Charitable Donation Deductions in Canada

Gifts in Kind & U.S. Donations May Not Count

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Question: What are the limits on charitable donation deductions for a Canadian business?

Answer:

Whether you are filing personal Canadian income tax or corporate income tax, the rule for charitable donation deductions is basically the same if you're running a Canadian business.

As a sole proprietorship or partnership filing a T1 income tax return, you can claim on line 340 charitable deductions and gifts of up to 75 percent of your net income (line 236).

The exception to this rule relates to the taxpayer’s death; "For the year a person dies and the year before that, this limit is 100 percent of the person's net income" (General Tax and Benefit Guide, Canada Revenue Agency).

The maximum amount of charitable donations that a Canadian-controlled corporation filing a T2 income tax return can claim is the same; 75 percent of its net income (line 300).

You cannot claim charitable donations to create or increase a loss but unused charitable donations can be carried forward and used in any of the five following tax years.

What Organizations Qualify as Donees?

The CRA lists the following organizations as eligible to issue official donation receipts:

What About Donations to U.S. Charities?

The tax treaty between Canada and the U.S. allows for deduction of donations made to U.S. charities if your business has U.S. source income. If this is the case you may donate to U.S. charities and claim the eligible amount of U.S. gifts up to 75 percent of your U.S. income reported on your Canadian tax return.

Do Gifts (Donations in Kind) Qualify?

A registered charity may issue donation receipts for non-monetary gifts, however in order to do so the charity must be able to determine fair market value (FMV) for the gift, which can be difficult in some cases. The Canada Revenue Agency (CRA) states:

"Generally, if the fair market value of the property is less than $1,000, a member of the registered charity, or another individual, with sufficient knowledge of the property may determine its value. The person who determines the fair market value of the item should be competent and qualified to evaluate the particular property being donated. If the fair market value is expected to be more than $1,000, we strongly recommend that the property be professionally appraised by a third party (that is, someone who is not associated with either the donor or the charity)."

The CRA keeps a close eye on donations in kind to charities due to abuses of the system that have occurred in the past (situations where donors were given tax receipts in excess of the fair market value of the gift). If an audit reveals that a claim for a gift donation was excessive the claim may be disallowed. Charities that engage in such  practices risk monetary penalties or loss of charitable status.

For more information on what charitable donations a corporation may make and how a corporation may increase the amount of charitable deductions, it is allowed to claim on its income tax, see the Canada Revenue Agency's T4012: T2 Corporation Income Tax Guide.

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