Jared Pilon
It seems like nearly every day that goes by, taxes of one kind or another are being increased.
These rate increases are eating away at your hard-earned income & capital.
According to Investment Executive, individuals in 8 of 10 provinces face top tax rates exceeding 50% in 2024. In Alberta, income in excess of $355,000 in 2024 will expose you to the top rate of 48%.
Luckily, there is a way to mitigate some of these rising rates through a few simple steps depending on whether you are an employee or a shareholder of a privately held corporation.
This blog will look at the benefits of donation over taxation and how you can use donations to reduce your tax burden, support an organization that you value and take back some of the control that the government continues to steal with respect to your finances.
Donations – Employees
Each year you give a portion of your after-tax income to charities that you value most. When the following tax season comes, you file your return and receive a refund due to the application of the donation tax credit.
While it may be nice to get a sizable refund once a year, in reality you are actually giving the government an interest-free loan. I guarantee that you are in a better position to spend your hard-earned income than any politician or bureaucrat in this country. So, what do you do about it?
The answer is simple. You complete Form T1213 Request to Reduce Tax Deductions at Source and file the same with the Canada Revenue Agency (CRA). Once processed by the CRA, they will issue a ‘Letter of Authority’ which is then given to your employer. The letter will provide instruction as to how to lower the tax withholdings on your regular paycheque, thus translating into more cash in your pocket during the year.
Donations – Private Company Shareholder
The process for an individual who receives remuneration via his/her private corporation is much simpler. Contact Legacy Accounting in advance to complete personal tax planning scenarios with respect to donations. Regardless of whether you are taking remuneration via wages or dividends, we can advise on what your expected tax refund will be given the donation amount you intend to give in that calendar year.
Once determined, simply make the necessary adjustment to your regular payroll remittance or personal tax instalment payment to CRA.
What should you do with your extra cash?
It is important to remember that come tax season, you will not be receiving a large tax refund (all things being equal) due to the application of the donation credit.
You will, however, have additional cash throughout the year that can be used for several different purposes. Options include investing (RRSP, TFSA, FHSA, etc.) or donating additional amounts to your favourite charity which would translate to a bigger credit than you had originally planned for.
It is important to strike a balance between your charitable contributions and your tax liability as dollars donated to charity do not translate into a one-for-one credit on your tax return.
In Alberta, you will receive a federal donation credit of 15% on the first $200 and 29% on additional amounts. If you have income taxed at 33%, you will also receive a donation credit at 33%. The provincial credit is 60% on the first $200 and 21% on additional amounts.
Case Study
The following will look at a couple who are actively engaged in a private corporation. They recently made the switch from working as employees for a 3rd party, to providing similar services through their own corporation.
Prior to incorporating, the husband was the main income earner for the family. He received an annual salary of $100,000. The wife received gross employment of $15,000. Thus, total family income was $115,000.
| 3rd Party Employees | Gross Wage | CPP | EI | Tax |
Net |
|---|---|---|---|---|---|
| Husband | $100,000 | $3,754 | $1,002 | $21,157 | $74,087 |
| Wife | $15,000 | $684 | $245 | $0 | $14,071 |
| Totals | $115,000 | $4,438 | $1,247 | $21,157 | $88,158 |
After incorporating, the husband and wife take dividends and wages from the company (respectively). The remuneration split is based on each individual’s input into the company. The husband receives dividends of $70,000 and the wife receives gross wages of $35,000.
| Via Corporation | Wage/Dividend | CPP | EI | Tax | Net |
|---|---|---|---|---|---|
| Husband | $70,000 | $0 | $0 | $8,243 | $61,757 |
| Wife | $35,000 | $1,874 | $0 | $3,726 | $29,400 |
| Totals | $105,000 | $1,874 | $0 | $11,969 | $91,157 |
You’ll note that the overall gross remuneration of the couple is lower than when they worked as employees for a 3rd party, while the net income has increased. Once incorporated, the company will have to make an equal CPP payment of $1,874 so this needs to be factored into the cash flow calculation.
If donations are added into the personal tax planning mix, we can see how the couple can maintain a similar net income amount, contribute to a charity that they value and reduce the amount of tax that the government collects from their family unit.
| Donations-$12,000 | Wage/Dividend | CPP | EI | Tax | Net |
|---|---|---|---|---|---|
| Husband | $70,000 | $0 | $0 | $2,193 | $67,807 |
| Wife | $35,000 | $1,874 | $0 | $3,726 | $29,400 |
| Totals | $105,000 | $1,874 | $0 | $5,919 | $97,207 |
Net income ($97,207) less donations ($12,000) = $85,207, which is a net reduction in cash of $2,51 ($88,158 - $85,207). Amount paid to the government (not considering the corporation’s portion of CPP) is reduced from $26,842 ($4,438 + $1,247 + $21,157) to $7,793 ($1,874 + $5,919), or $19,049.
Via incorporation, better sharing of responsibilities and thus remuneration and through the use of donations, the couple’s overall net income is similar $85,207 ($88,158) and they have paid $19,049 less to the government in CPP/EI/tax (not considering the corporation’s portion of CPP).
Yes, the husband is no longer paying into CPP which will impact his eventual pension benefits but is then able to use after tax paid income to invest in his retirement in a manner that he sees fit. Also, EI is very limited for small business shareholders. Typically, when you go into business for yourself, you have assessed the potential risk associated with the venture and choose to proceed despite the lack of employment insurance benefits.
Conclusion
As with all tax planning options, there is no one-size-fits-all option. What works for one family may not be beneficial for another family. With that in mind, adding donations into your tax plan may be beneficial. It is important to have a professional on your team that is up-to-date and looking out for your best interests. Please contact us at for one-to-one advice related to your corporation and donation tax planning.
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Posted: 7/22/24
