Charitable Donations – Within a Corporation or Personal?
I’m on the prowl again for a charity that aligns with my values and provides top value for those they are trying to help (ie. keeps their admin expenses low). Within this search, for you business owners out there, I came to the question of whether it’s better to donate to charity within a private corporation or under a personal name.
Lets review how the charitable donations affects taxation under both structures.
Charity Donations under a Personal Name
As I explained in the article “how the donation tax credit works“, charitable donations have the additional benefit of giving a tax credit to an individual. Donations for the year (registered charities only) are added together and the tax credit is calculated. The first $200 will receive a tax credit equivalent to the lowest marginal rate (federal and provincial combined) and the remaining will receive a tax credit at the highest marginal rate (federal and provincial combined). You’ll have to check your specific province to see what the lowest and highest marginal rates are.
Charity Donations under a Private Corporation
Charitable donations to a registered charity made under a private corporation are taxed differently than an individual. Where an individual gets a tiered tax credit, a corporate donation is simply an expense, and reduces income dollar for dollar.
To determine which is better, you’ll have to understand how corporate taxes work. Basically the small business tax exemption allows a small business to be taxed at a preferred rate. For active income less than $500k (a lot of small businesses), the corporation pays around 16% income tax. The tax rate jumps, however, if the corporation derives most of it’s income from investments. Income from investments within a corporation is taxed at the highest corporate rate (high forties).
Corporate or Personal?
So with the background established, which is better, a charitable donation under a personal name or the private corporation? The answer is that it depends on the situation. If it’s a simple private corporation with active income, then it’s probably best to donate under personal as it will give you a higher tax deduction. In this scenario, donating under the corp would give you a tax benefit of about 16% whereas a personal donation would result in at least a 40% tax benefit (providing the total donations for the year is much greater than $200).
The line isn’t so clear if the corporation is primarily used for to generate investment income. In this case, the tax return in either scenario will be fairly close as the marginal tax rates will be similar.
12 Comments, Comment or Ping
1. Four Pillars
Funny – I was going to send you an email about this topic – I don’t have a corp – would I be better of making personal contributions (and getting the donation credit) or donating through the business – (no donation credit but then I can write it off).
I suspect that donating through the business is a better method.
Apr 28th, 2009 @ 10:09 am
2. FrugalTrader
FP, that’s an interesting question. For tax purposes, I assume that a sole proprietorship is treated as the person who owns the business. Therefore, a charitable donation under the business would be treated as if you personally donated it and not as a business expense.
Can any tax people confirm this?
Apr 28th, 2009 @ 11:04 am
3. Cam
In my opinion the Charitable Tax Credit is better than a Tax expense write off in all except a very small margin of people. The only time an expense write off would be better than a credit at the top tax bracket would be if you were in the top bracket by a tiny amount and the expense write off brought you down a bracket. But even then the credit would amount to the same amount of tax being paid in that top bracket and if you had any expense left over after pulling down a bracket it would have less effect, whereas the tax credit continues to have the same tax benefit regardless of the person or income.
In Alberta the situation is even better where the tax credit actually amounts to more than the top tax bracket with a 50% credit. I can’t figure out any way an expense would have a better return than that.
If your charitably minded at all, donations and the resulting tax benefits are a huge bonus. If your seriously charitable you could take the extra tax bonus (especially in Alberta), that would be the amount of tax credit you receive in excess of the tax you would have paid on the amount, and put in into your giving for next year and keep reaping a larger and larger reward each year, both for your chosen charities as well as yourself from the joy of giving. The best part is for those with somewhat limitied incomes thats a great way of increasing your giving without negatively affecting your well-being.
Apr 28th, 2009 @ 1:10 pm
4. Four Pillars
FT – that’s not my understanding but the fact is – I don’t know.
Cam – I think you might be confused about how the progressive tax brackets work.
I know if I can claim the donation through the business then I save the marginal tax rate (more than 40% for me). From what I recall of tax forms it doesn’t seem like charitable contributions save that much tax – or do they??
Apr 28th, 2009 @ 2:19 pm
5. cannon_fodder
The other factor is how much you intend to donate. With the $200 personal limit on contributions at the lower MTR it is often wise for people who have a high MTR to accumulate charitable contributions until you are well in excess of the $200 figure.
