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.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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frogblender
7 years ago

An old post but still relevant:

“Biz”… yes, I think you did miss something: on your option B): “Pay 1000 from company”. This is fully deductible for the corp, but your final sentence doesn’t account for this. This deduction will be worth between $155 (<$400k small business rate) to ~$487 (for non-active investment corps). This $155 to $487 can be paid out as salary if desired. So option B (donate via corporation) is much better, giving you the same as option A, plus an extra pocketful of twenty dollar bills.

Did I miss something?

jim
8 years ago

I have a small business and my business has decided to make a donation this coming xmas season to a local homeless shelter. The shelter is a registered non-profit.
I have asked my employees for contributions asking for only amounts they are comfortable with.
Are my employees entitled to a reciept for tax purposes?
The donation will given in my company name and employees.eg: abc co. and employees.
Is the business entitled to use the total amount given, employee and company donations, as a charitable donation for tax purposes?

Biz
10 years ago

inkowl has it mostly correct but missed the true comparison

Option A. Pay 1000 personally. Take 1875 from company, gov’t gets 875 now. Govt gives you back 475 in April when you file taxes. Gov’t keeps 400 in end and you keep 475 and charity gets 1000.

Option B. Pay 1000 from the company and pay the 875 as salary (at some point this year). Gov’t keeps 400 now and you keep 475 and charity gets 1000.

So its very close over time although you have to wait.

There is a slight differences to consider:
1) if you pay EHT (>400K payroll) then Option B saves the company 1.95% on the donation amount since its not payrol.
2) i fyou paid the personal amount 875 as a dividend gov’t may get slightly less.

Did I miss anything??

inkowl
10 years ago

My family owns 100% of a Canadian Corporation that is also our employer. As such, we control the salaries that we get. We like to always take the minimum salary possible. This way we minimize personal tax and maximize the money left in our corporation to finance growth.

This morning I have to write a $1000 donation check to an important charity. I will need to take additional salary in order to make a personal donation. According to my payroll program, I would need to take a $1875 bonus in order to get $1000 after tax in order to make my donation. Even if I get $400 back in personal tax credits that hardly justifies the $875 extra my company needs to pay me for the same $1000 contribution.

Conclusion: I will make a corporate donation to my favorite charity. I do not think I want to send the government an extra $875 this month so that I can get a $400 personal tax credit 10 months from now.

Susan Mladenovich, CMA
11 years ago

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.

Erick
11 years ago

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

Robert
11 years ago

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%.

Rob
11 years ago

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.

Chuck
11 years ago

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.