What Trudeau's change to the top tax rate might mean for charitable donation credits
December is typically the biggest month for charitable giving, with about 60 per cent of Canadian adults expected to donate approximately $5 billion between now and the end of the year, according to Imagine Canada, a national charitable organization whose cause is supporting Canada's charities.
Statistics Canada says that Canadians give just under $13 billion annually to charities and nonprofits, meaning that approximately 40 per cent of all donations take place in the last six weeks of the year.
Why do people give?
Statistics Canada identifies "compassion for those in need" as the top reason Canadians donate (89 per cent), followed by "personally believe in a cause" (85 per cent) and "contribute to our communities" (79 per cent). Six-in-ten (61 per cent) are motivated by being personally affected by the cause.
Of course, to encourage individual Canadians to give, there are tax benefits in the form of federal and provincial non-refundable tax credits. On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200. These rates are equal to the tax rate of the lowest federal bracket (income below about $45,000) and the highest bracket (income above approximately $139,000) respectively. Parallel provincial credits work similarly.
The Liberal election platform called for an increase in the top federal personal income tax rate from 29 per cent to 33 per cent, for taxable income exceeding $200,000, meant to increase tax on the top one per cent of income earners. This proposal could be introduced as early as this week, once Parliament reconvenes, and will likely be effective Jan. 1, 2016.
The increase in the top tax rate, however, begs the question as to whether the federal charitable donation credit for donations above $200 per year will also rise to 33 per cent from 29 per cent, providing a higher benefit to all taxpayers who give more than $200 annually - even if you're not part of the one per cent.
Technically, the Income Tax Act states that the donation credit rate for amounts over $200 in a given year "is the highest percentage ... that applies in determining tax that might be payable ... for the year." The policy question is whether, once the top rate is increased from 29 per cent to 33 per cent, this rule will be maintained.
Toronto tax lawyer and author David Sherman has raised the issue with the Department of Finance and said that if the government doesn't want to give a 33 per cent credit to donors when most Canadians are in the 15 per cent, lowest, federal bracket, then perhaps the government would consider introducing a second annual donation threshold, such as $5,000 or $10,000, so that total donations exceeding that threshold would be eligible for the new 33 per cent federal credit. As Mr. Sherman explains, "This would allow major donors to continue to obtain the high rate once they exceed that threshold. In practice, most people donating more than $5,000 or $10,000 have high incomes."
A few years back, when the Ontario government added new, higher tax rates for high-income earners, it didn't adjust its provincial donation credits such that there is currently a mismatch in that the current top combined federal/Ontario tax rate is about 49.5 per cent while the combined federal/Ontario donation credit is about 46.4 per cent. If the federal government doesn't adjust the rate, according to Mr. Sherman, "there will be a serious mismatch and a disincentive to charitable giving (since) in Ontario ... income will be taxed at 53.5 per cent while the credit will be only 46.4 per cent. Someone who chooses to earn an extra $10,000 to give it all to charity will pay about an eight per cent tax for doing so."