If you made a charitable donation to a registered Canadian charity (or other qualified donee) in the 2007 calendar year, you may claim it on your 2007 tax return OR you may defer claiming the donation on your tax return until one of the following 5 tax years (2008, 2009, 2010, 2011 or 2012 in this case).
This is advantageous if you want to avoid the lower credit for donations up to the first $200 every year. For example, let’s assume that our donor Rajiv makes charitable contributions of $200 per year and is domiciled in Ontario.
Scenario 1: Rajiv claims the donations every year
Every year Rajiv would claim $200 on his tax return and would receive a tax credit equal to the donation amount multiplied by the lowest marginal tax bracket for Ontario of 21.55%. Therefore, $200 x 21.55% = $43.10 in tax savings per year. If we multiply this out for 6 years, his total tax savings on $1200 of charitable contributions is $258.60.
Scenario 2: Rajiv carries forward the donations every other year
In this case, Rajiv carries forward the donations as long as possible. This means he claims 6 years worth of contributions in one year’s tax return. The first $200 earns a credit of 21.55%, or $43.10. The next $1000 earns a tax credit of 46.41%, or $464.10. If we add it all up, his total tax savings is $507.20.
By carrying forward the donations, Rajiv was able to save $248.60. This is more than one year’s worth of donations in his case. You can see that the common theme of avoiding the lower tax credit amount on the first $200 of donations can again be accomplished through spacing out when you claim your contributions.
Carrying forward deductions may not always make sense
If your charitable donations are high, carrying forward your contributions might not be advantageous since the most you can save in tax is $49.72 per year (Ontario). This becomes less significant when the total amount of your donations increase. In this case, while you may be missing out on $49.72 in tax savings for a given year, the total tax credit you earn per year may be higher and could potentially be re-invested and earn significantly more than this amount.
For example let’s assume Rajiv contributes $10,000 per year. If he claims his donations every year, he will generate $4,591.28 in tax savings every year (or $9,182.56 over two years). If he waited to claim his donations every other year he would earn $9,232.28 in tax savings every other year. You can see that the savings are: $9,232.28 – $9,182.56 = $49.72. BUT, if he re-invested the tax savings of $4,591.28 when he claimed his donations every year, and assuming he used a 4% GIC, he would earn $183.65 in interest. (Even when that interest is taxed at his marginal rate, he is still ahead.)
So you can see, it makes more sense to carry forward claiming your donations when your annual donations are smaller. But once they get over $1000 per year, you’ll probably want to look at claiming them every year regardless.