As companies turn the page on the 2014 fiscal year, business owners should take the opportunity to review their charitable gifts for the year, and understand the tax implications of whether their gifts are made through their company or through a personal account. 

Incorporated business owners who wish to donate to charity have the option to make the donation either through their business or personally. Unlike personal donations which are eligible for non-refundable tax credits that reduce your year-end tax bill, corporate gifts to charity are eligible for a dollar for dollar deduction in computing taxable income. There are several factors you should consider when determining if it is better to donate personally or through a corporation.

Does your corporation run an active business, or does it earn investment income?

An important factor to consider when planning your charitable gifts from a tax perspective is whether your corporation has active business income (“ABI”) or whether it is an investment holding company. This is an important distinction to make because the taxation of investment income within a corporation is at a much higher rate than that of ABI in a Canadian Controlled Private Corporation (“CCPC”).

If an Ontario-based CCPC that earns ABI eligible for the Small Business Deduction were to make a $10,000 charitable donation, the corporation would receive tax savings of $1,550. If the income were not eligible for the Small Business Deduction, the tax savings would be $2,650.  If, however, that same $10,000 is donated through an Ontario investment holding company, the company will benefit from a much larger tax savings, ranging from $3,333 to $4,617.   

Finally, if you instead chose to make the $10,000 donation personally from cash on hand, the tax savings in Ontario from the non-refundable credits would likely range from $4,641 to $4,953 (depending of course on the individual's level of personal income).

As you can see, the choice of whether or not you should donate to charity through your corporation largely depends on the type of income earned in the corporation. Although the tax savings of donating personally is likely much greater than the tax savings afforded to a CCPC eligible for the Small Business Deduction, it becomes more tax efficient to donate in the corporation when you own an investment holding company paying tax at over 46%. 

Where do you have the funds to donate, in the corporation or personally?

In the analysis above we worked off the assumption that the business owner already had the money personally in order to make the charitable donation; however, the optimal scenario may change if you have to flow money out of the corporation in order to facilitate a donation personally. The primary consideration when there are insufficient personal funds to make the donation is the tax exigible on the extraction of funds from the corporation.   

If you own an Ontario-based CCPC eligible for the Small Business Deduction it may not make sense to pay funds out of the corporation to facilitate a donation. In paying funds out of the corporation, a high rate taxpayer will be subject to personal tax at over 49% & 40% for the receipt of salary and non-eligible dividends respectively.  Despite that the personal donation tax credit of 49.53% will be larger than the corporate donation deduction of 15.5%, the additional income tax owed on the receipt of a salary or dividend will negate this benefit.

Similarly, when looking at the identical scenario for an investment holding company there are also limited tax savings associated with paying out funds to facilitate a donation. For instance, the payment of a salary from an investment holding company to extract funds for the purpose of making a donation will yield a tax deduction of 46.17%.  However, for a high rate taxpayer, the benefit of the deduction will be eroded by the personal taxes payable upon the receipt of the salary, typically exceeding 49%. Furthermore, the personal tax credit available to the donor (49.53%) will be only marginally greater than the 46.17% deduction afforded to the holding corporation.

Conclusion

In summary, the best way to make a charitable donation may change from time-to-time depending on your corporate and personal situation.  Although there are cases where a personal donation may be preferable to a corporate one, there are also a number of circumstances where a corporate donation may yield greater tax benefits.  Consult your tax advisor before making any significant charitable donations to ensure that you’re maximizing the tax savings available to you and your private corporation.

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