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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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