Have you ever been in a situation where you, the business owner had to decide between donating personally or through your corporation? Often times, people automatically jump to the conclusion that donating personally rather than through their corporation that they solely control seems like the better or rather easier option. The flawed thought process behind opting to make a personal donation as oppose to a corporate donation is that if the personal tax rate is higher than the corporate tax rate, the tax savings from donating personally must be higher as well. However, this is not always the case. The reality is the best alternative of the two on a net basis is actually the corporate donation option. Here is a simplified illustration on the difference between making a personal charitable donation versus a corporate charitable donation:
Personal Charitable Donations
Let’s say an individual in Toronto chooses to draw $1,000 from their corporation to make a charitable donation personally. The dollar amount being withdrawn from the Canadian corporation for the donation is considered to be taxable income for the Toronto based individual. Firstly, the $1,000 will attract about $450 in personal income taxes. Of the $1,000 donated amount, this will result in a $360 charitable donation tax credit [($200 x 20%) + ($800 x 40%)]. In Ontario, the first $200 donated during a year is eligible for a 20% charitable donation tax credit and any amounts above the first $200 will yield a tax credit in the amount of 40%. As a result, the individual will have to pay approximately $90 in net tax ($450 – $360) as a result of making this charitable donation personally.
Corporate Charitable Donations
Now if we were to look at this from a different angle that is through the corporations’ lens, the corporation will get a full tax saving for the amount of the donation if it is done through the corporation. As such, the corporation is indifferent between paying a salary to the owner so that he can make the donation personally OR if it makes the donation directly from the corporation – the corporation will get the tax savings for the full $1,000 and the corporate taxes remain the same in both scenarios. The difference, however, is that if the $1,000 is paid to the individual, then he must report this amount as taxable income resulting in personal tax in the amount of the $90 as per above. Thus, it is in the individual’s best interest to make the charitable donation directly from the corporation rather than paying for this amount personally.
It is very important to take the time and do thorough analyses of the situation by drilling down to the root of each alternative. You want to be able to come to a solution where you will receive the highest rewards that result in significant savings. In this scenario, we can safely conclude that donating through a corporation is the superior choice.
For more information regarding the charitable donations, please contact SRJ Chartered Accountants in Toronto or Mississauga at 647-725-2537 or info@srjca.com. One of our tax specialists or chartered accountant business consultants will be happy to assist you.
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