In short, the CRA treats the voluntary transfer of property or cash as a gift. Here’s a quick overview of the rules about charitable giving for small businesses in Canada.

Once you give to charity, you issue a donation receipt to a qualified donee (recipient) equivalent to the monetary value. The donated amount attracts a tax deduction against your business income. It reduces taxable income and your tax liability. You are under no obligation to claim total tax deductions. You can carry this forward for up to five years, which allows you to optimize high donations against a low taxable income.

Tax deductions limitation

Small businesses in Canada can claim deductions on charitable donations for up to 75 percent of their net income. The only exception is death. Upon a taxpayer’s demise, a business can claim 100 percent. However, the claim is for the year before and after death.

Corporate donation vs. individual donation

There is an essential distinction between a business donation and an individual one. When your business donates to charity, it can claim a tax deduction against income. On the other hand, you claim a tax credit if you make a personal donation. Otherwise, the tax impact for both entities is the same.

Tax credits

Additional tax credits apply per province. In Quebec, a $1,000 donation carries a tax credit of $494. A similar donation in Alberta attracts $450 and $361 in Ontario. In all these instances, the assumption is that a donor has met the 75 percent income threshold.

Who qualifies for charitable deductions?

Businesses can only donate to qualified entities. Most of these entities comprise registered charities. The Canadian Government and the United Nations (including all its agencies) also qualify to receive donations.

Charities in the U.S.

You can donate to charities in the U.S. and claim the tax credit, but there is an exception. The source of business income must be from the United States. For tax credits, a similar threshold, 75 percent of your income, applies. Donations to non-U.S. or non-Canadian charities do not qualify for tax credits.

Giving in kind

So far, we have only dealt with donations in cash. Other types of donations also qualify for a tax credit. These include listed securities, goods, and land. The fair market value determines what to offset from the tax liability.

Some of these rules seem confusing or complicated, but they are straightforward once you understand the dynamics.

If you’re looking for an experienced accounting partner who will help minimize your tax obligations and help with your charitable giving for small businesses needs, contact us for more information. Visit our blog for more articles, news, and updates about small business accounting, tax planning, CRA audits, and bookkeeping.