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.