‘Tis the season of giving, and along with it come many questions about the income tax treatment of charitable donations.
Individual vs. Corporate Tax Treatments
It’s important to know that the income tax treatment of charitable donations made by a corporation has both similarities to and differences from the tax treatment for charitable donations made by an individual. In either case, the amount that may be claimed in a year is generally limited to 75% of income for that year, and unused donations may be carried forward for up to five years.
The primary difference between an individual and corporate charitable donation is that when an individual makes a donation, they receive a tax credit. The tax credit reduces the income tax otherwise payable by the individual. When a corporation makes a donation, it receives a tax deduction, which reduces the amount of income that is subject to tax.
Charitable vs. Non-Charitable Donations
Any donation for which a corporation receives an official donation receipt from a registered charity would be a charitable donation for the purposes of the Income Tax Act, and would be subject to foregoing rules.
Sometimes corporations make donations to organizations other than registered charities. These donations are not charitable donations for the purposes of the Income Tax Act and aren’t subject to the rules above. However, they may be deductible for tax purposes provided that they were made for the purpose of generating income from the corporation’s business. This may be the case where, for example, making the donation promotes the corporation’s business.
If a corporation has unused donations from prior years that are at risk of expiring, the corporation should consider some strategies to increase its income so that the expiring donations may be deducted. Such strategies could include claiming less than the maximum amount of capital cost allowance, not claiming allowable income tax reserves, etc.
Donations may be in cash or in-kind (i.e. gifting a tangible asset such as a car, or an intangible asset such as marketable securities). Where a donation is made in-kind:
- The amount of the donation is generally equal to the fair market value of the asset donated.
- The asset donated is considered disposed of for proceeds of disposition equal to its fair market value. This may result in the realization of a capital gain, recaptured depreciation, etc.
Generally, the taxable portion of a capital gain is equal to half of the capital gain. However, where a donation in-kind to a registered charity consists of certain marketable securities held as capital property, the taxable portion of the capital gain will be nil. In this scenario, the corporation doesn’t pay any income tax on the capital gain and gets a deduction equal to the value of the marketable securities donated.
For certain types of corporations, the non-taxed portion of a capital gain is added to the corporation’s capital dividend account, and may be used to pay a non-taxable capital dividend to the corporation’s shareholders. Generally, the non-taxed portion of a capital gain is equal to half of the capital gain. However, in the case of a donation in-kind to a registered charity consisting of certain marketable securities held as capital property, the entire capital gain is non-taxable and may be added to the corporation’s capital dividend account. In this scenario, the corporation’s ability to pay non-taxable capital dividends to its shareholders is increased.
Please contact your DMCL advisor to discuss how these rules apply to your corporation.
Article written by Stewart Bullard, CPA, CA.