In short, the CRA treats the voluntary transfer of property or cash as a gift. Here’s a quick overview of the rules about charitable giving for small businesses in Canada.
When a business gives cash or property to a qualified donee, the qualified donee issues the official donation receipt. The donor does not issue the receipt. The receipt generally shows the eligible amount of the gift, which is used to support the charitable donation deduction or tax credit claim. The donated amount attracts a tax deduction against your business income. It reduces taxable income and your tax liability. You are under no obligation to claim total tax deductions. You can carry this forward for up to five years, which allows you to optimize high donations against a low taxable income.
Tax deductions limitation
Small businesses in Canada can claim deductions on charitable donations for up to 75 percent of their net income. The only exception is death. Upon a taxpayer’s demise, a business can claim 100 percent. However, the claim is for the year before and after death.
Corporate donation vs. individual donation
There is an essential distinction between a corporate donation and an individual donation. When a corporation donates to a qualified donee, it may generally claim a deduction from taxable income, subject to the applicable limits. When an individual makes a personal donation, they may generally claim a non-refundable charitable donation tax credit. The tax result is not identical, so business owners should consider whether a corporate or personal donation is more effective for their situation.
Tax credits
Additional tax credits apply per province. In Quebec, a $1,000 donation carries a tax credit of $494. A similar donation in Alberta attracts $450 and $361 in Ontario. In all these instances, the assumption is that a donor has met the 75 percent income threshold.
Who qualifies for charitable deductions?
Businesses can only donate to qualified entities. Most of these entities comprise registered charities. The Canadian Government and the United Nations (including all its agencies) also qualify to receive donations.
Charities in the U.S.
Donations to U.S. charities may qualify in limited situations, but the rules are specific. In general, Canadian taxpayers may claim eligible gifts to certain U.S. organizations only against certain U.S.-source income, subject to the applicable limits. Some U.S. universities and certain foreign charities may also qualify if they meet CRA’s qualified donee rules. Because foreign donation rules are narrow and technical, business owners should confirm eligibility before assuming a donation will be deductible or creditable in Canada.
Giving in kind
So far, we have only dealt with donations in cash. Other types of donations also qualify for a tax credit. These include listed securities, goods, and land. The fair market value determines what to offset from the tax liability.
Some of these rules seem confusing or complicated, but they are straightforward once you understand the dynamics.
If you’re looking for an experienced accounting partner who will help minimize your tax obligations and help with your charitable giving for small businesses needs, contact us for more information. Visit our blog for more articles, news, and updates about small business accounting, tax planning, CRA audits, and bookkeeping.