The gift of giving: donations and sponsorships

Canadians have a reputation for being generous, with approximately 20% of Canadians donating to charity every year. This is great news for the many registered charities that desperately need extra funds, but it’s also beneficial for donors.

Charitable donations can be used to reduce your tax burden. It’s important to retain your official receipts to provide to your accountant when filing your taxes. The Canada Revenue Agency requires proof of your donations as well as the CRA registration number of the charities you’ve helped.

Donations are eligible for a 15% tax credit on the first $200, and 29% on amounts above $200. While few reach the maximum donation limits, it’s important to note that you can’t claim more than 75% of your income, except in the year of death and one year prior.

A professional chartered accountant can ensure you take advantage of reductions on your taxes. For instance, they may recommend combining your receipts with your spouse, allowing the higher-income partner to benefit in their higher income tax bracket.

Donations versus sponsorships

Most Canadians are familiar with reporting their donations on their taxes, and about a quarter of us admit that income tax benefits are actually a motivating factor in our contributions. Similar rules apply for corporations. Like individuals, corporations that make a donation are entitled to a tax reduction against their income.

What may be less familiar to corporations and small business owners is sponsorship. This is a particular type of charitable donation from which the business benefits, and it differs from regular charitable donations.

Sponsorship is defined as a business making a donation toward the cost of a charity’s activity or event, and in return receiving some benefit like promotion of their brand. The tax benefits of sponsorship are reduced, because the business is benefiting from other advantages.

How sponsorship works

If a business chooses to support a registered charity in a sponsorship capacity, a business receipt can be issued if the recognition is minimal and at the same level as all other donors. This means that the business must not have received any special treatment. A simple acknowledgement would be an example of a sponsorship that may be eligible for a receipt.

However, if the business receives special recognition, it’s considered a sponsorship advantage. Generally, the fair market value of the advantage is deducted from the donation for receipt purposes.

It’s helpful to have a skilled accountant handle your taxes because calculating the fair market value of a sponsorship advantage is complex and challenging. If the value can’t be calculated accurately, then the charity cannot issue an official donation receipt.

Complications

The Canada Revenue Agency does make allowances for sponsorship eligibility for tax benefit purposes. If the fair market value of the advantage received from the sponsorship is less than the full donation, a business may still be able to receive some benefits for the remaining amount. However, if the advantage constitutes over 80% of the sponsorship value, the CRA generally doesn’t consider it to be a gift, exempting it from any tax benefits.

The benefits of sponsorship

While the tax advantages of sponsorships may be limited, a CPA can ensure that your company maximizes their value when you file your taxes.

Even without the same benefits as other charitable contributions, there are good reasons for businesses to sponsor charities. It’s a great way to increase awareness of your brand and a financially efficient method of advertising. It also allows businesses to target specific demographics and can contribute to improving a company’s reputation.

With the season of gift-giving upon us, now is a great time to consider making a charitable donation or entering into a sponsorship agreement with a registered charity. Not only will you enjoy tax benefits, but you’ll be among the thousands of Canadian individuals and businesses who generously contribute each year to make our country a better place.