By: Adam Aptowitzer
Lawyers and advisors in the charitable sector often discuss high level tax topics in articles and seminars – but, for many, tax remains a dark and mystical art. Indeed, even those who once professed an understanding of the system may, over time, lose touch with the basics if they do not remain current on developments. This is a somewhat reasonable reaction to the complexity of anything tax related, but ostriches do not have a good track record at avoiding difficulties. A donor’s reason to understand the tax implications of a donation are clear but even charities interested in attracting donations need a thorough understanding of their tax implications.
Fundamentally, there are two major types of tax differences between the Provinces. The first are the actual tax brackets and the second are the tax rates.
A tax bracket is the level of income to which specific percentages are applied to determine tax owing. Each Province has its own determination of how to break up income and the number of these breaks range from 3 to 5. Income is typically taxed on a progressive level so that if a taxpayer’s total income falls in the third bracket he or she would pay the maximum tax in the first two brackets and the applicable tax rate is then only applied to the difference. The same procedure is followed in the Federal level which has its own tax brackets that may or may not coincide with a given Province. These rates are usually (although not everywhere) given a cost of living adjustment every year. An example of how the Federal and Provincial rates brackets work is below.
Example 1.
| Bracket Number | Federal Income Level | Provincial Income Level |
| 1 | 0 – $30,000 | 0 – $35,000 |
| 2 | $30,001 – $75,000 | $35,001 – $65,000 |
| 3 | Over $75,000 | Over $65,000 |
The second area of difference relates to the difference in tax rates charged. For the most part their application is fairly simple except that Ontario and PEI have surtaxes as well. In these cases, the taxpayer calculates her taxes owing and if the calculation is greater than the threshold amount she multiplies the total taxes in that bracket by the surtax rate. Effectively, this has one going through the same mathematical exercise with the results of the first set of calculations.
Taking our previous example and assigning tax rates to them
Example 2
| Bracket Number | Federal Income Level | Federal Tax Rate | Provincial Income Level | Provincial Tax Rate |
| 1 | 0 – $30,000 | 0 % | 0 – $35,000 | 0 % |
| 2 | $30,001 – $75,000 | 15% | $35,001 – $65,000 | 9 % |
| 3 | Over $75,000 | 20 % | Over $65,000 | 11 % |
Then somebody with taxable income in the year would pay the following amounts of tax.
| Bracket Number | Federal Income Level | Federal Tax Rate | Tax Owing | Provincial Income Level | Provincial Tax Rate | Tax Owing |
| 1 | 0 – $30,000 | 0 % | $0 | 0 – $35,000 | 0 % | $0 |
| 2 | $30,001 – $75,000 | 15% | $6750 | $35,001 – $65,000 | 9 % | $2700 |
| 3 | Over $75,000 | 20 % | $1000 | Over $65,000 | 11 % | $1650 |
| Total | $7750 | $4350 |
To this we would apply surtaxes (on the Provincial tax of $4350) like this:
| Provincial Surtax Level | Provincial Surtax Rate | Tax Payable |
| 0 – $1,999 | 0 % | $0 |
| $2,000 – $3,000 | 20% | $200 |
| Over $3,000 | 36 % | $486 |
| Total | $686 |
The total tax owing then is $7,750 in Federal taxes, $4,350 in Provincial tax, and $686 in Provincial surtax for a grand total of $12,786.
Charitable contributions work to offset the taxes owing. So in a situation where a person earns a dollar and then donates that dollar (ignoring for the purposes of this example the effect of source deductions) the person is taxed at the appropriate rate and then deducts from that tax the relevant amount of the credit. That credit amount is determined as follows.
For the first $200 of donations in the year the taxpayer is entitled to a credit at the lowest Federal and Provincial rates. In our example above it would be 15% Federally and 9 % Provincially. Effectively what this means is that the governments are foregoing their share of tax for the benefit of the charity. Where the donor gives more than $200 the actual tax rate Federally and for most of the Provinces is the highest tax rate (although in some Provinces it is the second highest rate). Where it is the highest rate the relevant government is again foregoing the tax due to it in favour of the charity. In those Provinces where it is the second highest rate the donor is out of pocket the donation plus some additional amount of tax that the Province does not forego. Obviously, in those Provinces with a surtax the credit works to reduce the amount of tax and then, indirectly, the amount of surtax.
These basics are important to understand the effect of donations, not only of cash, but of publicly traded securities, environmental property, cultural property and many of the other technical aspects of donations. Hopefully, with a renewed understanding of these fundamentals both donors and charities will be in a better position to navigate the tax minefield of charitable giving.