Ever since I moved to London 25 years ago , I’ve been immensely proud and grateful of our business community’s support for the many amazing charities and non-profits. Collectively, we have made a sizeable impact. Without our support, so many amazing projects in this city would have failed, or never even have existed. We are, without a doubt, a city of generosity.
For many business owners, supporting often comes in two main currencies: time (perhaps the most valuable currency we have as business owners), and money – often in the form of sponsorships or donations from our companies. With a little bit of creativity though, we can make our support even more impactful than you might imagine. And, believe it or not, the new small business tax rules around passive investment assets may make donating this year even more enticing.
Consider gifts of Publicly Traded Securities from your Corporation
Looking to reduce the amount of passive income in your corporation under the new rules? Here is a great strategy to implement this year to save yourself some hassle next year under the new rules.
If your Holdco (or Opco for that matter), has passive investments with a capital gain that trade on public exchanges, you can donate these securities in-kind to a charity. When you do so, you not only receive a donation receipt, you also get a full waiver on the capital gains tax that is normally owing on the sale of the security.
To make things even more enticing, due to the specific wording in the income tax act, you can now add the full value of the capital gain to your Capital Dividend Account (CDA). After your fiscal year closes, you can now issue the shareholders a tax-free dividend for the amount in your CDA. The net result is that by donating, you can take money tax-free out of your corporation for the same amount as the gain of the donated investments.
Donating personally, vs. corporately
If you are thinking of donating in cash, talk to your accountant about the benefits of donating personally vs. corporately. Beyond the Federal Budget changes for small business, the recent Ontario budget has made changes to the donation rules for individuals that increase the donation credit for certain income levels. Depending on your circumstances, it might be advantageous to take more income from your corporation, and then donate personally under our new regime, then to donate right from your company.
Have a corporately owned Life Insurance policy you don’t need anymore?
If you have a key-person life insurance policy, or a policy on shareholders that you no longer need, consider donating it to a charity by transferring ownership. If the policy is more than 3 years old, it can be assessed by an actuary, and your corporation can receive a receipt for fair market value, which is often significantly higher than the policy’s cash value. This is a particularly effective strategy for insurance policies with little to no cash value, that are several years old. Recently, I saw a policy with a $500,000 death benefit be valued for close to $250,000. That’s a pretty substantial tax reduction for your company, for something you might otherwise just be going to give up.
Transferring the policy to a charity may trigger a tax disposition if the policy has substantial cash value, but this will be offset by the charitable receipt. Take note under the new rules, the disposition will be classed as passive income – so best to donate before the end of the 2018 tax year so it doesn’t affect your eligibility for the Small Business tax rates on active income.
Beware of Charities as beneficiaries of your corporately owned insurance!
One last tidbit on corporately owned insurance policies : its almost never a good idea to have a beneficiary on your corporately-owned life insurance policy that is anything other than the corporation. Recently, I’ve seen a few generous business owners list charities or family members on corporate owned policies. If the policy pays out, the tax implications will be unpleasant in most circumstances – normally, I suggest a business owner owns such a policy personally, and not in the corporation.
Generosity needs qualified advice.
At the end of the day, make sure you are talking to your lawyer, accountant, and other financial professionals to maximize your giving, and make sure that your gift is structured in the best way for your corporation, and your personal assets.