Should you donate personally or through your corporation?
In Alberta, there is an added incentive to make donations personally, as each dollar of donations (in excess of $200) results in a 50% charitable donation tax credit. In most other provinces, the donation credit is the highest personal tax rate on employment income.
To demonstrate this in action, say you want to donate $10,000 to your favourite charity. You can decide to either make the donation through your company or take the funds from the company, pay personal tax on them and then make a personal donation.
Corporate tax rates are 11% for income subject to the small business deduction and 27% for active business income in excess of $500,000 for the associated group. A corporate donation of $10,000 will result in between $1,100 to $2,700 of corporate tax savings.
If the owner wants to make a personal donation of $10,000, it will be necessary to remove more than $10,000 from the company as either dividends or salaries to plan for the personal taxes that will be owing on the income. If a salary is paid from the company, there will be a corporate expense for the salary, thus a reduction of corporate taxes. In addition, there will be personal taxes on the salary of 37% and a tax credit on the donation equal to 50% of the donation.
Making donations to charities, either personally or corporately, will result in tax savings. Depending on the particular situation.
What are the benefits of donating personally?
For individuals, eligible donations made provide a non-refundable tax credit, reducing any personal income taxes owing. Unused donations can be carried forward up to a maximum of five years, so if an individual made a donation in 2019 but has no taxes owing, they can claim the donation tax credit to reduce their taxes in a tax year up to 2024. In Alberta, an individual will realize tax savings of $25 for every $100 of donations on the first $200 of charitable donations made. For every $100 of donations made in excess of $200, the tax savings can be as high as $50.
What are the benefits of donating through a corporation?
For corporations, donations also result in tax savings, although in the form of a deduction from income, rather than a credit. Similar to individuals, unused charitable contributions may be carried forward for up to five years. The charitable donation deduction will reduce corporate taxes by $11.00 on the first $100 of donations made when taxable income is less than $500,000 in the corporation and by $27.00 ($26.00 after July 1, 2019 and in 2022 it will be $23.00 with UCP’s recent Bill 3) when taxable income is greater than $500,000 in the corporation.
At first glance, it may appear that the benefit of donating personally results in greater tax savings; however, upon closer examination that is not always the case.
So, which is better, personally or through a corporation?
Let’s say you are an individual that falls in the $150,000 income bracket you have already made more than $200 of donations personally during the year and you want to make an additional charitable donation. You have $10,000 of pre-tax income in your corporation and are wondering whether it makes sense to donate directly through the corporation or to take the money out of the corporation via additional salary or a bonus. After the corporation pays its corporate tax, it would have $8,900 available to make the donation. The corporate-made donation would result in corporate tax savings of roughly $979, resulting in a net tax cost of $121 to make the charitable contribution.
If, instead, you decided to withdraw the money and make the donation personally, after paying the personal income tax, you would have $6,976 available to make the donation. After claiming the charitable donation tax credit, the net tax savings of making the donation would be approximately $414 – significantly less than if the donation is made through the corporation. In this case, it makes sense to donate personally with overall difference of $535.
In another example, let’s say that you want to make a $10,000 charitable donation and there is $10,000 in the corporation. In this case, if the donation was made directly from the corporation, the corporation would pay no corporate tax and the charity would receive $10,000. If, instead you pulled the money out of the corporation by way of additional salary or a bonus and then made a $10,000 donation, the donation tax credit would fully offset the personal income tax owing on the additional salary or bonus and there would be a net excess of roughly $1,926 in additional tax refund on your personal income tax return. It would make sense o donate personally in this situation.
Individuals who earns at the top marginal personal income tax bracket may get different results. If a person has $315,000 of taxable income, they are at a tax disadvantage off making the $10,000 donation personally. After claiming the charitable donation tax credit, the net tax cost of making the donation would be approximately $392 – significantly more than if the donation is made through the corporation (cost at $121). Additionally, the charity would be far better off if the donation was made through the corporation than if it was made personally ($8,900 received versus $6,276).
The general rule of thumb is that if an individual expects to have more than $315,000 of taxable income personally in 2019, it makes sense from a tax perspective to make the donation directly through the corporation. If not, then the donation should be made personally. This threshold amount changes every year, so you should check in with our firm annually.
CPA PROS has extensive experience in advising clients on their generous contributions. Please contact us for more information on how to get the most out of your donations.
Click here to calculate your charitable donation tax credit.