Being an incorporated business owner, you may want to make a charitable donation through your corporation.

 

To encourage charitable giving, the government provides a corporation with a tax deduction when the corporation makes a donation to a registered charity. The deduction reduces the corporation’s taxable income, which in turn reduces the corporation’s taxes. In addition, if a private corporation makes a donation of publicly traded securities, there may be an additional tax incentive. This article provides an overview of how your private corporation can qualify for the donation tax deduction and the tax benefits of donating publicly traded securities in-kind.

Qualifying donations

To qualify for the donation tax deduction, your corporation must make a donation to a qualified donee. Qualified donees are generally organizations that can issue official donation receipts for the gifts they receive. They can be charitable organizations, public foundations or private foundations. Typically, a registered charity is a qualified donee. In this article, the terms qualified donees and registered charities are used interchangeably.

The Canada Revenue Agency (CRA) maintains a list of qualified donees on their website. When your corporation is ready to make a donation, you may wish to check the list to determine if a particular charity is currently registered and can issue official donation receipts.

The CRA considers a gift to be a voluntary transfer of money or property for which you expect and receive no consideration. You can make these gifts in cash or in-kind if the qualified donee accepts noncash gifts.

 

Donation receipts are issued for the eligible amount of a gift made to a qualified donee; this is generally the fair market value (FMV) of the donation. In certain instances, an advantage may be deemed to be received, which reduces the amount of the eligible donation. An advantage is generally the total value of any property, service, compensation, use or any other benefit you’re entitled toas partial consideration for, or in gratitude for, the gift. An example of this would be if your corporation purchased a table for a charity benefit and it cost $500. The value of the food and party is considered an advantage with a value of $250; therefore, the eligible donation amount would be $250 ($500 less the $250 advantage amount).

Corporate donation tax deduction

A corporation is entitled to a tax deduction for the donation amount against their taxable income. By reducing taxable income, the corporation reduces their tax liability. A corporation does not need to claim the full donation in a particular year. Donations can be carried forward for up to five years. Generally, a corporation can claim a deduction for charitable donations up to 75% of the corporation’s net income for the year. Generally, if your corporation is a Canadian-controlled private corporation (CCPC), and it earns both active business income that’s eligible for the small business tax rate and passive investment income, the donation deduction reduces the CCPC’s taxable income subject to the small business tax rate rather than the investment income.

Gifting publicly traded securities

If your corporation wishes to make a cash donation but doesn’t have the cash on hand, it may have to sell some securities to raise the cash. If the FMV of the securities being sold exceeds its adjusted cost base (ACB), it will trigger a capital gain in the corporation. The corporation will pay tax on the taxable portion of the capital gain, and the non-taxable portion is added to the corporation’s capital dividend account (CDA). Once the corporation receives the cash proceeds from the sale, it may donate the cash to a qualified donee and deduct the amount donated from its taxable income.

 

The capital gains inclusion rate has increased from 50% to 66.67% for all capital gains realized in a corporation on or after June 25, 2024. A corporation can also donate certain types of securities directly to qualified donee. This can be an effective donation strategy if the corporation has securities with large accrued capital gains. The corporation can deduct the full FMV of the securities donated to a qualified donee against its taxable income, reducing overall taxes payable. In addition, the capital gain on the securities donated to a qualified donee may be eliminated and the full value of the capital gain is added to the corporation’s CDA. This increases the amount that can be paid tax-free to the corporation’s shareholders.

 

A corporation is entitled to a tax deduction for the donation amount against their taxable income. By reducing taxable income, the corporation reduces their tax liability. A corporation does not need to claim the full donation in a particular year.

 

To qualify for the elimination of capital gains, the donated securities can be:

• Shares, debt obligations or rights listed on a designated stock exchange;
• Mutual funds;
• Interests in related segregated funds; or
• Government of Canada or provincial government bonds.

Before making a donation of securities, it’s important to contact the qualified donee and verify that they can accept in-kind donations.

Conclusion

Corporate charitable donations provide shareholders a chance to support their community and receive tax incentives at the same time. By donating appreciated publicly traded securities through your private corporation, you may be able to receive three tax benefits: eliminating capital gains tax on the securities donated, getting a tax deduction for the FMV of the securities donated, and increasing the CDA balance which allows you to withdraw funds from your corporation as tax-free dividends. Speak to a qualified tax advisor to see if donating through your corporation makes sense in your circumstances.

 

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