There is ample opportunity in today’s society to give back to organizations in need of monetary donations. Most people can list off several organizations worthy of being the recipient of their hard earned money. Making the decision to donate and who will get your money is the first step in giving back.
But it’s also important to consider your own situation so that you maximize your donation and ensure you get the best tax credit available. In this blog post, our Tax Manager, Mary Ann Donahoe looks at the important question - which is the best option, donating directly from your corporation or donating personally?
Well the answer isn’t simple. There are a number of things to consider:
For the corporation
You need to determine the tax rate of the corporation, whether it is taxed at the small business corporation rates, the general income rates or taxes on investment income rates. Also the corporation must be taxable to benefit from the deduction. This will determine the tax saving for your corporation.
For the personal donation
If you are donating personally you will need to access funds from your company. You need to either take a wage or a dividend to draw the money out of the company and take the tax on that income into consideration when calculating the best option. So which is a better option - a wage or a dividend? Well, that depends!
What is your personal tax rate? What tax bracket are you in? That will determine how much tax you will pay on the wage or dividend you take from the company.
One thing we know is in PEI the tax saving on donations in excess of $200 is 45.7% of the donation.
The next step is to do the math. Look at the potential tax saving in your particular company and compare that to the net tax saving personally after taking into consideration the extra income (wage or dividend) you need to make the personal donation.
In general terms, if you are in a lower tax bracket personally it is usually more beneficial to make the donation personally. The higher your income the more likely the benefit will revert to a company donation.
For example, using a Canadian Controlled Private Corporation in PEI with income eligible for the Small Business Deduction and comparing the savings by the company verses an individual in PEI whose income is in the “middle” tax bracket (45-63K) or the “highest” tax bracket (over 200K).
With the “middle” income calculation, it is more beneficial to take a wage from the company and make the donation personally. There was an additional 11.4% tax saving compared to a corporate donation.
With the “high” income calculation, it was better to make the donation in the company with an additional tax saving of 5.67% compared to taking a wage from the Company and making the donation personally.
As you can see, donating from your personal account versus your corporate account can have different implications. It is important that you are informed and have the best strategy in place so that you are maximizing your money.
We recommend that you consult your tax adviser to obtain advice that is specific to your situation.
We are pleased to share in this announcement as our colleague at Teed Saunders Doyle & Co., Andrew Logan, CPA, CA is the new president of DFK Canada. We congratulate Andrew and look forward to his leadership in the coming years. We thank outgoing president Paul Panabaker, FCPA, FCA, CFP, RFP, TEP for his contributions to the association. We also welcome Lynn Morrovat as the organization's executive director.