When you donate, you think about giving, not receiving. However, there’s definitely a favourable tax consequence to donating – that is, you get a donation tax credit and it lowers your tax bill from the Canada Revenue Agency (CRA).
A business owner of a corporation has the option to donate under their personal name versus under their corporation. For individuals who are employed or self-employed, there isn’t much of an option to optimize how the donation is made. So, what’s the difference in the two approaches as far as taxes are concerned? Let’s take a look.
Donation Tax Credit – Personal Tax
When an individual donates personally, they get a “tax credit”. A tax credit means that it reduces your tax bill from CRA dollar-for-dollar. However, keep in mind that a donation results in a non-refundable tax credit. That is, it will reduce the taxes owed, but only to the extent that a tax payable was calculated to begin with. It won’t result in a refund beyond refunding back the taxes calculated. For the purpose of this post, we won’t talk about the political donation tax credit and leave that for another post.
Calculation of the donation tax credit
There are two aspects of the calculation – federal and provincial. Let’s assume that the taxpayer lives in Ontario. For rates related to other provinces, click here.
The federal donation tax credit is calculated as follows:
- 15% of the first $200 donation
- 29% on the amount over $200
- There was a recent amendment in 2016 to the tax credit calculation for individuals who have income in the highest federal tax rate bracket of 33%. In those cases, a tax credit rate of 33% now applies to donations when an individual’s taxable income exceeds the top personal tax bracket. For 2019, the highest tax bracket starts at income above $210,371. For our calculation example below, we will ignore this scenario of the taxpayer having income in the highest tax bracket.
As a result, if you donate $500, the federal donation tax credit will be:
- 15% * $200 = $30
- 29% * $300 = $87
- Total = $117
The provincial donation tax credit is calculated as follows:
- 5.05% of the first $200 donation
- 11.16% on the amount over $200
Likewise, on the $500 donation, the provincial donation tax credit will be:
- 5.05% * $200 = $10.10
- 11.16% * $300 = $33.48
- Total = $44 (rounded)
The total provincial and federal tax credits add up to $161. That is, a 32% saving and a $500 donation “cost” you $339. Not bad! You’ll notice the calculations above didn’t factor the individual’s income (ignoring the highest tax bracket scenario mentioned above). The taxpayer could have been making $30,000 or $150,000, the donation tax credit calculation would be the same.
Limits and Deadlines
First of all, only donations or gifts to registered charities and other CRA approved donees can be claimed as a charitable donation on your tax return. Secondly, up to 75% of an individual’s net income can be claimed as donations, except in the year of death or the year preceding death, when 100% of net income can be claimed as donations.
As for the deadline, a donation must be received by the charity by December 31st in order to receive a charitable donation receipt for that taxation year.
Sharing between spouses
When a spousal or common-law partner return is filed, donations can be combined and reported on one taxpayer’s return. As we can see from the calculation above, that may be in our favour because we bypass the lower tax credit on the first $200 faster. For e.g., if one spouse donated $300 and the other spouse contributed $400, both would get a 15% credit on the first $200. However, if the combined amount of $700 is reported on one taxpayer’s return, the lower tax credit rate of 15% would only be used once, the entire remaining $500 would be eligible for a tax credit at the rate of 29%.
Carryover to future years
Since the donation tax credit is non-refundable, you may be in a situation where you are not able to utilize the benefit of all donations made. Not to worry. Unused donations can be carried forward for up to five years. Furthermore, if an unused donation is reported under one spouse in a year, it can utilized by the other spouse in the future year.
Donation Tax Credit – Corporate Tax
Tax treatment of a donation under a corporation is extremely simple. In contrast to personal taxes, a corporate donation works as a “deduction” against the company’s income and gets the same treatment as any other expense and gets deducted from the corporation’s revenue in calculation of net income on which corporate taxes are calculated. As such, the net tax benefit to the corporation for making a donation is its corporate tax rate.
Let’s assume a small business corporation based in Ontario that had net taxable income before any donations are made of $10,000. Using the combined federal and provincial corporate tax rate in Ontario of 12.5%, the Corporation would have paid corporate taxes of $1,250. Let’s say the corporation had made an eligible donation of $1,000. This donation would directly reduce the corporation’s taxes by $125.
Limits and Deadlines
For corporations, the same 75% limitation applies; however, the donation is claimed as a tax deduction against the corporation’s taxable income. The donation must be made within the corporation’s fiscal year to be claimed as an expense.
Sharing between corporations
If the business owner owns more than one corporation, or has other related and associated corporations, there is no sharing of the donation deduction across these corporations, and the deduction has to be claimed by the corporation that made the donation.
Carryover to future years
Similar to individuals, if the donation cannot be used in one year, it can be carried forward for up to five years.
Which One Should You Choose
Given that the corporate tax rate is very low in Canada, almost always the net tax cost of making a donation personally is going to be more tax effective.
However, keep one caveat in mind. If you are thinking to take the money out of the corporation (as salary or dividend), pay personal taxes and then make a personal donation, it would be more costly than if you simply made the donation through the corporation. Regardless of which option you choose, donating is wonderful and high fives to you!
We hope the above was helpful as a general guidance. However, tax calculations are always specific to the taxpayer’s circumstances and we encourage you to reach out to our team at Think Accounting for any tax related questions. Visit us at www.thinkaccounting.ca, email us at firstname.lastname@example.org or give us a call at 905-565-0095.