Sunday, December 10, 2023

Canadian charities must be nervous if tax modifications are handed

Kim Moody: The chance for considerably diminished charitable donations by higher-income earners is excessive

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A long time and many years in the past, Canada made a deliberate coverage alternative to make use of our taxation system to assist encourage philanthropy. Such a alternative included offering tax-exempt standing for registered charities — and tax incentives for donors to make presents to such organizations — and non-profits.

Throughout Canada’s one and solely complete taxation evaluate (from 1962–1966), The Royal Fee on Taxation really useful the taxation system proceed for use as a way of encouraging philanthropy (see chapter 20).

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General, utilizing the taxation system to encourage philanthropy and non-profit actions is sound from a coverage perspective, however it may be topic to abuse on a day-to-day foundation. Issues want to alter on this space to enhance compliance and curtail abuse together with extra well timed audits of charities and non-profits.

Within the 2014 federal price range, the federal government introduced it was going to seek the advice of with Canadians on whether or not the tax exemption for non-profits was correctly focused. This session — which might not have included registered charities — was lengthy overdue and a small step in the fitting course. Sadly, this session didn’t proceed when the Liberal Social gathering received the final election in 2015. It must be resurrected.

If the taxation system is for use to encourage philanthropy — which has apparent social advantages — then all associated insurance policies introduced by the federal government must be per these coverage goals. The current proposed amendments to the different minimal tax (AMT) are definitely not per that goal.

Some fast background. In 1985, the federal authorities introduced it was exploring the introduction of an AMT: “The measure may have the impact of accelerating the tax legal responsibility of these high-income people who use the tax incentives offered by present regulation to construction their affairs in order to pay little or no tax. This initiative will thus improve the equity of the tax system.”

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In 1986, the AMT turned regulation. General, the AMT is poor taxation coverage, particularly contemplating the AMT is a refundable tax (for a most seven-year interval following its utility to the extent the AMT just isn’t relevant in these subsequent years). The AMT structure has probably not modified a lot since its introduction.

Quick-forward to the election interval of 2021 and the Liberal Social gathering had one small paragraph in its election policy platform that mentioned it was going to “create a minimal tax rule so that everybody who earns sufficient to qualify for the high bracket pays at the least 15 per cent annually, eradicating their skill to artificially pay no tax by the extreme use of deductions and credit.”

The tax group was puzzled by this since Canada already had an AMT. Did the coverage writers know this?

After being re-elected, the Liberals doubled down on this promise. The 2022 Federal Price range acknowledged the federal government’s “dedication to look at a brand new minimal tax regime, which can go additional in the direction of guaranteeing that every one rich Canadians pay their fair proportion of tax.”

A 12 months later, the 2023 price range introduced particulars of its so-called “examination,” which finally was a tinkering of the present AMT regime and proposed to be efficient Jan. 1, 2024.

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The tinkering has some very important amendments. For instance:

  • Capital gains-type revenue is proposed to now be totally included (as in comparison with the present regulation of 80 per cent) for the needs of calculating AMT publicity;
  • The brand new proposed tax fee for the AMT is to be 20.5 per cent, in comparison with the present 15 per cent;
  • The brand new proposed exemption for the AMT is to be the quantity on the backside of the fourth private federal tax bracket (estimated to be $173,000 for 2024), which is meant to exempt modest-income earners from the revised AMT. It is a important improve from the present exemption of $40,000;
  • All private tax credit at the moment are solely 50 per cent creditable when calculating AMT publicity as in comparison with the present 100 per cent. This contains charitable tax credit.

For people who’ve capital gains-type revenue, beware. Why? Properly, the very best present federal tax fee on capital beneficial properties is 16.5 per cent. This easy truth might set off AMT in sure circumstances since 16.5 per cent is lower than the AMT fee of 20.5 per cent. That is clearly a “back-door” capital beneficial properties inclusion fee improve.

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Nevertheless, one of the vital important proposed amendments is that fifty per cent of particular person charitable donation tax credit (and different private tax credit) might be a choice merchandise when calculating publicity to the amended AMT.

Giant charitable presents are sometimes made by high-income earners and/or high-net-worth people. Underneath the brand new regime, the ensuing AMT legal responsibility when making massive charitable presents may be stunning due to the 50 per cent add-back for the charitable tax credit score.

The satan is within the particulars (since everybody’s revenue profile and charitable gifting are completely different), however suffice it to say that if the AMT proposals get handed as is extensively anticipated, then there isn’t any doubt that the charitable sector has trigger for concern since it will typically make little sense for high-income earners to make charitable donations that might trigger the revised AMT to be considerably triggered.

Utilizing the taxation system to encourage philanthropy is smart to encourage quite a lot of social positives. However good public coverage typically will get in the way in which of fine — however flawed — politics corresponding to “guaranteeing that every one rich Canadians pay their fair proportion of tax.”

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Associated Tales

If the proposed AMT amendments get handed of their present type, charities must be nervous for the reason that chance for considerably diminished charitable donations by higher-income earners is excessive. And that might be total unhealthy for Canada.

Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Personal Shopper, a former chair of the Canadian Tax Basis, former chair of the Society of Property Practitioners (Canada) and has held many different management positions within the Canadian tax group. He may be reached at and his LinkedIn profile is

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