Tax changes would curb big charitable gifts, foundations worry
Increased tax on donations of securities would harm charities and ultimately Canadians, they say
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Back in August, the Canadian government tabled legislation that proposes amendments to the Income Tax Act that could, if implemented, raise the Alternative Minimum Tax (AMT) paid by individuals. It would do this partly by taxing capital gains embedded in securities that are donated to a registered charity.
Historically, donating securities has been an efficient (and attractive) way for individuals to give, as it has not attracted any tax on capital gains: Donors get the maximum deduction for their philanthropy, and charities receive the full value of the gift.
So we at Leith Wheeler Investment Counsel wanted to hear from stakeholders in the not-for-profit sector. How could this change affect donor activity and, by extension, charities’ ability to serve their constituents?
The one consistent message we received from tax professionals and not-for-profit leaders alike is that the mechanism behind this new tax is complex. That complexity is one reason few have been writing about it, and why clients are not raising it with their advisors. They just don’t understand it.
One thing you can count on, though, is that the folks at CRA will understand it come tax time, so it’s best to be prepared.
Basically, the new rules would increase the tax cost of donating qualifying securities to charity. Among other things, the new AMT calculation would apply a 30-per-cent inclusion rate for capital gains for individuals for securities they donate to charity (up from 0 per cent).
(For more on the AMT, click here: HNW taxpayers: Get ready for ‘refreshed’ alternative minimum tax for 2024.)
How might these changes impact not-for-profits? Here’s what philanthropic leaders said.
Trillium Health Partners Foundation
Caroline Riseboro, president and CEO of Mississauga, Ont.-based Trillium, says she’s apprehensive.
With charitable-giving participation rates in decline for more than 20 years, there is a strong dependence on large donations to fill the gap, she says.
“Currently, 60 per cent of charitable donations in Canada come from those with assets of $1 million or more, and the charitable sector is increasingly dependent upon high-net-worth individuals to donate to causes like healthcare, secondary education, the arts, environmental groups and community-based organizations to ensure the quality of life of many Canadians.”
Riseboro also specifically points to the importance of donated securities to donors’ overall giving plans, saying, “It is through gifts of appreciated securities that donors have increased the size of their donations in recent years, which has increasingly benefited the social good. However, longstanding donors are already raising concerns about this change to the tax code, and how it may mean less funds directed to charity.”
BC Cancer Foundation
Elissa Ming Morrissette, vice president, development at the BC Cancer Foundation, says that while the foundation is “confident that donors will continue to invest in the causes that are most important to them, there is concern around how the proposed AMT measures will impact the scale of some gifts.” She also stresses that “it is more important than ever for donors to work with their financial and tax advisors to fulfill their charitable wishes.”
The foundation has seen a marked increase in gifts of securities over the past decade, which increased by nearly 450 per cent as donor awareness about the benefits of this giving vehicle has increased. She notes as well that the size of these donations is often higher than gifts through alternative vehicles due to the tax advantages.
“They represent an incredibly valuable source of funding for cancer research and innovations to care,” she says. “With philanthropy playing a substantial role in fuelling advances in healthcare, a negative impact on donations would be regrettable for the health of our communities.”
Community Foundations of Canada
Andrew Chunilall, CEO of Community Foundations of Canada, which has member foundations in more than 200 Canadian communities, is also hearing some concern. Given the personal nature of the AMT, the complexity of the calculation and potential ability to recover AMT in future tax years, he thinks the impact on donor behaviour is, at present, difficult to determine. Early signals show many donors are tuned into the conversation and are assessing its impact broadly — including on their own charitable giving.
Chunilall turned to the topic of taxation of capital in general, the principle of which he agrees with philosophically, saying, “I’m a proponent of taxing capital because that helps pay for roads and health care and education, and I think most Canadians would get behind that. It’s the level of taxation of capital, as well as when taxation is triggered (i.e., charitable contributions) that is a concern because we don’t want to disincentivize the deployment of capital and the risk taking, because that’s what makes the economy go around.”
With all that said, would Chunilall prefer an inclusion rate of 0 per cent or 30 per cent? “I think in my sector you’d say the highest level of optimization is the 0-per-cent inclusion rate, [to have] more dollars going through philanthropic organizations or social service agencies to enable them to do the essential and good work they do for community.”
More on the AMT
The legislation aims to implement proposals in the federal government’s Budget 2023. The original document itself focuses on the government’s aim of targeting higher-income taxpayers with the changes, estimating “more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million per year.”
If the changes result in lowering charitable giving among those same taxpayers, though, it could end up making for bad policy. Says Trillium’s Riseboro, “While the government may be motivated to ensure everyone pays their fair share of tax, the unintended consequence of this tax change may mean those who depend upon charitable organizations for their well-being (which is the majority of Canadians) could be adversely impacted.”
The changes, if passed, would go into effect in early January, meaning time is short for donors to take advantage of the 0-per-cent capital gains tax on donations of securities. Perhaps we’ll see a surge in 2023; perhaps not. Either way, we hope to see continued growth in philanthropy, tax incentives or not.
Mike Wallberg, CFA MJ, is Principal, VP Marketing, for Leith Wheeler Investment Counsel, one of Canada’s largest independent wealth managers. With offices in Vancouver, Calgary and Toronto, Leith Wheeler manages more than $23 billion for individuals, families, foundations, Indigenous communities and institutional clients across Canada. A former investment banker, equity analyst, institutional portfolio manager and television news producer, Mike also hosts CFA Institute’s flagship investment podcast, Guiding Assets, which is currently ranked in the top 10 per cent of business podcasts globally.
This information in this article should not be treated by readers as investment, tax or legal advice and should not be relied on as such. You should consult legal or tax professionals regarding your specific situation.
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