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A scale with assets on one side and a heart on the other, representing the balance in small business philanthropy between financial wealth and social good.

Smart Philanthropy for Small Businesses: Tax-Efficient Giving in Canada

Written for Business Owners

Get a quick overview of smart business philanthropy in this video:

For in-depth information, read the full blog post below:

Rajiv, an entrepreneur in the healthcare technology sector, had always supported local charities on an ad-hoc basis. He felt good giving back, but never thought of giving as a strategic part of his business plan. Then, he connected with a team of advisors who specialized in philanthropy. They helped him align his giving with supporting youth STEM programs, while also maximizing the tax benefits and boosting his company’s reputation within the community. Giving wasn’t just about writing a cheque anymore – it was an integral part of his business success.

Smart philanthropy isn’t just about donating money – it’s about aligning your giving with your business goals, maximizing tax benefits, and creating a lasting impact. Let’s dive into how you can make your philanthropic giving a strategic part of your business plan.

An infographic showing how smart philanthropy is a win-win for business and community

The Benefits of Smart Giving: Beyond Tax Breaks

Philanthropy isn’t just about tax breaks – it’s a powerful business strategy. Let’s discover the many ways giving can benefit your company.

The Benefits of Smart Giving: Beyond Tax Breaks

While tax advantages are a significant benefit, strategic philanthropy offers a multitude of advantages for your business. Let’s explore some key ways that smart giving can enhance your success:

Reputation Enhancement

Supporting causes that align with your company’s values positions you as not just successful, but as a force for good within the community. For example, a software company focused on productivity tools could partner with a foundation providing tech scholarships to students from underrepresented backgrounds. This type of targeted giving demonstrates commitment to creating opportunities and can attract both socially conscious customers and top talent.

Stronger Community Engagement

Invest directly in your local community through philanthropy.  Whether you sponsor local initiatives, provide in-kind services, or encourage employee volunteering, these actions build goodwill and position your business as a community leader.

Employee Morale & Talent Attraction

Employees, particularly younger generations, want to work for companies that have a positive social impact. Matching donation programs, company-wide volunteer days, or establishing a charitable fund with employee input can boost morale, increase retention, and attract values-driven individuals to your team.

An infographic highlighting the advantages of smart philanthropy for small businesses

Maximizing Your Donation’s Impact

Donating publicly-traded securities that have grown in value is a tax-smart way to give more to the causes you care about. Here’s why:

  • Eliminate Capital Gains Tax: When you donate appreciated securities directly, you avoid paying capital gains tax on their increased value. 
  • Maximize Your Giving Power: By eliminating capital gains tax, you can donate a larger amount or support multiple causes without increasing your out-of-pocket costs.
  • Strategic Tax Planning: Donations create tax deductions for corporations and personal tax credits for individuals. Understanding the difference is crucial. We can help you develop a giving strategy that maximizes tax benefits for both you and your business.

Smart philanthropy isn’t just about maximizing the donation itself. Should you donate corporately or personally? The right strategy depends on your specific goals.

Should You Donate Corporately or Personally?

When deciding how to structure your charitable giving, it’s important to weigh the benefits of donating through your business versus donating as an individual. The best approach depends on your specific circumstances. Consulting with an advisor specializing in philanthropy ensures you maximize the tax benefits while aligning your giving with your overall goals.

Tax Implications

  • Corporate Donations: Receive a tax deduction, which reduces your business’s taxable income.
  • Personal Donations: Qualify for a tax credit, which directly reduces the amount of tax you owe.

Decision Factors

  • Location of Assets: If the assets you wish to donate (cash, securities, property) are held within your business, a corporate donation might be the most straightforward.
  • Tax Optimization Needs: Consider which entity, your business or yourself, has the greater need for tax reduction in a given year.
  • Alignment with Intent: Does the donation support a cause that aligns more with your personal values or with your company’s philanthropic mission?

Important Note: Both corporate and personal donations have annual limits for tax deductions and credits based on a percentage of income and can be carried forward for up to five years.

Example

You own a successful business and hold appreciated publicly-traded securities, both within the business and personally. You could make a corporate donation of the company-held shares and a personal donation of the individually-owned shares. This strategy could maximize your tax benefits while aligning giving with different causes.

Types of Donations

This section provides an overview of the different ways businesses can give, focusing on options that offer strategic tax advantages. We’ll discuss the pros and cons of each method to help you make informed decisions.

Cash Donations

The most common form of charitable giving, cash donations offer immediate tax benefits and are the simplest to execute.

  • Pros: Simplest method, immediate tax benefits, can be done through cash, cheque, or credit card.
  • Cons: The most expensive way to donate after-tax, lacks the potential for amplified tax benefits compared to other asset types.

Donating Appreciated Securities

Donating appreciated stocks, bonds, or mutual funds allows you to make a larger charitable impact while minimizing your tax burden.

  • Pros: Eliminates capital gains tax, allows for a larger donation, potential long-term tax benefits.
  • Cons: Slightly more complex than cash, requires holding appreciated assets.

In-Kind Donations (Goods or Services)

A powerful way to support causes by donating your company’s products, services, or professional expertise.

  • Pros: Non-cash way to give, can align donations with your business offerings.
  • Cons: Valuation can be tricky, may need to find charities that specifically want your goods/services.

Real Estate

Donating commercial or residential property can offer significant tax benefits and create a lasting legacy.

  • Pros: Potential for significant donations, may eliminate capital gains tax, legacy impact.
  • Cons: Complex process, illiquid asset, finding the right recipient charity can be challenging.

