What do Corporations Need to Know About Charitable Donations and Taxation in Mississauga
February 16, 2022 | Written by: Sohail Afzal
There are both similarities and differences between the tax treatment of charitable donations made by corporations and those made by individuals. It is generally true that a taxpayer may not claim more than 75% of their income for any given year, and unused donations may be carried forward for up to five years.
Donations made by individuals and corporations differ primarily in that individuals receive tax credits when they make donations. Individuals receive tax credits in place of income tax. Corporations receiving tax deductions for contributions reduce the amount of their taxable income. If you want to ensure that you are not taxed more than you should be, contact a professional tax firm in Mississauga. Their CPA can help you with all your corporate tax problems.
Charitable vs. Non-Charitable Donations
For the purposes of the Income Tax Act, any donation that a corporation receives from a registered charity does qualify as a charitable donation.
A corporation may donate to an organization other than a registered charity. As such, these donations do not qualify as charitable contributions under the Income Tax Act, and they are not subject to the rules above. The corporation may be able to deduct these expenses if they are being incurred in order to generate income for the business. If the donation promotes the corporation’s business, this may be the case.
As a result of past year’s unused donations that are about to expire, a corporation should consider several strategies that will increase its income in the future so that the expiring contributions can be deducted from its income. To take advantage of such strategies, some may claim less than the maximum capital cost allowance, some may not claim their allowed reserves for income tax purposes, etc.
Contributions can be in cash or in-kind (for example, giving a car or marketable security as an intangible gift). Examples include:
- Donations usually equal the fair market value of the donated asset.
- In determining the proceeds of disposition of an asset donated is based on its fair market value. The result may be the realization of a capital gain, depreciation recaptured, etc.
It is generally the case that half of a capital gain is taxable. The taxable portion of a capital gain resulting from a donation in-kind to a registered charity will, however, be zero if the donation consists of certain marketable securities held as capital property. This gives the corporation an income tax exemption on its capital gains and an equal deduction for marketable securities donated.
Corporations that do not owe taxes on their nontaxable capital gains can use the nontaxable portion of their gains to pay a nontaxable capital dividend to their shareholders. Non-taxable capital gains are generally equal to half of the capital gains. A donation of certain marketable securities held as capital property, however, can be included in the corporation’s capital dividend account if the entire capital gain is not taxable. In such a case, the corporation can give its shareholders non-taxable capital dividends.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.