As a small business owner, there are a variety of non-financial benefits you can gain by making charitable contributions from your business. From a purely financial perspective, if you’re considering making charitable donations this tax year, there are some things to consider to determine whether those donations should come from your business account or your personal account.
How Much Can Be Claimed: Personal vs. Business?
As of 2017, rules for charitable donation deductions are similar whether you are filing a personal Canadian income tax or a corporate income tax. Individuals can claim a non-refundable tax credit of up to a maximum of 75 percent of their net income. The limit for individuals goes up to 100 percent of net income in both the year preceding death and the year of death. Corporations can claim up to 75 percent, and the donation is applied as a deduction against taxable income. This applies to in-kind gifts as well instead of just cash.
In both the personal and business cases, charitable donations can not be claimed to create a net loss or increase a current loss. However, unused charitable donations can be carried forward for up to five tax years. Also, there is something unique to think about for businesses that are classified as investment holding companies. Since these entities are typically taxed higher than normal businesses, a charitable donation from an investment holding company has more "bang-for-the-buck" than one from a normal business or personal account.
Examples Donations Through Business and Personal Accounts
Some quick examples can help show the implications of a donation to charity through business accounts or personal accounts. Assume your business has $5,000 to donate. If the business is eligible for the Small Business Credit, this donation reduces your business’s tax liability by 15.5 percent, or $775. If you instead donate the money from personal funds, ignoring the lower tax credits for donations up to $200, you reduce your personal taxes by approximately 46 percent, or $2,300. In this scenario, donating from your personal account is the better idea. This assumes that you have the cash on hand to make the donation. If you had to take income from the business in order to make the donation, that changes everything.
If you withdraw the $5,000 as salary from the business, you must first pay tax on it. Assuming a 46-percent tax rate on this salary withdrawal, $2,300 is added to your personal tax liability. This exactly offsets the tax benefit from making the charitable donation from a personal account. In this scenario, it only makes sense to have the business make the charitable donation directly. In the case that the $5,000 is taken out as a dividend, the business and the shareholder must pay tax on it. With the many moving parts and tax rates in this scenario, it isn’t totally clear if it is better for the business or the individual to make the donation in this case.
Overall, there are many factors unique to your personal situation and business that need to be analyzed in order to make the most financially efficient charitable donation. Due to the potential complexities, it’s a smart idea to consult with a tax professional with in-depth knowledge of the latest charitable rules and regulations.