The Income Tax Act, while having many references to charitable gifts, does not provide a definition of a gift. The Canada Revenue Agency defines a gift as “a voluntary transfer of property without valuable consideration to the donor.”
The choice to make the gift must rest solely with the donor in order for it to be considered voluntary. For example, if a contest prize was a gift of $500 to a charity of the winner’s choosing, while they may choose the recipient of the gift they would not be eligible for a receipt as they did not choose to make the gift.
“transfer of property”
The gift must involve an absolute transfer of property to the charity. As donor advised funds have become increasingly popular in Canada and the United States over the last few years, there has been scrutiny by tax officials with respect to whether these constitute a transfer of property. In particular, if the donor continues to make investment decisions as well as distribution decisions without the recipient charity appearing to have the final say, it may be debatable whether the charity has ownership.
In general this refers to the gift causing a benefit to the donor greater than the value of the donation receipt. Examples might include tickets to charity galas, where the value of the dinner, prizes, entertainment. The consideration must be deducted from the price of the ticket in order to obtain the value of the donation receipt. Where CRA finds proof that the consideration to be significant to the donor (greater than 80% of the value of the gift) than to the charity, a receipt is disallowed and in some cases may be identified as unregistered tax shelters and charities have been deregistered.
Tax Implications of Charitable Giving
Canada’s maximum combined tax rates for incomes greater than $126,264 range from 39% (Alberta) to 48.25% (Quebec). The donation tax credit available for charitable gifts is 15% on the first $200 and the individual’s tax rate those gift amounts above $200 and up to a maximum of 75% of the donor’s annual income.
If a gift is made of capital property, the donor would be subject to tax on 50% of the capital gains. The exceptions to this rule are for gifts of publicly listed securities, certified cultural property, ecologically sensitive land, and principal residences. In the case of any of these gifts, none of the capital gains is taxable.
The examples given on the Professional Advisors eResource website assume a rate of 45% for illustrative purposes. Any unused tax credits can be carried forward for up to five years.
An individual can claim the donation tax credit for gifts made by their spouse or common-law partner in order to maximize the tax credit.