By: Adam Aptowitzer
People always complain about the tax laws being way too complex but you know things are bad when even the tax lawyers are losing track of the most fundamental elements of the law. And what could be a more fundamental element of income tax then knowing the right percentage to apply to a given transaction – specifically a donation?
Up until a few years ago the system for calculating the donation tax credits was relatively simple. You simply added the lowest rates for donations under $200 and the highest for donations over that. Dealing with the surtaxes was (and still is) tricky but we managed.
Now though the Federal and various Provincial governments are going their own way in developing their donation tax credit systems. The result is an asynchronous where advisors have to be careful in calculating the appropriate donation tax credit rate depending not only on what was donated and to whom but also on the residence of the donor and their taxable income before and after the donation.
Many of the Provinces still use the traditional system but Alberta, Ontario, New Brunswick, Newfoundland, PEI and the Yukon all have a system where the highest tax rate is not the same as the tax credit rate for donations over $200. In Alberta the credit rate is in fact higher than the tax rate but in the others the rate is lower. Besides the complexity in calculation where the tax rate is higher than the credit rate those in the affected brackets really are discouraged from giving.
To illustrate the disincentive consider the former situation. When a donor at the highest marginal rate earned a dollar she would have paid tax at the highest rate – say 46%. That means the government would take 46 cents of the dollar but the taxpayer would keep 54. If the donor decided not to keep that dollar but direct it to a registered charity the government would forego its 46 cents in favour of the charity. So the donor was out her 54 cents and the government out its 46.
Now consider the situation where the marginal tax rate is 50% but the applicable donation tax credit rate is only 46%. In the situation where the individual earns a dollar but donates nothing she pays 50 cents to the government and keeps 50 cents. If, on the other hand, she decides to donate that dollar to a registered charity she gives her half to the charity, the government foregoes its half and the donor still must pay 4 cents to the government! So the donor must pay 4 cents tax on a dollar they do not have!
The problem is of course magnified as the spread between the two rates grows. In New Brunswick the current differential is 2.46% but in Ontario, when taking the surtaxes into account at the highest rates, the spread is 3.12%. The effect of the surtaxes effectively increases as the individual’s income grows. The net result in Ontario is that those people most able to give are the most discouraged from doing so.
It also puts the lie to the established practice of cheque exchange. Because a receipt cannot be issued for services given for free to the charity, the CRA encourages the ‘donor’ to invoice the charity for their services. The charity pays the invoice and then the donor donates the funds back to the charity. While the donor pays income tax on the money received it (used to) be offset by the credits generated from the donation (assuming both transactions took place at the highest rate). Now though there is more tax to pay than credits that can offset it. So the person who wanted to simply give his or her services to the charity for free is out of pocket!
The Federal government should be given some credit (no pun intended) for avoiding this situation. It may have added complexity to the Act but their new system ensures that donors paying the highest rate receive an equal credit until they drop down into a lower bracket (see articles by members of Drache Aptowitzer LLP here and here).
Years ago, donations to charity were treated as deductions rather than as credits. This was changed, apparently to ensure that the value of a donation credit was the same regardless of the income of the person who made it. Now though, we are moving into a system where the value of the credit chosen has detrimental impact to the largest donors. While all of the Provinces are hurting financially and there will be little political will to be seen helping the rich it would make life simpler for all and remove the disincentive to giving if the Provinces would see fit to follow the model laid out by the Federal government.
Below is a chart outlining the credit for donations above $200 in the common law Provinces and Territories.
|Highest Provincial Tax Rate 2016||Highest Provincial Donation Tax Credit Rate|
|BC||14.7 %||14.7 %|
|AB||15 %||21 %|
|SK||15 %||15 %|
|MB||17.4 %||17.4 %|
|ON*||20.53 %||17.41 %|
|NB||20.30 %||17.84 %|
|NS||21 %||21 %|
|NL||15.3 %||14.3 %|
|PE*||18.37 %||16.7 %|
|YT||15 %||12.8 %|
|NT||14.05 %||14.05 %|
|NU||11.5 %||11.5 %|
*Indicates adjusted for surtaxes
Rates current as of March 8