New rules needed to spur small donations
Charities increasingly depend on wealthy donors for survival
'Tis the season for giving, not only to friends and family members but to the numerous worthy charitable causes that vie for our attention -- and wallets -- this month.
As a reminder, donations to registered charities need to be made by Dec. 31 to be eligible for the donation tax credit for 2009.
This credit was the subject of a new study released this week by the C.D. Howe Institute titled, "Lending a Hand: How Federal Tax Policy Could Help Get More Cash to More Charities" by A. Abigail Payne, fellow-in-residence at the Institute, and also an associate professor and Canada research chair in public economics at McMaster University in Hamilton, Ont.
Prof. Payne has observed a marked change in the pattern of charitable giving over the past twenty years, specifically noting that the share of Canadians reporting cash donations has fallen while at the same time the charitable sector's reliance on large donations by wealthy donors has risen.
This dichotomy is problematic to charities that primarily rely on numerous smaller cash donations for their funding. Prof. Payne proposed a couple of tax reforms that would encourage wider cash donations.
Under the current rules, the amount you donate is eligible for both federal and provincial donation tax credits. For the first $200 of donations you make in a calendar year, the federal donation credit is equal to 15% of the amount given. Once you've made at least $200 of donations in any year, however, the donation credit jumps to 29% federally. The provinces and territories also provide provincial donation credits at varying rates.
Prof. Payne recommends two possible reforms to the federal donation system, the first one being a "united rate" of 29% for all donations. This would simplify the administration of the credit and provide an additional incentive for smaller, lower-income donors.
Taxpayers who already donate $200 or more would save an extra $28 in taxes [$200 x (29% -15%)] for an estimated total cost to the government of approximately $110-million in lost federal tax collections.
The second reform would be to provide a higher tax credit, say 40%, for the first portion of donations that would be linked to your annual income. This higher rate would, however, be capped for higher-income earners.
For example, let's assume a higher tax credit was available for donations made up to the first 1% of your income, subject to a $500 cap. If you earned $40,000 per year, you would get the high 40% donation credit for your first $400 in annual donations (being 1% of $40,000) and the regular 29% credit for donations above this amount. If you earned $50,000 or more, your high-credit donation would be capped by the $500 limit.
Finally, Prof. Payne recommends that amounts eligible for the higher tax credit be allowed to accumulate in much the same way that unused RRSP and TFSA room can be carried forward from year to year. This amount would be tracked by the Canada Revenue Agency and reported to you annually on your Notice of Assessment.