As a business owner, you may already make personal charitable donations to worthy causes. But have you considered also giving via your corporation? As we’ll discuss in this article, there can be meaningful advantages for entrepreneurs who do so.
Personal vs. Corporate Giving: How They Compare
The Canada Revenue Agency (CRA) treats personal and corporate donations in a similar, but not identical manner. In both cases, you can claim donations equal to 75% of net income in a given tax year. Corporations and individuals may also carry forward unclaimed donations for a period of 5 years. This may be especially beneficial for a business that believes its profits will rise in the years following a donation—as its tax liability can be smoothed out to a certain extent.
One key difference is that claiming personal donation results in a non-refundable tax credit, while a corporate donation simply entitles the donor to a tax deduction. In both cases, however, the tax liability is reduced.
What to Give: Cash vs. Securities
Donating cash is a popular way of giving to charity, and there’s really no downside to doing so. But it’s not the only way. If your business holds qualifying securities* with an unrealized capital gain, these can be ideal for charitable purposes. You simply gift the shares to a registered charity. A company can receive a tax deduction equal to the fair market value of the securities and eliminate any capital gains tax that would have been payable.
Gifting appreciated securities is preferable to selling the securities, recognizing the gain, and then donating cash. By gifting the securities “in-kind”, you maximize the amount you donate (helping the charity), and you also maximize the tax deduction you’ll receive.
*Qualifying securities include stocks and debt obligations that trade on an exchange, mutual funds, or provincial or federal Canadian government bonds.
But Wait, There’s More!
By donating appreciated securities from your business, you also get to withdraw the 50% non-refundable portion that flowed into the capital dividend account tax free. This is great if you’ve been looking to take money out of your corporation but have been wary of the tax consequences.
Catalysts to Give
If a corporation has multiple shareholders, sometimes a catalyst emerges that allows for a large charitable donation. Typically, this is a liquidity event, such as the sale of property, or the sale of a business unit. These transformational events can bring a huge cash windfall to the business and spark conversations about giving back to the community.
Donor-Advised Funds vs. Foundations
Charitably minded business owners may wish to set up a Donor-Advised Fund (DAF) to facilitate their philanthropy. A DAF is its own entity, and whoever funds it (personal or corporate) receives the deduction. Donor-Advised Funds come with multiple advantages:
- You can place larger sums into them and receive a tax receipt immediately. This can be beneficial after a sale of property or even a sale of an entire venture. You can then choose to disburse this money over a long period of time.
- DAFs offer flexibility to change your mind with respect to which charities you will support. Plus, they allow for continuity as your family members can eventually assume decision-making authority.
- DAFs have flexible disbursement quotas – not necessary the mandated 5% of private foundations.
- Setting up and administering a DAF is much cheaper than a private foundation. In addition, you can fund a DAF with as little as $25,000, and then add to the fund over time if you’d like.
We are very familiar with Donor-Advised Funds and can help you get one up and running with little hassle.
Finding That Passion
We’ve covered some of the ins and outs of giving through your business. Practicalities aside, though, what’s really important is deciding what causes you care about, and what charities can best address them. You’ve worked so hard for the assets you’re giving away, so spending considerable time ensuring they’re going to the right place is crucial.
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.
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