Tax Articles
Tax and Philanthropy
Wayne Dunkel
The Advocate.
Fall 2009
Business and philanthropy are no strangers these days. Local organizations and their employees have and continue to respond to the needs of our community and of those farther from home.
The Government of Canada provides tax incentives to corporations and individuals for making a qualified donation, such as a gift of goods or money, to a qualified donee.
A qualified donee could be a registered charity, the Government of Canada, a province, or a municipality. If there is any doubt, the Canada Revenue Agency maintains a list of registered charities.
Calculating the dollar amount of a donation is straightforward, unless you receive some benefit, such as tickets to an event. In that case, the ticket value must be deducted to determine the amount that qualifies for income tax purposes. Other rules may apply when goods or property are donated.
But what is the actual tax benefit? It could be quite different for a corporation that makes a donation versus an individual.
For a corporation, the tax benefit depends on its income tax rate. A corporation receives a deduction from its taxable income equal to the amount of the qualifying donation, subject to certain limitations. With a corporate tax range of 16.5% to 48%, the tax benefit on a $1,000 donation can range from $165 to $480. The deduction is limited to 50% of the corporation’s net income, so it needs $20,000 of net income to deduct a $10,000 donation. There are carry forward rules for donations in excess of this 50% amount.
On the other hand, individuals who make a donation receive a tax credit rather than an income deduction. The amount of the credit is not dependent on income; all donations in excess of $200 receive a tax benefit at the highest tax bracket (46.23%) in Ontario. Whether someone earns $50,000 or $500,000, he/she will receive the same benefit. A $10,000 donation provides an individual with a tax benefit of $4,600, so the actual donation cost is $5,400. There are certain restrictions on the amount of donations for which an individual can receive a tax credit; generally, the donation cannot exceed 75% of the individual’s net income.
Some types of donations can offer additional benefits, such as a donation of shares or debt of a corporation listed on a Canadian Stock Exchange. For example, assume the shares to be donated have a value of $50,000 and a cost of $10,000:
| Option 1: Sell the shares then donate the proceeds |
Proceeds
Cost
Capital gain
Income tax on Capital gain
Donation
Tax benefits (46%)
Tax cost of Capital gain
Net cost of donation |
$50,000
10,000
40,000
9,200
50,000
(23,000)
9,200
$ 36,200
|
Option 2: Donate the shares
Capital gain
Donation
Tax Benefits (46%)
Net cost of donation $ |
deemed to be 0
50,000
(23,000)
27,000
|
There are many community needs being addressed by our donations; maximizing the tax benefits will also maximize the assistance we can provide.
