Some fear upcoming federal tax changes on rich could result in donation nosedive; others say concern unwarranted

Canadian charities say the federal government must amend new tax legislation targeting the country’s wealthiest – or risk a drop in donations.

In spring’s federal budget, the Canadian government proposed several changes to the Alternative Minimum Tax (AMT) calculation — a second way of determining taxes owed, designed to ensure that all Canadians are paying their fair share after credits and benefits are tallied up.

Beginning in 2024, Canadians earning more than $173,000 will be required to calculate their taxes using the standard and AMT methods, paying whichever is higher. 

When the AMT method is applied, the federal changes will require Canadians to pay 30 per cent of the capital gain on some types of donations, such as gifts of stock or donations of ecologically sensitive land — a change from the current total exemption of capital gains.

The proposed legislation will also reduce the donation tax credit from 100 to 50 per cent for an individual calculating taxes owed using the AMT method.  

Charity sector professionals say these measures will make giving more expensive for some high-income Canadians and could lead to a drop in large donations. 

“We very much believe the wealthy should be paying their fair share of taxes,” said Ruth MacKenzie, CEO of the Canadian Association of Gift Planners (CAGP), a group representing fundraisers, lawyers and other wealth management professionals advocating against the changes. 

“I just wonder: Is limiting charitable donations the best way to do that?” 

In September, CAGP submitted a letter to the Department of Finance, arguing against the AMT changes. The letter was co-signed by 180 charity sector professionals, including executives of prominent community foundations, university and hospital foundations and large charities. 

More than 900 sector professionals have also signed a petition launched by charity sector association Imagine Canada, which demands the government keep the existing donation incentives in place and argues that while income inequality is a national concern, it should not be addressed through hampering the work of a sector already under strain. 

Tax credits are not the key driver for charitable giving, said MacKenzie, but when wealthy Canadians are facing a big tax bill — in a year, for instance, where they’ve sold their business or a cottage — these incentives can help to spur giving. 

Without them, high-income Canadians might just opt to pay the tax instead, she said. 

AMT makes tax system fairer: tax fairness group

However, Katrina Miller, executive director of advocacy group Canadians for Tax Fairness, said the government’s proposed changes to the AMT are sound. 

“The reason we have an alternative minimum tax is out of acknowledgment that with all of the tax credits, the various tax exemptions, and the various loopholes that we’ve set up, our tax system has become unfair,” she said. 

In Budget 2022, the federal government said despite higher tax rates for top-income earners, about a third of tax filers earning more than $400,000 — those in the 99.5th percentile for income earners — managed to pay less federal tax in 2019 than some of their middle-class peers. 

In 2019, two per cent of tax filers with incomes above $400,000 paid no federal income tax at all, while one out of ten paid five per cent or less and 16 per cent paid five to 15 per cent, according to government figures.  

As someone who has worked in the charitable sector, Miller said she understands the fundraising challenges non-profits face but argues the government’s proposed AMT changes are good for the sector as they will boost the government’s capacity to finance social services. 

“[Charities] become burdened with social responsibilities when the government decides to exit itself from public programming when it doesn’t have money,” she said. 

“Think of all the charities set up around health. Think of all of the charities set up around education. Some of those have more work to do because the government has reduced its funding in those areas directly.” 

In September, the Office of the Parliamentary Budget Officer released a report, projecting the proposed changes to the AMT will result in an additional $2.62 billion in revenue over five years. 

It’s reasonable for the government to modestly claw back some of the existing charitable tax benefits offered to high-income earners, Miller also argued, saying raising sufficient tax revenue is more important than stimulating additional charitable dollars. 

“As much as charitable donations are an important part of Canadian society, frankly, we believe that paying taxes so that our public and democratically-directed institutions can do what we need them to do supersedes that,” she said. 

Sandra Sullivan, executive director of the Hospice Georgian Triangle Foundation, disagrees, suggesting it’s “academic” to say government dollars are superior to those from donors. 

“A dollar’s a dollar,” said the executive of the Collingwood, ON-based charity. “We have bills to pay, and we have people to pay — and if [those dollars] come from the government or a philanthropist, it’s money we have to spend on our operations.” 

Bernadette Johnson, advocacy director at Imagine Canada, agreed, arguing stimulating charitable giving is also crucial as private donations are more commonly “unrestricted” than government dollars. 

“What the government has done over the last 15 years is they’ve directed their spending and support for charities within the regime of project-based funding, which has been very, very problematic for the sector,” she said. 

Johnson said the government’s proposed AMT changes are also concerning as they seem to work at cross-purposes with other recent federal efforts to boost funding for the sector, including the $400 million Community Services Recovery Fund and the increase to the disbursement quota. 

Sullivan added that she is also particularly concerned about the impact of the proposed policy change on smaller organizations like hers.

While some experts have said they believe the AMT policy will lead to the most significant drop in donations for large universities, hospitals and community foundations, the foundation executive director disagrees. 

“We have a lot less wiggle room and a lot less opportunities to make up that money elsewhere,” she said. “There’s only so many grassroots charity fundraising events that we can host to make up that gap.” 

How much will AMT change impact donations?

CAGP and Imagine Canada believe the proposed changes will lead to a decline in donations but differ in their estimates of the impact. 

In their submission to the Department of Finance, CAGP said the changes could affect as much as 35 per cent of the sector’s revenue — an estimate based on the share of total revenue that typically comes from “very large gifts,” according to MacKenzie. 

Imagine Canada estimated the changes will lead to a five per cent drop in giving sector-wide, resulting in a half-billion dollar loss in annual giving. 

The Department of Finance has done projections on the impact of the AMT changes on donations but will not release them, said Johnson. Future of Good asked the Department for these figures but received only a written explanation for why the government has made the proposed policy changes. 

The Parliamentary Budget Officer has, however, estimated the AMT changes would ding fewer than 29,000 Canadians. 

While this number is modest, Johnson said donations from this sliver of the population have become increasingly important in recent years. 

According to Statistics Canada, in 2020, donors with incomes of at least $150,000 represented just one in 10 donors but accounted for 40 per cent of the total donations. 

Charity experts also say large donations of appreciated securities — one of the types of gifts impacted by the AMT changes — are also an increasingly important part of charitable giving, especially among affluent donors. 

In 2022, donors made about 9,100 donations of qualifying securities through charity giving platform CanadaHelps. While these donations represented just 0.3 per cent of the 3.2 million donations made through the platform that year by number, they represented seven per cent of the total value of donations overall ($32 million of $439 million). 

Some donors re-considering multi-year pledges

Imagine Canada is consulting with the government on this issue, hoping for a policy change before the new rules are set to take effect in January, said Johnson.

While the rule change is complex, she said her organization is increasingly hearing from members on this issue, spurred by gloomy conversations with donors.  

“Many are hearing their donors are worried and that they are looking to maybe make adjustments to their multi-year pledges.”