Budget Sense

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.