As a business owner who includes charitable giving in your financial plan, you may be surprised to learn that there are various ways to structure your charitable donations, each with unique financial and tax implications. In this blog post, we will focus exclusively on cash donations, while we will address the advantages of donating securities in a future post.
For our analysis, we will use the following assumptions applicable to a business based in British Columbia:
- Corporate tax rate (small business): 11%.
- Corporate tax rate (passive business): 50.67%.
- Taxable income: $120,000.
- Personal marginal tax rate: 38.29%.
- Personal effective tax on non-eligible dividends: 31.40% (which includes gross-up and dividend tax credits).
- Donation amount: $10,000.
- Associated charitable tax credit (combined federal + BC): 45.2852% = $4,528.52.
Canada’s tax integration system aims to ensure that earning income through a corporation does not systematically alter the total tax burden compared to earning the same income personally. However, understanding the different options for making donations is crucial in order to identify which benefits work best for you and your business.
We will explore the differences between donating cash from active versus passive corporations and donating corporately versus personally, either by salary or dividend.
Active vs. Passive Corporations
When a corporation donates cash to charity, this is treated as an expense, thus reducing the corporate tax owed.
- Active business: $10,000 donation x 11% = $1,100 in corporate tax savings.
- Passive business: $10,000 donation x 50.67% = $5,067 in corporate tax savings.
Corporations can also claim this deduction when they pay a salary, as salaries are also treated as an expense. However, dividends are paid from after-tax corporate dollars. It is important to note that paying a salary involves additional costs and complexities, such as payroll expenses and tax remittance.
Personal Tax Outcomes
If the donation is made personally, the following results apply regardless of whether the corporation earns active or passive income:
- Salary-funded donation:
- Personal tax: $10,000 x 38.29% = $3,829.
- Charitable credit: $10,000 x 45.2852% = $4,528.52.
- Net personal benefit: $699.52.
- Dividend-funded donation (non-eligible, effective rate basis):
- Personal tax: $10,000 x 31.40% = $3,140.
- Charitable credit: $10,000 x 45.2852% = $4,528.52.
- Net personal benefit: $1,388.52.
At the higher passive corporate tax rate, donating directly from the corporation becomes significantly more advantageous. However, for many business owners, the combination of extracting cash from their corporation while also receiving a personal tax benefit can be particularly appealing.
In many cases, the choice between donating personally or through a corporation hinges on the specific opportunities available and where tax relief is most beneficial. Because these rules can interact in complex ways, you should review your unique situation and charitable giving strategy in consultation with your accountant and financial advisor.
At Connect Wealth, we believe that charitable giving should be integrated into a comprehensive financial plan. We work with business owners like you to evaluate available opportunities and develop strategies that maximize the impact of your giving while ensuring alignment with your tax, retirement, and estate planning objectives.
