Incorporated business owners will often ask their tax advisor whether they should make charitable donations with personal or corporate funds to achieve the best tax result.
Quite often, business owners will compare their corporate income tax rate of say, 13% on income eligible for the small business deduction or 27% on all other active business income, to the donation tax credit they get on their personal tax return, which can be 44% or more. A quick comparison of these rates and the conclusion business owners often come up with is that it would be more advantageous to donate personally and get a 44% tax benefit than to donate through their company and get only a 13% or 27% tax benefit, similar to their other business expenses.
There is just one glaring omission from this comparison – in order to make a personal donation you must have previously taken either a wage or dividend out of the company and paid personal tax on those funds already. This is why the personal donation tax credit is higher than the corporate one – you are being made whole for the personal level of tax already incurred.
Without going into an in-depth number crunching analysis, you can take comfort in the fact that our tax system in Canada is almost perfectly integrated such that where donations exceed $200 annually and you are at or near the highest personal tax bracket, you are generally indifferent whether you donate corporately, take a wage and donate personally, receive a dividend and donate personally, or any combination of these.
Given our tax system varies by province and type of income (i.e. salary, non-eligible dividends, eligible dividends, active income, passive income, etc.), all other factors being equal, there is generally a slight benefit to making a corporate donation over a personal one.
In reality, most incorporated business owners will make some donations personally and some corporately. The method of donation is often simply a result of how the request for support came about and what the most convenient way was to make the donation at the time. In the end, this normally produces an acceptable tax result.
There may be other factors that could influence your decision to donate personally over corporately, such as eligibility for the First-Time Donor’s Super Credit – i.e. you haven’t claimed any charitable donation credits within the past five years. In this case, you would benefit more from making your next donation personally and accessing the enhanced tax credit.
Another influencing factor could be if you are uncertain as to whether the donation is being made to an actual Canadian registered charity and it has a business element to it. In this case, you should use corporate over personal funds. If it turns out not to be deductible as a charitable donation, it would still be an allowable advertising or promotion expense of the corporation, assuming it was incurred to earn income.
For donations of under $200 per year, you are better off to make these through your corporation or at least carry them forward on your personal income tax return and claim them every five years or so to benefit from the higher donation tax credit on donations in excess of $200.
It should be noted that the rules regarding the ability to carry forward unclaimed donations for up to five years is the same for individuals and corporations, as is the limitation that you can only claim donations up to 75% of your income in any one year. Note that this limitation is increased to 100% in the case of an individual taxpayer in the year of death and preceding year.
Donation of Publicly-Traded Securities
As an aside, the donation of publicly-traded securities to a registered charity receives preferential tax treatment. Any unrealized gain is not taxed on the disposition, yet you will still receive a donation receipt for the full fair market value of the securities. This benefit is available to individuals and corporations. Depending on where you hold the securities, this could influence where you make the donation from, as this type of in-kind donation is one of the most tax-effective ways to make significant charitable donations.
As you can see, making the most tax-effective charitable donation may not always be as straightforward as first thought.