Obama has proposed the largest budget in US history. He is planning on various tax cuts for people earning under US$250,000 and various tax increases for those earning over US$250,000. He is also planning on reducing the tax incentives for donations to charities for people earning over US$250,000. I will discuss the Canadian implications at the end of this note. If Obama’s move on the charity front completely caught you by surprise you might want to read my blog posting in September: http://www.globalphilanthropy.ca/index.php/blog/united_states_examining_tax_breaks_for_charities_will_canada_follow/
According to the Chronicle of Philanthropy in their article: “Obama’s Plan to Reduce Charitable Deductions for the Wealthy Draws Criticism” at
http://philanthropy.com/news/updates/index.php?id=7244, they note that
“In a document outlining his 2010 budget plans, President Obama proposed limiting the value of the tax rate for itemized deductions, including donations to charity, to 28 percent for families making more than $250,000. In other words, the taxpayer would save 28 cents on their federal income taxes for each dollar donated. That would reduce by as much as 20 percent the amount wealthy taxpayers could get in tax breaks. Under the current system, taxpayers who are in the 33 percent or 35 percent tax brackets use that rate to claim deductions. The president says the proposal on itemized deductions — which would also apply to claims such as mortgage interest — would raise $318-billion over 10 years. That money would help pay for a 10-year $630-billion reserve fund designed to help make health care more affordable and available.”
In the article it noted that the effect may not be as “disastrous” for charities as some had suggested. First, because people don’t donate to save taxes. I know this will shock some but they had a good quote in their article: “...53 percent of high-net-worth donors surveyed in a 2006 study for Bank of America said their giving would stay the same, or even increase, if the tax deduction for charitable gifts fell to zero.” Yes that is zero, not 28%. They are motivated more by the cause than tax deductions. Secondly as one expert noted: “Many wealthy Americans who would otherwise be in the 33- or 35-percent tax bracket — and thus able to take that same percentage deduction for their charitable gifts — have used mortgage payments and other deductions to qualify for the alternative minimum tax rate of 28 percent, says Robert F. Sharpe, a Memphis planned-giving consultant. By paying the alternative minimum tax rate of 28 percent, those wealthy taxpayers are already restricted to the same percentage on their charitable deductions, Mr. Sharpe says. “A lot of the rich are already used to the 28-percent deduction,” which means the Obama proposal would not result in any change for them.”
Because Obama proposes something does not mean that it will be accepted by the Congress and Senate. However, it is very interesting that tax policy relating to charities figured so prominently in the numbers in this budget proposal. Obama also seems to be responding to the Reagan/Bush ideas that tax cuts are a panacea for everything and that more generous incentives for donations to charity are necessarily good for US charities and society.
The Center on Budget and Policy Priorities (CBPP) released a report on the tax cuts at http://www.cbpp.org/3-3-09bud.htm
I think many Canadians will find interesting, perhaps shocking, that many Americans only receive about a 25-35 percent tax benefit from donating to charities. In Canada, those in the top tax bracket can save 40-50%. So Canadians actually have very generous tax incentives for donations to charities because our marginal tax rates are higher in Canada than in the US. Not surprising that Stephen Harper in his last budget did not listen to the charity “sector representatives” who were asking for additional tax benefits, some of which would be almost exclusively of benefit to wealthy Canadians.
The big questions it seems to me are
1) will our Canadian “sector representatives” continue to be out of touch with the sector and more concerned about tax incentives that are mainly aimed at helping the wealthy rather than shutting down abusive tax avoidance schemes which undermine public trust in the sector, hurt fundraising, and reduce the tax base which is necessary to support many charities in Canada such as hospitals, schools, universities, international development and social service organizations?
2) We are always competing with the US, and if the US does raise taxes on the wealthy, reduce taxes on the poor and middle class and reduce tax incentives for charitable donations, then will Canada be far behind?
I think that we are very fortunate to live in Canada. We should count our blessings every day and stop complaining about how tough we have it and how wonderful the US is. Although I must admit with Obama at the helm, the US is starting to look more wonderful!!
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
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.