Good news for wealthy donors: New high-income tax bracket to be matched by higher tax credit
On Monday afternoon, Finance Minister Bill Morneau formally asked the wealthiest one per cent of Canadians “to contribute a little more” by tabling a Notice of Ways and Means Motion in the House of Commons that will have Canada’s highest income earners paying four per cent more federal tax on taxable incomes above $200,000 starting Jan. 1, 2016 “to help pay for (the) middle class tax cut.”
Buried in the draft legislation, however, was a piece of good news for high-income earners who are also charitably inclined. The government announced its intention to introduce a new tax credit rate of 33 per cent, coinciding with the new top rate for taxable incomes over $200,000, which will apply to the extent that a donor has income that is subject to the new high rate.
Under the current rules, donations attract both federal and provincial non-refundable tax credits. On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200. These rates are equal to the tax rate of the lowest federal bracket (income below about $45,000) and the current highest bracket (income above approximately $139,000) respectively. Parallel provincial credits work similarly.
Starting in 2016, donors who have income subject to the new 33 per cent top rate and who donate more than $200 annually, will benefit from a 33 per cent tax credit on such donations. To understand how the new credit for high income earners will work, let’s assume that Catherine has $215,000 of taxable income in 2016 and donates $20,000 to charity next year.
She would calculate her 2016 tax credit in three steps. Firstly, she would get a $30 federal credit on the first $200 of annual gifts (15 per cent x $200). She would then get a credit of $4,950, or 33 per cent of $15,000 ($215,000 – $200,000), which is the amount of income above $200,000 subject to the new, top tax rate. Thirdly, she would get a credit of $1,392 (calculated as 29 per cent x $4,800), the amount by which her total donation of $20,000 exceeds the amount of her gift to which the 33 per cent rate applied ($15,000) and the first $200, which attracted a credit at the lowest rate. As result, Catherine’s total federal 2016 tax credit would be $6,372 ($30 + $4,950 + $1,392). She would also be entitled to provincial donation credits.
As a result of this change, donors in the top one per cent may have been tempted to delay claiming any donations made already in 2015 (or in prior years) until 2016 to claim the higher credit rate, since donations can be carried forward for up to five years. But, alas, the government has anticipated this and announced that the new, higher credit rate will only apply to donations made in 2016 and later years. Consequently, gifts made this year (or in previous years), but not claimed until next year (or later), will not be eligible for the new 33 per cent tax-credit rate.
Finally, note that there still may be a rate mismatch, depending on your province of residence, as not all provinces have adopted their top tax rate as their donation credit rate. For example, high-income donors in Ontario currently pay tax at a rate of 49.5 per cent while the combined federal/Ontario donation credit is about 46.4 per cent. Perhaps this federal change will encourage those provinces to follow suit by raising their top provincial donation credit similarly.