vancouver, Alberta, Winnipeg, Toronto, Montreal, and 27 foreign stock exchanges);
• shares of the capital stock of a mutual fund corporation; and
• units of a mutual fund trust.

33. This new rule applies to eligible securities you donate after February 18, 1997, and before January 1, 2002. This measure may become permanent, notably if it is seen to encourage charitable giving. As a result of this change, the combined federal-provincial tax assistance on such donations of securities may rise to as much as 64% of the value of the gift. You should note that this measure does not apply to publicly traded securities given to a registered charity that is a private foundation.

Increase in annual donation limit for gifts of capital property

34. The second major incentive for capital gifts concerns the annual limit on charitable donations.

35. If you include a capital gain in your income as a result of a gift of capital property to a registered charity, you can increase your standard donation limit by a percentage of that taxable capital gain. This increased donation limit applies to the year that you make the gift of capital property. It will enable you to offset the tax payable on the capital gain.

36. For gifts of capital property made after 1996, the standard donation limit of 75% of net income is increased by adding to it 25% of the taxable capital gain resulting from the gift.

Example

Andrew gives a painting to a registered charity. He bought the painting 10 years ago for $50,000. An independent appraiser establishes the painting's value at the time of the donation at $90,000.

This means Andrew has a capital gain of $40,000 ($90,000 - $50,000).

He must include three-quarters of the capital gain ($30,000) in his taxable income.

His income from other sources is $70,000. Therefore, Andrew's total taxable income is $100,000 ($70,000 + $30,000).

How much of his $90,000 donation can he claim?

75% of his total income ($100,000) = $75,000

Plus 25% of his taxable capital gain ($30,000) = $  7,500

Total amount that can be claimed = $82,500

Andrew can claim $82,500 as a charitable gift this year. He can carry forward the remaining $7,500 ($90,000 - $82,500) and claim it up to 75% of his net income over the next five years.

Gifts of buildings and equipment

37. These gifts of capital property provide yet another incentive to encourage gifting to registered charities. Owners of depreciable capital property can routinely deduct from their taxable income a capital cost allowance for that property. However, in the past, donors of such property may have found themselves with a tax liability if the value of a property donated to a charity was more than its depreciated value for income tax purposes. This is because there would be a recapture of the capital cost allowance if the property being donated depreciated more slowly than was claimed for tax purposes.

38. For taxation years beginning after 1996, the annual donation limit (75% of net income) is increased by another 25% of the recapture arising on the gift. This increased limit applies to the year that the gift of capital property is made.

Example

In 1998, Widgets Inc. donated a building which had a fair market value of $95,000, a cost of $100,000, and an undepreciated capital cost of $85,000.

Its net income for the year was $200,000 + $10,000 of recapture on the disposition of the building.

How will Widgets Inc. calculate its charitable deduction?

It can claim deductions for charitable gifts made in 1998 up to 75% of its net income ($157,500).

In addition, its annual limit for charitable donations in 1998 is increased by another 25% of the $10,000 recapture ($2,500).

The corporation can carry forward any unused portion of the gift and claim it up to 75% of its net income for the next five years.

39. This concludes my presentation. Remember that if you need more information to make sound decisions about your charitable giving, the officials of the Charities Division are committed to provide Canadian taxpayers with all the available information.