Donating to a charity can be a very feel good experience; as well it can help on your taxes by reducing how much you pay. However, most people make some pretty common mistakes when either donating or claiming the donations on their personal tax returns. We’ll do our best to enlighten you on what to avoid when claiming donations.
Each Spouse Claims Only Their Donations
This is the most common mistake most taxpayers make, each claiming only their donations. As a married, or common-law, couple you can combine your donations. This allows one spouse to take advantage of a higher deduction, or maybe they benefit far greater than the other spouse claiming the donations. Whose name is on the donation receipt is irrelevant.
You get a higher deduction when claiming more than $200 in donations. On the first $200 of donations you get a 15% tax credit, and the amount over $200 you get a 29% tax credit.
For Example, Susie has $50 in donations while her husband, Eric, has donations of $190. Separately, they are under the $200, and Susie would get a tax credit of $7.50, while Eric would get $28.50. If they were to combine these donations, one would be claiming $240 in donations. The credit would be $30 ($200 x 15%) plus $11.60 ($40 x 29%) for a total of $41.60. If Eric were to claim the donations he’d get an addition $13.10, and, if Susie were to claim them she’d get an additional $34.10. This may make more of a difference on either’s tax bill depending on their income.
No Receipt For The Donation
This is a common one for people who drop coin or bills into the boxes and cans strewn throughout their city or town. This may add up during the year, however, without a receipt or other proof, you probably won’t get away with the deduction.
This also occurs when you get people coming to your door, and asking for a donation. If it’s a legitimate charity, you will get a receipt right there and then.
What are donation schemes and why should I avoid them?
People are sometimes approached to donate to charities or other qualified donees through tax shelter arrangements. Before you decide to donate in this way, you should be aware of the risks associated with participating in certain tax shelter donation arrangements including:
- Gifting trust arrangements;
- Leveraged cash donations; and
- Buy-low, donate-high arrangements.
Promoters of such shelters must obtain a tax shelter number from the Canada Revenue Agency (CRA). The CRA uses the tax shelter number to identify the tax shelter and its investors, but offers no guarantee that taxpayers will receive the proposed tax benefits.
The CRA reviews all tax shelters to ensure that the tax benefits being claimed meet the requirements of the Income Tax Act. The CRA has audited many of these gifting arrangements. Generally, the CRA reduces the amount of the tax credit to no more than the taxpayers' cash donation, and in many cases it is reduced to even less than that. In some cases the credit is reduced to zero. The CRA may also charge interest and penalties.
I have found that when these kinds of schemes go to court, CRA usually wins. I know someone who was caught up in the art scheme some time ago, where you buy a piece of art for cheap and then donate it to a charity at an inflated price (usually way above fair market value).
What types of gifts qualify for charitable tax credits?
Examples of donations that do usually qualify for charitable tax credits include:
- Ecologically sensitive land;
- Certified cultural property;
- Capital property;
- Personal-use property (such as prints, etchings, drawings, paintings, sculptures, jewellery, rare folios, rare manuscripts, rare books, stamps, and coins); and
- Inventory (such as art, antiques, rare books).
The following do not usually qualify for charitable tax credits:
Contributions of services, such as time, skills, effort;
Certain admission fees to events or to programs (e.g., fees for daycare or nursery school facilities);
The purchase price of a lottery ticket or other chance to win a prize, even though the lottery proceeds benefit one or more charities; and
- The payment of tuition fees (exceptions exist).
These common mistakes for charitable donations can end up costing you quite a lot in taxes. Always make sure you get a receipt, look at the best possible scenario when it comes to deducting charitable donations, and don’t fall for the schemes that may save you initially but end up costing you way more later on.