Disclaimer: These information is included here are for reference and information only. They are purely hypothetical and expert advice is strongly recommended. Tax payer should speak to their own financial advisors to be informed what is best for their particular situation
You are the owner of an incorporated business who has $10,000 to donate to charity. The corporation is an Ontario-based Canadian-Controlled Private Corporation (CCPC) eligible for the Small Business Deduction, so a $10,000 charitable donation will reduce the corporation’s tax by $1,550 ($10,000 x 15.5%).
If, on the other hand, the client makes a $10,000 donation personally from cash on hand, the tax savings is approximately $4,600 ($10,000 x 46%), ignoring the lower tax credits on donations up to $200. Based on these assumptions, the after-tax cost to the corporation of donating $10,000 to charity is $8,450, compared to a cost to the individual of only $5,400. As a result, it may be more advantageous for the business owner to donate to charity with personal sources of cash.
For your business owner client to have cash to donate to charity, she needs to receive a salary or dividend. Let’s look at a salary example first. In order to withdraw $10,000 from the corporation, the business owner will pay income tax on this additional income. Assuming a 46% tax rate, the business owner will be liable for approximately $4,600 of personal income tax.
Based on our assumptions above, the $10,000 donation to charity will generate a tax savings to the business owner of approximately $4,600. As a result, the additional taxes owing on the salary is offset by the tax credits from the charitable donation. Therefore, if the business owner needs to pull additional salary out of the corporation in order to make a donation, she may be better off simply by having the corporation make the donation. In addition, the donation creates a cash flow problem, since the business owner will have to come up with additional sources of cash in order to contribute the full $10,000 to charity.
Is it more beneficial for the business owner to take dividends? If dividends are paid out of the business, the business owner will end up with approximately $5,370 after the corporation and shareholder pay tax on the income, representing an overall tax liability (46.3%) similar to that of salary being paid to the shareholder (46.4%). In this situation, as above with the salary example, because the business owner will receive a non-refundable tax credit of approximately $4,600, the net tax savings from this strategy would be negligible.
As a result, it may be better for the client to make the donation directly from the corporation rather than paying out income to donate.