IMPORTANT: This post is specific to Canada. If you are not a Canada business/taxpayer then it is probably not applicable to you.
Many Canadians support non-profit organisations through Charitable Contributions. But as a business owner, which is the most tax-efficient way to donate? Through your corporation or personally? The answer, like most tax questions, is: It depends!
Let’s look at a scenario of a company with $80,000 in net income and a target $5,000 donation. For the sake of this example we are assuming that this is a Corporation (not a Sole Proprietor – see below), all income is active business income eligible for the Small Business Deduction, the owner is receiving remuneration exclusively by dividend, company is distributing all available bet income to the owner and has no other income or deductions. I am using 2019 Ontario tax rates.
Generally speaking, it is better to take the full dividend and make the donation personally. Doing this you will get an effective tax reduction worth $2044 on your personal return for the $5000 donation.
If we made this donation from the company this will reduce the corporate tax, your available dividend will reduce, and therefore your personal income tax on the dividend will reduce but you will lose the 40% personal donation tax credit. Overall you will receive a tax reduction of $1,531 – $513 less than if you paid it yourself.
However, there are some advantages to this second approach. If you have income tested benefits (including OSAP student grants for your children) then paying the donation from the corporation and reducing your personal dividend will result in a lower income.
Salary instead of dividend
If you are drawing a payroll salary instead of a dividend then there is a slight advantage ($87) to paying the donation in the corporation and reducing your salary accordingly. If your income is lower (beneath the CPP cap) then there is a much greater benefit as you can reduce the CPP contributions on your salary both for your contribution and the employer contribution – this could be a benefit of up to $510. However, the corporation must have taxable income of a third MORE than the amount of the donation. In this example, the corporation must have net taxable income (before the donation) of $6667. This means that after the donation is deducted tax will still have to be paid on $1667 (approx. $200). Therefore this strategy only works when the company isn’t fully distributing all of it’s income, but in this situation it is less likely that you would be reducing your salary to compensate and therefore the tax advantage is not as strong.
Note that drawing a salary usually results in a lower taxable income, but subjects you to CPP.
Other Considerations
If a corporation has income taxed at higher than the CCPC rate it MAY be more beneficial to pay the donation in the corporation (but a more detailed analysis is recommended to clarify the unique circumstances).
Sole Proprietors (who report their income on form 2125 of their T1) can’t deduct charitable donations as business expenses. They can only claim them as tax credits like all other individuals.
Donations to US 501(c)(3) charities can only be claimed if you have US source income. If your business has clients in the US then this may easier to justify through the corporation than against your personal return (where your only US source income is likely to be US dividends or capital gains).
Corporations with non-calendar financial years are not bound by the traditional Dec 31 deadline. You can make donations at any time (as usual). To be eligible it must be sent to the charity on or before your financial year end (better if it is received by that date).
The rules work quite differently in the US. Make sure that anything you read is applies to your location!
Warning
As with all such commentary, this is not tax advice. In this article we are analyzing a single question and not factoring in all the possible factors that may affect your personal tax situation. Please consult your tax professional for advice specific to your situation.