Of course, you are allowed to pool contributions from you and your spouse to maximize the benefit.
Apr 28th, 2009 @ 3:56 pm
6. Dividend Growth Investor
That’s an interesting debate. I would probably donate the money in order to minimize my taxes the most. It seems to me that donating individually versus donating from a corporation is better from a tax perspective..
However if you are really involved in the cause that you are donating into in the first place, maybe you wouldn’t care as much about gaining as much as possible from the donation..
Apr 29th, 2009 @ 9:23 am
7. Canadian Finance
FP, you’re right that the business “expense” giving you back 40%+ on the entire amount would be better. But as FT mentioned, the question for us might be if this is an allowed business expense for sole proprietorships?
Apr 29th, 2009 @ 1:58 pm
8. Chuck
Its a blurry line between whether its a personal or business donation when you have a sole proprietorship. I looked at the CRA website and came across the following:
http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html#P594_42484
Looking at T4002: Business and Professional Income from the CRA site, you’ll see in Chapter 3:
“Enter only the business part” means that any of the following are not included as part of your expenses:
…{snip}
donations to charities and political contributions;
..{snip}
So a charitable donation wouldn’t be a tax deduction for the business.
Apr 30th, 2009 @ 4:00 pm
9. Rob
There are a few other issues to consider on the corporate side. First – you can only deduct charitable deductions from net income for tax purposes – if you are in a loss position, you can carry forward the deduction which reduces the value due to the PV.
Second – any expenses at the corporate level uses pre-personal tax dollars, whereas the personal payments are using after tax dollars – you need to consider the integration impact. Assume you took the money from a corporation (salary or dividend) and then made a personal donation. $100 earned in a corporation would yield you $60 after tax if paid as a salary , assuming a 40% personal tax rate (there would be a deduction for the corporation – so no corporate tax). If that $60 donation was made, there would be a credit of approximately 40% (assuming top marginal tax rate), providing a tax credit of $24 – leaving total tax of $16 and a donation of $60. The remaining $24 would be cash on your tax refund – which would potentailly be re-donated, etc. A similar effect would happen if a dividend was paid, with slightly different tax effects due to the brackets.
Alternatively, in the corporation the full $100 would not be taxed as it would be a deduction from net income for tax purposes. Therefore, the charity would receive the full $100, with no tax implications.
From the above – it’s better to give from the corporation, as the charity gets more money (i.e. the full $100 vs the $60 in the first example), as you do not have to take it out of the corporation and pay. The $100 vs $60 is not exact – the $60 would need to be increased to account for the $24 in cash you are left with, which could be re-donated. That said, the $24 when you cycle it through will end up netting both situations to zero – in both cases you pay no tax if you are in the top marginal bracket.
Of course this assumes the taxpayer is in the top tax bracket and that more than $200 has been donated. For someone in a lower brack, the personal donations are likely better as the tax you pay on the salary would be at a lower rate (say 30%) vs the donation credit at the top marginal rate (say 40%).
Every situation is different and will vary by province and individual.
May 6th, 2009 @ 7:05 pm
10. Robert
As pointed out, it depends on your situation. I have an active small corporation and pay myself personally via dividends. With my RSP contributions, basic exemption and the dividend tax credit and a few small personal donations, my personal tax rate is darned close to zero. So an extra personal donation achieves almost nothing for me. In my case far better to donate through my company, where it is worth approximately 15% as an expense.
BTW, the small business rate in Alberta is nominally around 15-16%, but this assumes no expenses. Personally my effective tax rate on the company (total taxes paid / total revenue) is around 11%.
May 9th, 2009 @ 7:48 pm
11. Erick
I’m approaching corporate year end, so I thought I’d review this thread again before deciding whether to use corporate or personal funds to make a charitable donation.
A bit more googling turned up a great summary (for Ontario) that shows that in most cases, it’s more tax-efficient to donate personally:
http://www.stewartkett.com/resources/wp-content/uploads/2009/02/2009-02-01-individual-versus-corporate-donations.pdf
Aug 3rd, 2009 @ 4:12 pm
12. Susan Mladenovich, CMA
What about donating corporate assets? In that case the owner would be taxed on the value of the transferred asset. This taxpayer is in the highest bracket in Ontario.
Nov 5th, 2009 @ 12:32 pm
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