Is there a ‘cap’ on charitable tax credits?

In the next couple of weeks, I plan to explain some perplexing issues of the Income Tax Act. The research will be based on CRA’s pronouncements and information circulars.

In Sunday school, some very interesting points were brought up. Is there a federal “cap” on charitable donations? Would people contribute charitable donations, even if they could not get a tax receipt? Why can’t domestic Canadian charities funnel receipted donations to non-affiliated non-profit organizations?

Today we’ll discuss question one. Does the federal government’s tax legislation place a ‘cap’ on charitable contributions?

The long and short of the question is, yes!

It is a common misconception that the ‘cap’ is the tax credit formula. This is not true. The limitation as articulated in section 118.1 (1) that ‘total charitable gifts may be eligible for the tax credit to a maximum tax credit of 75% of division B income’. Therefore, the ‘cap’ on charitable contributions is 75% of taxable income (supported by the proper receipts).

Most often, the ‘cap’ is considered the spirit and calculation of the tax credit. The first limitation is that tax credits can only be used to the extent that they offset division B (taxable) income. The second limitation is the calculation. The formula to calculate the charitable tax credit is equal to (A*B) + C (D-B); where A= 16%; B= first $200; C= highest federal marginal tax rate for the year; D= is the total gifts in excess of $200.