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Disclaimer: Before you consider which amount is tax-deductible in Canada and which is not, you need to consider whether the amount under consideration is a business donating some amount to a charity that is registered or if it is a corporate that is entering into a sponsorship agreement with any other entity.

In addition to other common goals for profit, companies all over the world also recognize their social responsibility. Over the years, significant new business resources are allocated to these new efforts. Organizations must consider various options and their corresponding advantages and disadvantages.

If the company wishes to support a registered charity, it can do so through a donation or sponsorship. By law, a gift requires:

  • an intention to donate property;
  • (ii) acceptance of the gift;
  • (iii) delivery of the gift; and
  • (iv) no corresponding benefits have been provided in exchange for the gift.

Under the Income Tax Act (Canada) (“ITA”), there is a broader definition of a charitable gift that allows a corporate client to obtain a benefit in exchange for a gift if the “benefit” does not exceed 80% of the fair market value of the gift. Conversely, sponsorship (which is not defined in the ITA) means the payment by a corporate client to a charity in exchange for advertising or other benefits.

If the company grants a charitable donation, it is entitled to deduct the amount shown on the gift certificate from the taxable income, provided the following:

  1. The deduction does not exceed 75% of the company’s taxable income and any excess can be transferred to five years.
  2. If sponsorship is a reasonable expense or a profit-generating expense, then it would qualify as a corporate expense for Canadian income tax purposes that can be deducted from the company’s taxable income.
  3. Business expenses differ from charitable donations in that they are business expenses: (i) not subject to the 75% limit; and (ii) cannot be carried forward for five years.

From a tax perspective, therefore, charitable donations and sponsorships have tax advantages that are very similar to those of corporations.

Corporate donations to charities can include gifts of gift cards, inventory, real estate, and leasing interests, but exclude services because there must be a transfer of assets for the gift to exist. ZDP has special rules regarding certain types of property that are donated to a charity: medicines, inventory, life insurance, capital goods, cultural goods, and environmental goods.

But, wait. There are a few legal issues that any corporation would have to take care of. They have been covered for you below:

  1. What level of approval is required to approve a gift/sponsorship – approval by the board, executive, others?
  2. Do the articles of association or other original documents allow, in addition to the consideration for the profit of the company, also the authorization of the activities in question?
  3. Is there a sponsorship agreement for sponsorship that clearly states what benefits and information a corporate customer is entitled to?
  4. Should a board committee or other internal group be formed to develop donation/sponsorship policies?

The corporate client should also consider whether there are any risks associated with working with a particular charity or project, bearing in mind: anti-terrorism laws; tax concealment rules; adequate levels of financing costs; and charitable activities and other policies.

Are you registered in Canada?

Corporations are classified as residents in their management, headquarters and controls are located somewhere in Canada. (e.g., if the company’s board of directors meets in Canada). In addition, a company incorporated in Canada after April 26, 1965, is generally regarded as a resident in Canada for the purposes of the Income Tax Act. In order to be able to take advantage of the tax deduction, you need to be registered in Canada.

Conclusion

Yes, individuals pay taxes up to 45%or beyond in Canada, while corporate pay much higher than that, but there are a few things that are tax-deductible.

Companies may want to create a parallel charitable foundation for their charitable donations. A charitable foundation can help in uplifting their public image, as there will be a separate entity that will collect and manage the money raised from employees, customers, and others, and also allow (within certain parameters) to build a capital base to support charitable activities. ongoing if at some point corporate profits are low. These benefits need to be weighed against the initial and ongoing costs of establishing and maintaining a separate management structure, including bookkeeping and financial reporting.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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