Where does the money go? A look at how donations work in the tax system.
Donating to a worthy cause always feels good, doesn’t it? But have you ever wondered what happens to your money after you’ve selected the option to “round up” your purchase at whatever store you may be at, to donate to the charity they may support? Before I tell you what happens to your money, I would like to clarify that this article is in no way designed to discourage you from donating to any charity. Charities hold a valuable position in our economy and do so much good for our society. Funding them is of the utmost importance to furthering the growth and development of our communities, including the charities I’ll bring up in this article. However, it’s how you donate and who get’s the credit is what this article will discuss.
Before I begin, I would like to thank a few Partner Charities for giving me the privilege of working with them at my company, Aloe Tax. STARS Air Ambulance is an extremely critical component to lifesaving services across the province. Canadian Mental Health Association (CMHA) now more then ever needs our support as our society suffers so greatly not only from a pandemic, but the resulting divide. Canadian Blood Services easily calls themselves “Canada’s Lifeline” as they work together with donors, recipients, employees, partners, and volunteers to bring critical lifesaving products like blood, plasma, and even organ and tissue donations. Each of these 3 charity organizations have had a meaningful impact on my life either directly, or indirectly through someone I know, and I am happy to be a tool to drive them the money they need.
Like most Canadian taxpayers, I don’t have a lot of free money floating around to just throw away. That’s why while at McDonalds today buying a couple Happy Meals for my friends’ kids, I chose to take a picture of the big “warning” symbol that flashed onto the screen taking up the entirety of it pushing their charity “Ronald McDonald House”. My options were to “Round Up and donate $0.26”, this option was highlighted and centered with two other options below it, the same size but much less noticeable. It was either donate $1.00 or Not Today. This presentation alone is one of the first steps they use to start building up corporate tax credits using our money. $0.26 is nothing right? But how often do you go to McDonalds and donate $0.26 in a year? 10? 100? It adds up.
From Ronald McDonald House Charities (RMHC) website, they say; “Ronald McDonald House Charities Alberta supports families seeking vital medical treatment for their seriously ill or injured child. Our warm, compassionate Houses provide a home-away-from-home for families who need to travel for medical reasons. When those families are experiencing one of Life’s most difficult times – we offer them the gift of togetherness.”
As an Epileptic since about the age of 12 who suffered from multiple tonic-clonic (grand mal) seizures several times a year and constantly seeing specialists in both Alberta and Ontario up until about the age of 31, I certainly value and appreciate what RMHC does for our families. I’ve also experienced similar services as a child from charities like WIN House. I do endorse and support all charities and the services they provide. And my company, Aloe Tax, loves to partner with them to offer free tax preparation services through the CRA’s Community Volunteer Income Tax Program. So why on Earth would I write an article apparently targeting RMHC? To understand we need to have a look at how any donation works.
Since there are so many complications and calculations when it comes to how much to donate and how much you’ll get back in the form of a tax credit, I would like to focus on the process rather then the amounts. However, it should be noted that neither the individual or corporation will get 100% of it’s donations back in credits and there are limits to how much you can donate before you stop receiving credits. Let’s start with corporations and what happens when they donate. As earlier stated, let’s use McDonalds as our example.
McDonalds is currently a for-profit company that solicits donations from its customers they’ve already profited off of and then donates it to their charity, RMHC. As stated in an article on RBC Wealth Management: “A corporation is entitled to a tax deduction for the donation amount against their income. By reducing taxable income, the corporation reduces their tax liability. A corporation does not need to claim the full donation in a particular year. Donations can be carried forward for up to five years. Generally, a corporation can claim a deduction for charitable donations up to 75% of the corporations net income for the year.
Looking at my $0.26 example, let’s assume I did that once a week along with half of all Canadians; let’s just say 15 million people. That would mean McDonalds will donate to its own charity $202.8 million of your money. It then reduces its tax payment to the government by up to 75% of it’s net income for the year. Now the actual amount of the credit is not material to this article, but it will be less than $202.8 million. It’s the fact that they are nickel and diming you $0.26 at a time so they can pay less taxes. As our society requires taxes to fund itself and our public services, that burden now gets placed on the individual.
Individual donations work in much the same way. If you donated $0.26 to RMHC directly every week, then you’d get the tax receipt for a charitable donation of $13.52 and a deduction from your taxes owing at the end of the year, or even an increased refund. Once again, the credit amount will not be equal to the amount of the donation, but rather slightly less.
So why should we let McDonalds nickel and dime us for our money after already profiting off of our purchases and then allow them to save millions in tax dollars when you can donate that money directly to RMHC and get the tax credit yourself? Many of you will note that at Aloe Tax we do act as an intermediary collecting donations for our partner charities, however our donations are given to them in the donor’s name, so they receive the tax credit instead of us. We do this because corporations are still an important part of the process with the voice and reach that they can provide the charities. Perhaps McDonalds can start “discounting” their meals by the amount of your donation as they can’t issue a tax receipt. This allows you to still donate to McDonalds for RMHC without giving them a discount. That of course will be a decision for McDonalds corporate head office to decide at the highest of levels. I doubt this article would even cross that desk.
To learn more about the donation process and how you can continue to help your favorite charities while earning tax credits yourselves instead of letting big business get you to pay for the discounts off their own tax returns please feel free to contact us today or visit the Government of Canada’s website for more information.
*It should be noted that there was an instance last year where one of our partner charities gave us the charitable donation receipt instead of the client. The client allowed us to credit them $25 and we just kept the receipt for our tax purposes in an effort to not disrupt the charity and have them reissue the receipt.
Dave Stock
Aloe Tax & Bookkeeping Services
