Modern Canadian tax laws have created boutique measures around charitable giving in a bid to achieve social objectives and ‘contribute positively to the financing of charities’ . With a reported 26% of Canadians motivated by tax credits, it is logical to conclude that the provision of benefit to donors may spur additional giving, yet individual giving is in decline and overall giving has plateaued since 2006 at estimates of $9 Billion per annum. This paper seeks to explore these trends, reviewing whether the two key tax relief measures available under the Income Tax Act for charitable contributions - tax credits and capital gains exemptions - have been effective in achieving the government’s objectives. The paper will also discuss their impact upon charitable giving, and the wider implications of these measures.
Tax Credits
Since the introduction of the 1917 Income War Tax Act’s provision of tax deductions to those donating to patriotic and war funds, charitable tax incentives have existed in Canada. The perceived purpose of introducing charitable deductions at that time was to provide relief to families contributing to institutions supporting the war efforts - releasing some of the direct burden of care away from the government. This Act was later revoked then reintroduced and underwent many amends in order to meet the differing interests of the governments. In 1987, the modern tax system for charitable donations took shape and the previous tax deduction was reformed into a non-refundable tax credit in hopes of injecting equity into the system and separating the benefits of philanthropic behaviour and income. Charitable tax credit laws have remained largely unchanged in structure since, and in their current form under Section 118.1 of the Income Tax Act, they provide credit to donors up to 75% of their net income through a two-tiered system of federal and provincial rates.
Whilst the tax credit system is more equitable than a deduction and has a statistically significant effect upon charitable decision-making, it has been largely ineffective at inspiring additional giving. Giving levels as a whole have remained unchanged, and individual donor levels have continued to decline. The introduction of new schemes within the system such as ‘First-Time Donor Super Credits’ sought to address this and promote a giving culture through greater tax credit provision to first-time donors – but such efforts fell flat. Upon review, there may be several reasons for these results in relation to tax credits. First, due to the non-refundable nature of the credit, many Canadians may not actually see the full benefit of their giving. Nearly 70% of Canadians receive refunds in their tax, so whilst it is unclear what percentage of donors miss-out on the full value of their credit, through the non-refundable provision the government has restricted its own benefit and thus made it, at best, partially redundant. Secondly, Canadians are not primarily motivated to give in order to receive benefit - rather they purport compassion to those in need, a personal belief in the cause and want to contribute to their community as their drivers. The current system fails to address the true needs and motivations in the market through the current credit system as it only focuses on a peripheral incentive. Third, giving levels have been found to be better determined by wealth, income and a university degree than by tax credits. The current system fails to tap into these wider socio-economic causing and correlating factors of donation and link them adequately.
Capital Gains Exemptions
Canadians are also provided benefit for their donations under Section 38 of the Income Tax Act. In 1997, capital gains taxes on securities gifted were reduced to 50% of the normal rate, lowering the price of giving beneath that of cash donations by 39%. This significant amendment had the objectives of increasing charitable donations, creating a fairer distribution of donations amongst charities, and providing a comparative donor option to the US to deter donor money flowing south of the border. The amendment was pushed further by the Conservative federal government – reducing capital gains relief to zero in 2006. In 2007, the credit was expanded to include donations to private foundations and in 2008 it allowed for donations of select unlisted securities.
The measures were both heralded as an opportunity for charitable growth and criticised as another tax cut for the rich. The criticisms held true as “in 2012, over 96 percent of the value of donations of publicly listed securities to charities [were] contributed by the top 5 percent of income earners”. This point can be further emphasised in review of 2015’s reports that only 5,200 individuals donated shares, alongside 410 gifts of cultural property, and less than 100 gifts of ecologically sensitive land. Through a brief comparison of these numbers against the 5.6 million individuals that claimed tax credits in the same year and their per donor simple average cost to the taxpayer, ($473; $36,538; $60,975; $50,000 respectively) it is clear that the divide in the applicability and benefit of the capital gains tax exemptions is vast. This benefit, with greater effect than tax credits, has prompted a shift away from a large diversified donor pool to a system increasingly reliant on a small group of wealthy donors. It has been ineffective at inspiring additional giving overall and negatively affects the majority of Canadians through its transfer of tax dollars from the State into the hands of the wealthy.
Conclusion and Further Discussion
In review of the current tax structures, it is difficult to argue their true adequacy and effectiveness. Canada’s tax laws are unsustainable and misguided, taking away valuable dollars from the government funds to the primary benefit of the wealthy, homogenizing giving and impact. The impact of these tax laws is vast as average Canadian donors are not incentivized or inspired to give, much less give more. The 85,000+ CRA recognised organizations operating within Canada are increasingly reliant on a diminishing pool of largely traditional donors, creating long term impacts as funding largely flows to select groups of established institutions and causes.
Canadian charitable tax law has also failed in its design and execution in achieving social objectives. By placing credit and tax exemption at the heart of the legal structure, the government has set a course whereby donors expect reward for their donations. A culture of philanthropy cannot thrive in a system promoting individual benefit and no true social objective can be achieved through the overwhelming provision of benefit to the wealthy.
In order to address the inadequacies of Canada’s charitable tax laws, the government must reflect on its role in philanthropic giving. It is not there to ignite giving or inspire new donors, as it tried with the Super Tax Credit, nor is it there to reward giving behaviour. The government’s role is as a partner, supporting the donor, the charity, and itself, relieving some of the burdens of philanthropy. In order to assess its role effectively, the government should first review its laws through a self-serving lens. The origins of the Charitable Giving Tax Act were founded upon the premise that government cannot hold all power and responsibility for services for its citizens, and thus a diversified service to the public can be provided through profitable and not-for-profit channels. Through a return-to-roots approach, a better system can be created - providing greater benefit to charities, reducing the government’s service burdens, and meeting the primary motivations of the donor. One such system that theoretically can meet these goals is a government charitable donation matching system. Whilst not discussed here, it is possible to see how under such a program, charities may benefit from stable centralised funding, the government may benefit from diversified and public services provision, and donors may benefit as their primary motivations for good are addressed through the doubling of funds and impact directed at their chosen causes.
In conclusion, the government cannot continue in to build upon its myopic system that naively believes that charitable giving tax cuts provide benefit to society and charitable organizations. Whilst the laws in place reduce some barriers to giving when reviewed holistically, it is not equal or equitable. Faced with current results, it is now more important than ever to bring change and balance to Canadian charitable giving laws. Without such change, the structure stands to cause permanent damage to donor culture within Canada and the charitable sector at large, all at the expense of taxpayers.
Sarah Powell has over 10 years experience in partnerships - working across TV, entertainment and not-for-profit industries in the UK and Canada. As Manager, Sponsorship and Strategic Partnerships at the University of Toronto, she leads strategy, development and impact measurement of sponsorship and marketing partnerships. Sarah is currently completing her professional Master of Laws at University of Toronto.
