Weighing the Benefits of Charitable Tax Donations
The spirit of giving grows stronger and stronger as we approach the holiday season — and with the end of the 2015 tax year you may be thinking about how those charitable donations affect your taxes. Before loosening those purse strings, it's important to do some sleuthing. For example, instead of asking, "what should I give?" start by asking your accountant, "how should I give?"
There can be significant differences in tax benefits between donating as an individual and donating as a business, and sometimes there's no difference at all. It's also important to note when it's time to donate. As a business, charitable donations are based on the end of a fiscal year, as opposed to December 31 for individual donations.
Where you live is also an important factor. Each province has its own rules, and Alberta has one of the highest charitable tax credits in the country. Every dollar donated over $200 allows for a non-refundable tax credit of 50% — between your Alberta and Federal tax return. This means a donation or donations of $500 dollars earn a $200 tax credit.
Both an individual and a corporation can claim a non-refundable tax credit up to 75% of their net income, however, as a business the donation is claimed as a tax deduction against taxable income.
What it really boils down to is the percentage of the tax savings, which changes from business-to-business and from individual-to-individual. A charitable donation may reduce a corporation's tax by a set amount but it could save the individual significantly more. The numbers can change, however, when accounting for the salary or dividend that's used to pay for the donation. The business owner is liable for the personal income tax that comes from withdrawing the money to pay for the donation.
Talk to your accountant. Giving is good – maximizing your taxable benefit is even better.