Considerations when donating goods and services from a business to charity

Services

Registered charities may only issue official donation receipts for gifts of cash or other property. Contributions of services, even if professional or business in nature, are not property and do not qualify for a donation receipt. 

There is, however, a way to transact a service donation indirectly to achieve a similar result. Such a transaction, sometimes known as a cheque exchange, works to allow the issuance of a donation receipt where a service is effectively donated to a registered charity. In this transaction, the donor invoices the charity for services provided, and the charity then pays this invoice as well as the applicable sales tax. The donor then returns all or a part of the amount received back to the charity as a donation. In this case, the charity can issue a tax receipt for the cash (property) received. The requirement to collect and remit sales taxes on this transaction is unavoidable. 

For example, if a business provides a service to a charity worth $2,000, the business may invoice the full $2,000 to the charity, plus applicable sales taxes (using 11 per cent in Saskatchewan), for a total invoice amount of $2,220. The charity then pays that amount in full and the business uses the funds received (excluding the sales tax) to make a cash donation of $2,000 back to the charity. The charity provides a donation receipt for $2,000 to the business for tax purposes. In the result, the charity is out only $220 of sales tax, but has received $2,000 worth of benefit from the service. The business is not out any dollars from the transaction, but is out the labour and/or materials donated to provide the service. Alternatively, the business could bear the burden of funding the sales tax with its own funds and issue a cheque back to the charity for the full $2,220. The charity would then issue the company a receipt for $2,220. 

As another alternative, the business could discount the invoice (e.g. 50 per cent) if this is part of its normal operations when dealing with charities. The business could then make a cash donation to the charity for the discounted amount of the invoice before sales taxes. This strategy would only reduce the sales tax burden for the charity, offering no additional tax savings or cost to the business. There would be no income tax or GST/HST issues with discounting the invoice, as long as the business deals at arm’s length with the charity. 

Inventory

A business may also make a gift of inventory to a charity. However, the business must bring into income the fair market value of any goods donated to a charity out of inventory. The increase in income is offset by receiving the donation receipt from the charity and claiming a charitable tax deduction. The cancellation of the income with the deductible donation would leave the business with a deductible loss related to the cost of the inventory item that was donated. 

Receipts and appraisals

When issuing an official donation receipt for property received, it is the charity’s responsibility to ensure the fair market value used is accurate. The CRA has an administrative policy that permits most donations under $1,000 to be valued by the parties involved, but recommends professional appraisals for donations over $1,000. If an appraisal is obtained, the appraiser’s contact information is to be included on the donation receipt.¹

Is it better to donate personally or from a corporation?

There is no limit on the number of donations that may be claimed, regardless of whether the donation is made personally or by a corporation. Individuals may claim a non-refundable tax credit on up to 75 per cent of net income; this limit is increased to 100 per cent in the year of death and in the year preceding death. A corporation’s deduction of donations is equally limited to 75 per cent of its net income for that year. For both individuals and corporations, any unused donations may be carried forward for up to five years.

Corporate donations are deducted from taxable income, whereas individuals claim a non-refundable tax credit on donations made personally. An active small business taxed at the small business rate of 11 per cent (Saskatchewan rate) will only get back $11 per $100 donated. But for companies earning in excess of the small business limit ($600,000 in Saskatchewan), that amount is increased to $27 per $100 donated.

If your company is an active small business taxed at the small business rate of 11 per cent and your personal income is below $129,214² in Saskatchewan, it would be more advantageous to claim the donation personally than through the company. Rather than having the official donation receipt in the name of the corporation, you could account for the donation as a shareholder withdrawal, have the donation receipt issued in your personal name, and take additional dividends to cover the withdrawal. The 43.5 per cent personal donation credit you receive personally (in Saskatchewan) on all but the first $200 of your donation will be higher than your marginal tax rate³ plus the 11 per cent corporate tax rate your operating company will pay on forgoing a corporate deduction.

Contact your Baker Tilly advisor for more information. We can help guide you through the requirements and consequences of your charitable donations.