Consumers want to patronize businesses that show a lot of social responsibility, and one way for businesses to do that is by donating to charity. In addition to potentially impressing prospective customers, charitable donations can also earn your business clients a tax write-off. Here’s what you need to know to help your clients claim charitable donations on their tax returns.
Charitable Tax Credits for Individuals
Independent contractors, sole proprietors, and partnerships report income as if they are individuals, and they also claim charitable tax credits the same way as individual filers. Typically, these clients use Form T2125 (Statement of Business or Professional Activities) to report their business income and expenses, but they should report their charitable contributions on Schedule 9 of their T1 general income tax return.
To explain, imagine a client is a sole proprietor of a plumbing business and makes a donation in the name of the business. Because the business is not incorporated, your client can still claim the donation on his personal income tax return. As of 2018, he can claim a tax credit of 15 percent of the first $200 donated and 29 percent of any amounts over that threshold. On top of that, your client may also be able to claim provincial tax credits. These tax credits are not refundable, which means they can reduce your client’s tax bill but cannot trigger a refund.
Whether your clients are individuals or corporations, they can only claim donations made to registered charities, Canadian amateur athletic associations, low-cost housing corporations for the aged, municipal or public bodies, and prescribed universities outside of Canada. To accept donations and issue receipts, these organizations must register with the Canada Revenue Agency.
As a general rule of thumb, the CRA distinguishes between nonprofit organizations and charities. Charities have to benefit communities through poverty relief efforts, educational programs, and religious pursuits. In contrast, nonprofit organizations can focus on social welfare, civic improvement, or any other purposes not related to pursuing profits. For example, a local soccer league may be a nonprofit while a soup kitchen is likely to be a charity.
Your client may want to donate to nonprofit organizations to draw awareness to its company in the community, such as donating jerseys to a local hockey team. But as its accountant, you should ensure it understands these donations are not deductible unless that team is registered as part of an amateur athletic association.
Claiming Charitable Donations on Corporate Returns
Corporations can deduct up to 75 percent of their net income for charitable donations. For example, if a corporation has $1 million in net income, it can claim up to $750,000 in charitable donations. Your clients can roll forward donations they cannot claim in the current year, but most donations expire after five years.
If you have corporate clients that want to claim a deduction for charitable donations, you need to fill out Schedule 2 for them.
The first section of this form is for recording the majority of eligible donations made by your client, and section two helps calculate the maximum deduction your client can claim. If your client earned capital gains on an asset it donated, it may be able to claim more than 75 percent of its income in charitable deductions, and section two also helps you calculate this number.
To explain, imagine your client donates a building to a registered charity, and by disposing of the building, it incurs a capital gain. In this situation, it can claim a bit larger deduction. The exact amount varies based on the capital gain, recapture of capital cost allowance, and other factors.
Corporations can also claim deductions for donated cultural gifts. Certified cultural property includes any property of importance to Canada, and your clients can claim these donations in part three of Schedule 2. The properties must have a certificate from the Canadian Cultural Property Export Review Board. Again you can roll forward these deductions for up to five years.
Part four is for gifts of certified ecologically sensitive land. These deductions work the same as other corporate charitable deductions with one notable exception. As of 2018, your clients can take up to 10 years to claim gifts made after Feb. 10, 2014. If your clients donate medicine, they can report that in part five of this form. They receive a 50 percent increase on their donation for gifts made before March 22, 2017. The sixth and final part of this form is simply a chart to help you track the amount your client is going to roll forward to future years.
In some cases, your clients may be able to claim a larger credit than the amount they donated. For instance, as of 2018, farmers in Ontario, Nova Scotia, and British Columbia who donate food to eligible food banks can claim a 25 percent increase on their deduction. For example, if your client donates food with a fair market value of $100, it can claim $125 on its tax return.
When tax planning with your clients, let them know how donations can help to offset their tax liability and which donations are deductible. Keep an eye on changes to the tax law, and when your clients can claim extra credit for certain donations, let them know.