Incorporated business owners will often ask their tax advisor whether they should make charitable donations with personal or corporate funds to achieve the best tax result.
Quite often, business owners will compare their corporate income tax rate of say, 13% on income eligible for the small business deduction or 27% on all other active business income, to the donation tax credit they get on their personal tax return, which can be 44% or more. A quick comparison of these rates and the conclusion business owners often come up with is that it would be more advantageous to donate personally and get a 44% tax benefit than to donate through their company and get only a 13% or 27% tax benefit, similar to their other business expenses.
There is just one glaring omission from this comparison – in order to make a personal donation you must have previously taken either a wage or dividend out of the company and paid personal tax on those funds already. This is why the personal donation tax credit is higher than the corporate one – you are being made whole for the personal level of tax already incurred.
Without going into an in-depth number crunching analysis, you can take comfort in the fact that our tax system in Canada is almost perfectly integrated such that where donations exceed $200 annually and you are at or near the highest personal tax bracket, you are generally indifferent whether you donate corporately, take a wage and donate personally, receive a dividend and donate personally, or any combination of these.
Given our tax system varies by province and type of income (i.e. salary, non-eligible dividends, eligible dividends, active income, passive income, etc.), all other factors being equal, there is generally a slight benefit to making a corporate donation over a personal one.
In reality, most incorporated business owners will make some donations personally and some corporately. The method of donation is often simply a result of how the request for support came about and what the most convenient way was to make the donation at the time. In the end, this normally produces an acceptable tax result.
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