Canadian government proposes larger tax incentive for donations against donors income over $200,000

December 07, 2015 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA

As we know the Federal government is creating a new higher top marginal tax rate for those earning income over $200,000 and increasing the tax on that income from 29% to 33%.  From a tax policy perspective this will increase the progressivity of the income tax system in Canada.  The Federal government is also increasing the tax credit for donors that are in the 33% marginal tax bracket so that instead of the 29% tax incentive they will receive a 33% Federal tax incentive.  So for people earning over $200,000 in 2016 this will mean a greater tax incentive for certain donations that offset their income over $200,000.  The increased incentive will only take effect on January 1, 2016.

I never like it when governments announce tax incentives in December that will only apply in January as this could discourage some people from donating in December.  On the bright side, the differential is only a few percent and if a person who earns over $200,000 donates to a charity this year he or she can get the tax break much quicker compared to donating January 1, 2016. Therefore, there is a time value of money saving by donating sooner that probably equals the increased tax incentive. Thankfully also people are generous and not only fixated on tax incentives!      

A few other points I would make:

  1. When discussing federal incentives for giving keep in mind these are in addition to the provincial incentives;
  2. In addition to tax rates there are also provincial surtaxes that can increase the value of a donation;
  3. Although increases in marginal tax rates typically result in the concomittent increases in the tax incentive for donations to charities this is not always the case as we saw recently in Ontario and as we have seen in Alberta;
  4. The bottom line for those who are concerned about taxes remains the same - by donating to charity you can save taxes.  

Here is the Legislative Proposals Notice of Ways and Means Motions and Explanatory Notes has just been posted on the Finance Canada Site. 

Clause 2
Deduction by individuals for gifts

ITA
118.1(3)

Section 118.1 of the Act provides a tax credit to individuals for gifts made to registered charities and certain other qualified donees. The amount of the credit is determined under subsection 118.1(3). Currently, the credit is calculated as 15% of the first $200 of such gifts and 29% (i.e., the highest tax rate for individuals) of gifts above that amount. Subsection 118.1(3) is amended, consequential to the introduction of a new top personal income tax rate of 33% in subsection 117(2). In general terms, a new tax credit rate of 33% will apply to gifts in excess of $200 to the extent that an individual has income that is subject to the new 33% income tax rate.

As a result of this amendment, the credit available under subsection 118.1(3) is calculated as the total of

15% on the first $200 of total gifts,
33% on the lesser of

the amount, if any, by which the individual’s total gifts for the year exceeds $200, and
the amount, if any, by which the individual’s taxable income exceeds the dollar threshold for the top personal tax rate (in paragraph 117(2)(e)), and

29% on the individual’s total gifts for the year above $200 that are not eligible for the 33% rate above.

For example, in the case of an individual that has $215,000 of taxable income and makes $20,000 in total gifts in 2016, the individual’s tax credit under subsection 118.1(3) is calculated as the total of:

$30, being 15% of the first $200 of total gifts;
$4,950, determined as 33% of $15,000, being the lesser of

the amount by which the individual’s total gifts exceeded $200 ($19,800), and
the amount by which the individual’s taxable income exceeded $200,000 ($15,000); and

$1,392, determined as 29% of $4,800, being the amount by which the individual’s total gifts for the year ($20,000) exceeds the total of $200 and the amount of the individual’s gifts to which the 33% rate applied ($15,000).

In this case, the individual’s 2016 tax credit for gifts would total $6,372 ($30 + $4,950 + $1,392).

This amendment will apply to gifts made after 2015. Gifts made in 2015 and previous years, but claimed in 2016 or a later year, will therefore not be eligible for the new 33% tax credit rate.

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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