Tax Articles
Charitable Giving: A smart strategy for your community and your company
Business Times
Kais Aziz, CA
A survey* conducted by COMPAS in February, which was sponsored by BDO Dunwoody, found that for CEOs and business leaders, helping their community is the most important reason for charitable giving.
For 78% of respondents, pure philanthropy is the strongest motivator for business to give to charity. Generating publicity was a distant second reason and strengthening staff morale was the third.
These business leaders also feel strongly that charitable giving should not be mandated for employees. Rather, employees should be encouraged, and the company should lead by example such as participating in matching programs.
Donating not only benefits the community, it also benefits your business. Sole proprietors and partners residing in Ontario receive a tax credit of 21.55% on the first $200 of donations and a tax credit between 40% and 46% for donations above that amount, depending on the individual’s income level.
For corporations, the tax deduction is determined by the relevant corporate tax rate.
For most types of donations, the maximum that may be claimed by a corporation or an individual in any year is 75% of net income.
No matter how you look at it, donating is good for business. Following are some of the general rules and tax breaks with which you should be familiar. First, it’s important to know that there are restrictions regarding the type of donations that you can claim for tax purposes; donations must be a voluntary transfer of property, without expectation of receiving anything in return. Therefore gift certificates and business or personal services are not eligible donations. Neither is merchandise with a material advantage. This refers to situations such as where you donate an item for an auction and receive promotion in return. Or, you attend a charitable dinner for which the admission price is $100. If the dinner is valued at $60, you can only claim the donation portion of the event, which would be $40.
Donations that are eligible for tax credits include cash, payroll deductions, sponsorship donations, qualifying gifts of securities traded on a prescribed stock exchange (such as shares, bonds, warrants, debentures and mutual fund units), gifts in kind and capital property (such as land, buildings and equipment).
* Corporate Giving, BDO Dunwoody CEO/Business Leader Poll, published in the National Post, February 19, 2007
For qualifying gifts of securities, the entire capital gain is exempt from tax. This makes it more tax-efficient to give shares directly to a charity rather than selling the shares and donating the proceeds to the charity. There are special rules for donations of stock options.
If you donate depreciable property, such as a building or equipment, you may add 25% of the recaptured depreciation amount to your income limit, thereby enabling you to claim 100%.
Both corporations and individuals can carry forward for five years any donations unclaimed in the current year and use them to offset taxes in any of those years, up to the annual 75% limit.
Along with restrictions regarding the type of donations you can make in order to qualify for tax credits or deductions, there are also restrictions regarding the types of organizations to which you may donate. Those that are eligible include registered charities, registered Canadian amateur athletic associations, Canadian municipalities, certain housing corporations, the federal government, provincial government, the crown, the United Nations and certain foreign charities and universities. If you have US source net income that is taxable in Canada, donations to US charitable organizations also qualify.
Ultimately, government rules encourage philanthropy among Canadians. While tax savings may not be the first reason for charitable giving, isn’t it another good incentive to be generous with the organizations in your community that need your help?
Kais Aziz is a senior tax manager with BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or would like to receive a copy of BDO’s tax newsletter, contact Kais at (905) 270-7700 or kaziz@bdo.ca.
