The Income Tax Act provides a fairly generous income tax credit for donations to registered charities (as well as other “qualified donees” such as the federal and provincial government, many foreign universities and colleges, municipalities and others).
The federal credit is 15% of your first $200 of donations in the year, plus 29% of your donations above that amount. However, if your taxable income is higher than $202,800 (2017 year) so that you are paying 33% federal tax on the taxable income over that level, then you get a credit of 33% of your donation (over the first $200) to the extent of your taxable income over $202,800. For example, if your 2017 taxable income is $220,000 and you donate $2,000, $200 of the donation qualifies for the 15% credit and $1,800 qualifies for the 33% credit amount. On the other hand, if your taxable income is $120,000, the $1,800 portion qualifies for the 29% credit amount.
In addition, there is a provincial tax credit that varies widely by province. The combined credit for total donations over $200 is generally in the 40%-50% range.
On your death and for the year of death, there are special rules that apply. First, any donations you made in the year of death qualify for the credit in that year or the immediately preceding year.
Donations made in your will or by your estate (“testamentary donations”) are subject to different rules. Basically, they work as follows.
If the testamentary donation is made while your estate is a graduated rate estate (“GRE”) (during the first 36 months after death), the credit can be claimed in your return for the year of death or that of the immediately preceding year. Alternatively, the credit can be claimed by the estate in the year of donation, an earlier year of the estate, or carried forward and claimed up to 5 years later. Note that if the estate claims the credit, it is the estate’s tax, and not the deceased’s personal tax, that is reduced by the credit.
An estate can qualify as a GRE for up to 36 months after death, subject to certain conditions.
The above rules also apply if the donation is made within 60 months after your death, if your estate would qualify as a GRE but for the fact that more than 36 months have passed after your death.
In the above situations, the credit can be split amongst the different eligible years, but you cannot double up or otherwise multiply the credits.
Your GRE estate makes a $100,000 donation in its second taxation year. It can claim the $100,000 amount in that year or its first taxation year, or carried forward up to 5 years. Alternatively, the $100,000 could be claimed in your return for the year of death or preceding year. Or, for example, the estate might claim $50,000 in its first taxation year and $50,000 could be claimed by you in the year of death, and so on.
Furthermore, for donations made by your estate at any time, your estate can alternatively claim the credit in the year of donation or its subsequent five taxation years.
Donations of publicly-traded securities, ecological property and cultural property
The donation of these properties trigger no capital gains tax, although the full fair market value of the property qualifies for the charitable credit. For example, if you donate shares listed on the Toronto Stock Exchange with a cost of $10,000 and fair market value of $100,000, you will report no taxable capital gain but the $100,000 value will qualify for the donation credit.
If this type of property is donated to a charity under your will or otherwise on your death, special rules ensure that the gain on the deemed disposition of the property upon your death is nil. (Normally, accrued capital gains are taxed on death.) The subsequent donation to the charity will also have a nil taxable capital gain.