Budget Sense

Charitable donations are just that: it is a way for people to donate from their money to help those in need. That is how it should be treated and not a

Charitable donations: How to help others while getting a much needed tax credit.

way to get a tax advantage. However, and having said that, the government does make it possible to get a tax credit in exchange for your charitable donations. So you are shooting two birds with one stone: helping those in need as well as getting a tax break.

But there are a lot of charities out there and the first step is to decide which ones you are going to help. I have a list of about 3 charities that I help, in addition to my own church. All of these are registered charities, so I do get that tax advantage from the government. And you should check for the same thing too when choosing where your charity donations will go: that your charity of choice is registered with the CRA so you can get the tax credit for charity donations.

Here are the steps I follow to simplify my charitable donations, which makes my income tax filing easier too:

1. Decide how much you want to contribute annually: personally, I have a set amount per year. Some just donate when they can. It is up to you. For me,setting a fixed amount ensures that I am always contributing and not only when I remember to. It also ensures that I set that amount on a side. In fact, ‘donations’ is now a fixed category in my personal budget!
   

2. To whom? as mentioned above, it is good idea to decide who your favorite charities are. Good idea to limit to 3 or less.  Doesn’t mean you only give to those and no other ones. You certainly can, as long as it is within your donation budget amount.
   

3. Once you have set your annual amount and charities of choice, it is now time to organize your donation schedule: either by preparing post0dated checks to each, on a specific date of the month. Or if you like to keep things simpler and do it all online, simply sign up for online donations. For example, let us say you have two charities that you like to donate to. Let us also assume that your annual donations budget is $500. You would then divide that amount between the two (50/50 , 60/40 or however you like) and then do the math to determine how much you need to donate per month to each one .
   

4. Once you have automated it all, you can relax and forget about it.
   

At the end of the year, you will get tax receipts of your donations for the full year which you will use when filing your taxes.

To make matters simpler, CRA has come up with an online donations calculator, where you can put the amount you have (or plan to donate) and get an idea of what you will get back in total tax credits (provincial + federal) .  The cool thing about this calculator is that it can help you input numbers and instantly tell you how much you can get back in tax credits. This help with better tax planning.

Again, we should look at charitable donations as a way to help others first and not as a way to get a tax advantage. But, since the government does give you that tax credit in exchange for your donations, you certainly can take advantage of it. Helping others. Helping yourself. Both can be done with the simple act of donations.

When creating our first budget, we have to realize that it is not the final version, and you will have to change and revise it as you go along.

There are a lot of things that you may not remember to include right away, and will only be brought to your attention later on. One of these things is ‘donations’

The thing about donations, you are not only helping others, it is also good for your income tax, helping you lower how much tax you pay or increase how much you get back.  As such, it is important to include them in your budget if possible.  Donations, besides RRSP, is a perfect example of a tax-deductible item in your filing.

Different provinces in Canada have different charitable donation tax credit rates. For example, in Ontario, for the 2010 income tax year, the first $200 in donations entitles you to 5.05% provincial credit, and 11.16% for amounts over $200.  Click here for rates from all Canadian provinces and territories.

Here is an example from CRA’s website on how donations can be calculated in your income tax:

Example of charitable donation tax credit calculation

Danielle lives in the province of Saskatchewan and donated $400 in 2010 to registered charities:

1. The federal charitable tax credit rate is 15% on the first $200 and 29% on the remaining $200. Her federal tax credit is therefore (15% × $200) + (29% × 200) = $88.
2. The provincial charitable tax credit rates for Saskatchewan for 2010 are 11% on the first $200 and 15% on the remaining $200. Therefore her provincial tax credit is (11% × $200) + (15% × $200) = $52.
3. Her combined charitable tax credit is ($88 + $53) = $140.

In other words, you are getting almost one third of what you donated,  as a tax credit or deduction. Not to mention, the social and charitable benefits of your donations.

When making a donation, be sure to get an official tax receipt from the organization that you are donating to. Ensure it has a proper registration number and that it is not a fraudulent one.  And like everything else, if it sounds too good to be true, it probably is. This applies to situations where you are promised returns much greater than what your donation officially entitles you to-according to CRA calculations.

Therefore, given all the good benefits of donations, set a certain amount in your budget for donations. Once you have set the amount, decide on which organizations or charities you will donate your money to. Personally, I have one or two fixed places that I donate to, and the rest will vary according to unforeseen natural disasters and the arising needs to meet the challenges by different charities.  Be sure to ask for an official receipt for every donation you make-no matter how small-and put it in your income tax folder for that year.

If you only make one or few donations a year, and don’t see a need to crate a whole category for donations, then you could incorporate it into another category. This could be your ‘Emergency’ category or even ‘Personal Spending’. Just remember to note it down so you can remember to make the donation and deduct it from the right category. Update: as I was finalizing this article, a very catastrophic earthquake and a resulting tsunami devestated Japan. This very unfortuate but coincedental event stresses the need for our budgets to have a room for donations. We have to be there for other people when in need and hopefully they will be there when we need them as well.

You know tax filing season starts in mid February, yet you are often not prepared when it is here. As if you have never done this before. Being ready and prepared for income tax filing season could make the difference between getting a large return, or getting nothing (and even paying back to the government)

Tax season basically starts from the first day in the year! You have to set a special folder for the new year , label it, and start putting everything to do with taxes in there. This includes donation slips, medical expense records, RRSP statements, interest on student loans etc.

By having this simple folder, you are better organized and focused. This ensures that no tax related records are lost or misplaced. When tax season is here, you have all that you need to start your filing right away.

It also helps to have previous year’s return with you as well, just in case you need to refer back to it.

If you are doing your own taxes, it helps to have a good understanding of how the CRA works, and what you can deduct or use for your fillings. There are lots of Canadian books that specialize in offering advise on how to get the most out of your tax returns.

In upcoming articles, we will outline ways on how to get the most of your income tax return and avoid paying the government instead.

Just remember, income tax filing may be done in one hour, but preparation for it is ongoing from the first to the last day in the year. The more ready you are, the easier and probably better returns you will get.