Charitable donations made by your corporation

As most taxpayers know, there are significant tax savings with respect to qualifying charitable donations available for amounts paid to a qualified donee. Qualified donees are organizations that can issue donation receipts, and a list of these organizations is maintained by the Canada Revenue Agency.¹ 

For individuals that have taxable income subject to the highest Federal marginal tax rate of 33%, there is an offsetting non-refundable tax credit of that amount for donations in excess of $200. A corporation is entitled to a deduction against their income for a qualifying donation which will produce savings equal to the tax rate applicable to corporate taxable income. In both the personal and corporate examples, there is a general limitation on an annual claim equal to 75% of net income for tax purposes and a five-year carry forward for unused donation credits. For individuals, the limitation increases to 100% in the year of death or the preceding year.

Furthermore, the rules relating to donations in-kind are similar for individuals and corporations. For example, a gift of a publicly traded security (listed on a designated stock exchange) results in a charitable donation equal to the value of the security at the time of the gift, but there is an additional benefit as the tax on any unrealized capital gain on the security donated is eliminated – thereby increasing the overall tax savings when compared with selling the security and donating cash. Lastly, a donation by a corporation will allow the shareholders to extract the entire amount of proceeds without personal taxation through the capital dividend account discussed further below.

If you are in the highest marginal tax bracket and you have cash in both your personal and corporate accounts that could be used to fund your charitable giving objectives, then there would not be a significant tax difference between donating personally or through your corporation. However, if you have surplus assets in your corporation that you wish to withdraw, as well as securities in your corporation with unrealized capital gains, the overall tax benefits can be increased by first donating the security in-kind, which will increase the balance in the corporate capital dividend account (CDA).

In simplified terms, the CDA is a notional account that tracks the non-taxable portion of realized capital gains and losses on a cumulative basis and any positive amount in the CDA can be extracted from the corporation without personal taxation by filing the appropriate tax election form and legal resolution. The benefits of using the donation in-kind strategy are illustrated in the table below which assumes a combined federal and provincial corporate tax rate of 51%.

As outlined in the table above, donating the security directly reduces the cost of the donation by approximately $10,000 due to the elimination of tax on the realized capital gain. In addition, the increase to the CDA is doubled from $20,000 to $40,000. If other surplus assets are being withdrawn from the corporation, this would reduce personal tax on $20,000 of such draws. If additional surplus funds are not being withdrawn, the CDA could still be paid out and loaned back to the corporation – thereby reducing the value of the shares held in the corporation which reduces the potential tax exposure that could arise upon the death of the shareholder. Note that in order to implement a donation in-kind strategy you would need to contact the organization you wish to support to ensure they have the capability to accept such a donation.