Some of Canada’s most significant charitable gifts have come from successful entrepreneurs and business owners. Yet, charitable giving is not limited to those who have sold large companies or accumulated vast fortunes. Business owners of all sizes can often increase the impact of their giving by taking advantage of planning opportunities available through their corporations.
For many business owners, a holding company serves two important purposes. First, it can provide an additional layer of creditor protection by moving excess cash out of the operating company. Second, it can become a valuable vehicle for accumulating investments, funding retirement and supporting charitable goals.
While the favourable tax rates available to Canadian Controlled Private Corporations (CCPCs) help business owners build wealth, that success can create new planning challenges.
The passive income challenge
One of the most valuable tax advantages available to a CCPC is the Small Business Deduction (SBD), which currently allows eligible Ontario corporations to pay approximately 11.7 per cent tax* on the first $500,000 of active business income.
However, since 2018, access to the SBD has been reduced when a corporation and its associated corporations earn more than $50,000 of passive investment income annually. Once passive income exceeds this threshold, the SBD begins to be reduced and is completely eliminated when passive income reaches $150,000.
For a successful business owner, this can be significant. A corporation earning $500,000 of active business income may pay approximately $58,500 of tax when the full SBD is available. If the SBD is eliminated, the tax bill could increase to approximately $132,500.
It is important to note that passive investment income earned within a holding company is generally aggregated with passive income earned by associated corporations when determining eligibility for the SBD. Simply moving investments from an operating company to a holding company will not, by itself, avoid the passive income grind. Professional tax advice should always be obtained before implementing any corporate planning strategy that can help manage passive income while preserving access to the SBD. For charitably inclined business owners, charitable planning can be an important part of that conversation.
Why charitable giving through a corporation can be so effective
When a corporation makes a charitable gift, it receives a tax deduction that reduces taxable income. By contrast, individuals receive a charitable donation tax credit.
Both individuals and corporations can generally claim donations up to 75 per cent of net income in a given year, with unused amounts carried forward for up to five years.
One of the most powerful opportunities arises when publicly traded securities with accrued gains are donated directly to a registered charity.
Whether the donor is an individual or a corporation, donating publicly traded securities in kind eliminates the capital gains tax that would otherwise be payable if the securities were sold first and the cash proceeds were donated.
For business owners with significant corporate investment portfolios, this strategy can dramatically increase the after-tax value of a charitable gift. These strategies can be particularly powerful before or after the sale of a business, when investment assets are often transferred into a holding company and owners begin focusing on retirement, wealth preservation and legacy planning.
The capital dividend account: a unique opportunity for business owners
Private corporations benefit from a powerful planning tool known as the Capital Dividend Account (CDA).
The CDA is a notional account that tracks amounts that may be distributed to shareholders tax free. Although it does not appear directly on the corporation’s balance sheet, it can create substantial tax savings.
Normally, when a corporation realizes a capital gain, only half of the gain is taxable. The non-taxable half is credited to the CDA and may eventually be paid to shareholders tax free.
An even more attractive opportunity arises when publicly traded securities with accrued gains are donated in-kind to a charity.
Because the donation eliminates the capital gain entirely, the full amount of the capital gain is added to the CDA. As a result, the corporation receives three important benefits:
• A charitable donation deduction
• Elimination of capital gains tax
• A credit to the CDA that may eventually be distributed to shareholders tax free
For charitably inclined business owners, this combination can make donating appreciated securities one of the most tax-efficient charitable strategies available.
A simple example
Suppose a holding company owns publicly traded securities worth $100,000 that were originally purchased for $40,000. The securities therefore have an accrued capital gain of $60,000.
If the corporation sells the securities and donates the cash proceeds, half of the gain would be taxable and only the non-taxable half would be added to the CDA.
However, if the securities are donated directly to a registered charity:
• The charity receives the full $100,000 gift
• No capital gains tax is payable
• The corporation receives a charitable donation receipt for $100,000
• The entire $60,000 capital gain is credited to the CDA
The result is that up to $60,000 may be added to the corporation’s CDA, potentially allowing shareholders to receive that amount as a tax-free capital dividend.
Assuming a personal tax rate of approximately 48 per cent on dividends, the ability to receive $60,000 as a tax-free capital dividend rather than a taxable dividend could represent tax savings of $28,800.
In effect, the combination of the charitable donation deduction, elimination of capital gains tax and creation of CDA credits can significantly reduce the after-tax cost of making a charitable gift.
Corporate owned life insurance and legacy planning
Corporate owned permanent life insurance can further enhance charitable and estate planning opportunities.
By transferring corporate surplus into a tax-sheltered insurance policy, business owners can reduce the amount of passive income generated within the corporation while allowing assets to grow on a tax deferred basis.
Upon death, the death benefit received by the corporation, less the adjusted cost basis of the policy, is generally credited to the CDA. This can create a substantial pool of funds that may be distributed to shareholders tax free.
When combined with charitable giving strategies, corporate owned life insurance can help business owners:
• Reduce passive investment income
• Increase the efficiency of wealth transfer
• Create larger charitable gifts
• Reduce estate taxes
• Leave a greater legacy for both family members and charitable organizations
The bottom line
Successful business owners often spend decades building wealth inside their corporations. The challenge is not only growing that wealth, but ultimately extracting and transferring it in the most tax-efficient manner possible.
A thoughtfully structured holding company can help protect assets, preserve access to the SBD, support retirement income planning, and create significant charitable opportunities. When combined with strategies such as donating appreciated securities in kind and utilizing corporate owned life insurance, business owners can often reduce taxes, increase charitable impact, and leave a larger legacy for both their families and the causes they care about.
Because every situation is unique, business owners should work closely with their tax, legal and financial advisors to determine which strategies are most appropriate for their circumstances. For many business owners, a review of their corporate structure and charitable plans may uncover opportunities to enhance both their financial future and their philanthropic legacy.
In many cases, the government effectively becomes a silent partner in the charitable gift, allowing business owners to convert dollars that might otherwise have gone to taxes to charitable donations that can support the causes they care about most.
Many business owners donate cash because it is simple. However, donating appreciated securities held inside a corporation can often increase the amount received by the charity, eliminate capital gains tax, create CDA credits, and reduce the after-tax cost of giving.
Before making your next major charitable gift, ask your tax and financial advisors whether a gift of securities may be more effective than a gift of cash.
*Source: Tax Insights: 2026 Ontario budget – Tax highlights | PwC Canada
Tina Tehranchian, C.M., MA, CFP®, CLU®, CHFC®, CIM®, MFA-PTM (Philanthropy) is a FP CanadaTM Fellow and a Senior Wealth Advisor with CI Assante Wealth Management Ltd. in Etobicoke, Ontario. The opinions expressed are those of the author and not necessarily those of CI Assante Wealth Management Ltd. Please contact her at (905) 707-5220 or visit https://tinatehranchian.com to discuss your particular circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a Member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc.
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