Private Company Shares

Donating shares in your private company can be a tax-efficient way to support charities while facilitating succession planning.

  • Pros: Potentially significant tax benefits, supports succession planning, aligns philanthropic goals with your business ownership.
  • Cons: Requires valuation, process can be complex, liquidity considerations.

Other Assets: Art or Undeveloped Land

While less common, donating valuable art or undeveloped land can offer substantial charitable benefits.

  • Pros: Can eliminate capital gains tax, option for unique and significant donations.
  • Cons: Complex valuation process, finding charities equipped to receive these assets.

Donating Directly vs. Through a Foundation

When engaging in corporate philanthropy, businesses have the choice of donating directly to their chosen charities or establishing a giving structure through a foundation. Each approach offers distinct advantages and considerations.

Direct Donations

  • Pros: Simple and immediate, full control over the timing and recipients of donations.
  • Cons: Less administrative support, may require ongoing research into charities, potential for less strategic giving over time.

Giving Through a Foundation

  • Pros: Structured approach to philanthropy, professional management, enhanced branding opportunities, allows for long-term giving strategy, potential to separate the timing of donations from the grant making.
  • Cons: Increased setup and administrative costs, may necessitate relinquishing some control of grant decisions.

Types of Foundations

  • Donor-Advised Funds (DAFs): Offer flexibility and administrative ease. Popular DAF providers include:
    • Community Foundations across Canada (e.g., Toronto Foundation, Vancouver Foundation)
  • Private Foundations: Offer greater control over grant making and the potential for legacy building. Require more significant setup and ongoing administrative involvement. They also offer less privacy than public foundations.

Deciding Which Approach is Right

The optimal choice depends on factors such as:

  • Size and frequency of planned donations.
  • The desire for control over grant making decisions.
  • Long-term philanthropic goals and branding considerations.
  • Level of administrative involvement the business is willing to undertake.

Choosing the Right Cause

This section aims to provide guidance on selecting charities that align with a business’s values, resonate with stakeholders, and create meaningful impact.

Key Considerations

  • Alignment with Values: Identify causes that reflect your company’s mission, industry, and core beliefs.
  • Employee & Customer Engagement: Consider causes that your employees are passionate about and that resonate with your target customers.
  • Impact and Effectiveness: Research a charity’s track record, programs, and how they measure success.
  • Due Diligence: Utilize resources like Charity Intelligence Canada to evaluate a charity’s financial health, transparency, and governance.
  • Building Relationships: Beyond simply donating, explore opportunities for deeper partnerships, such as employee volunteering or skills-based giving.

Example: Alignment in Action

  • Scenario 1: Mid-sized software company with a focus on productivity tools donates annually to a foundation providing tech scholarships to students from underrepresented backgrounds. This demonstrates alignment with their industry, boosts their reputation as a company committed to diversity, and may enhance employee morale and talent attraction.
  • Scenario 2: The founder of a successful tech startup establishes a donor-advised fund focusing on local community initiatives after selling a portion of their shares. This highlights tax-efficient giving, flexibility in supporting various causes, and potential for legacy building.

Frequently Asked Questions About Corporate Philanthropy

Get the most out of your corporate giving with answers to these common questions.

Q: Are corporate charitable donations tax-deductible in Canada?

A: Yes. Corporate donations receive a tax deduction, reducing your company’s taxable income. However, Canada has relatively low corporate tax rates compared to some other countries, which impacts the immediate tax benefits of these donations.

Q: What are the differences between corporate and personal donations in terms of tax benefits?

A: While both corporate and personal donations generate tax benefits, they differ in how they are applied. Corporate donations provide tax deductions, while personal donations qualify for tax credits. Strategic giving often involves a combination of both approaches depending on the individual’s and the business’s specific financial situation.

Q: Is it always better to donate appreciated assets rather than cash?

A: Donating appreciated assets like publicly-listed securities can be more tax-efficient than donating cash. By donating securities, you eliminate the capital gains tax on their increased value, maximizing your donation’s impact. However, other factors like your current tax situation and the type of donation you’re making should be considered.

Q: What are other types of assets I can donate besides cash and securities?

A: Businesses can donate various assets, including real estate, private company shares, in-kind goods or services, and even art or undeveloped land. Each type of asset donation offers unique benefits and considerations.

Q: Are there donation limits I need to be aware of?

A: Yes, there are annual limits on the amount of charitable donations that can be claimed for tax deductions or tax credits. These limits are a percentage of your personal or company income, depending on whether you’re donating personally or through your corporation. Any unused deductions can be carried forward for up to five years.

Q: How does establishing a company foundation affect my giving strategy?

A: A company foundation (either a private foundation or a donor-advised fund) provides a structured approach to giving. It can offer enhanced tax benefits, branding opportunities, and the ability to separate the timing of donations from the grant making process.

Q: When is the best time to donate?

A: The optimal time for corporate donations depends on various factors, including your company’s tax situation, the timing of liquidity events (sale of business, etc.), long-term philanthropic goals, and the specific needs of the chosen charities.

The Power of Smart Philanthropy

While charitable giving is fundamentally about doing good, it also offers a multitude of benefits for your business. Smart philanthropy can boost your reputation, enhance employee engagement, strengthen community ties, and maximize your tax advantages. It’s more than just writing a cheque – it’s about aligning your giving with your business goals for long-term success and impact.

If you’re ready to explore the power of philanthropic giving, let’s connect and discuss how we can develop a customized strategy to maximize the benefits for both your business and the causes you champion. Let’s make philanthropy a cornerstone of your success story.

Tags: philanthropy, small business owners