By: Adam Aptowitzer
For many years tax and charity professionals calculated the after tax cost of a donation based on certain principles. One of those principles was that, at the top brackets both Federally and Provincially, the credit for the donation offset the tax owing for a dollar of income earned and then donated.
As the so-called 1% movement became more vocal, governments felt they had a license to tax higher income earners (although they taxed well more than the top 1%). In doing so many Canadian governments created new top tax brackets with higher tax rates, however they ‘neglected’ to raise the top donation tax credit rate. The result was that those in the highest bracket paid tax on money they donated. For example in Ontario, at the highest rates, a taxpayer would pay $4 to the government on $100 they did not have (because it was donated to charity).
One reason for this decision may be found in the application of the highest donation tax credit to donors in all brackets (on cumulative donations over $200). The higher the highest tax credit rate the higher the tax leakage in all brackets. So there is a definite incentive not to increase the rate over because of the magnified impact throughout the system.
This consideration was likely the impetus behind the Federal government’s decision in 2016 taxation year to ensure the credit was equal to the tax rate at the (then new) highest bracket but if the donation itself caused taxable income to drop into the second highest bracket the credit was lowered to equal that tax rate and kept at that level for all donors in lower brackets. This may have complicated the system but it had the merit of being fair.
As Provinces started down this path we held our breath to see if this new – and absurdly unfair – method of attacking the wealthiest donors would catch on across the country or whether that was the high water mark. Unfortunately, it seems that the jury is still out. BC has moved from the traditional fair system to the newer punitive one and Ontario’s proposed budget persists in using it (despite the fact that revamping its brackets was a perfect opportunity to rethink the approach). On the other hand, the Newfoundland budget has reverted to the more fair system.
Below is a review of the relevant rates in each Province assuming more than $200 in donations.
|Highest Provincial Tax Rate
|Highest Provincial Donation Tax Credit Rate
|Bracket at which rates are equal
*AB rates will never be equal because the top credit rate is by law always higher than the highest tax rate
** ON current rates as of the date of this article.
***PE rate calculation does not include operation of surtax which will raise taxes but not the donation tax credit rate