Far be it from me to defend the plight of the high-net-worth Canadian. I recognize it’s a national sport to caricaturize rich folks. It’s not always undeserved, but not always deserved.
Still, a little-noticed provision in the last federal budget that kicks in with taxes on income next year has been revealed in recent weeks as an unintended consequence that stands to hurts the wealthy’s beneficiaries even more than the benefactors themselves.
The government is proposing a reversal of provisions introduced by a Liberal government in the 1990s and enhanced by a Conservative government the next decade to remove capital gains tax on gifts of publicly listed securities to charities. The move, according to the charities themselves, will diminish major donations and further imperil their operations.
The change is part of an overhaul of the alternative minimum tax (AMT) introduced nearly four decades ago. It required high-earning Canadians to pay a minimum 15 per cent tax on income – with the regular income tax filing capped at 33 per cent federally. When higher-income Canadians file taxes, they have to pay the higher of the two – the AMT or the total they reached after claiming deductions and credits.
The proposed income threshold to impose the AMT will rise from its current $40,000 to $173,000, and the rate is jumping from 15 per cent to 20.5 per cent. The Parliamentary Budget Office (PBO) estimates this will collect an additional $2.6 billion for the treasury over the first five years.
The charitable sector says a large chunk of that treasury windfall is coming out of its hide.
The exemption for public securities donations pours about $1 billion into the sector annually. The budget reverses course and proposes a 30-per-cent tax on capital gains, which will likely move more into the AMT flat-rate cohort and away from converting securities into donations. For instance, a $2.1 million donation of securities that would yield $2 million in capital gains now will face a tax increase of $165,000.
Beyond that is a 50-per-cent reduction in the non-refundable tax credit, which means even ordinary cash donations will be affected.
At a time there are fewer but larger donors, and at a time more than half of the country’s charities express concerns about viability, this does nothing to encourage a climate of benevolence. Rather than examine incentives to capitalize on the opportunities for charities in this era of a large transfer of wealth, we are approaching a new framework for contributions that ought to hurt them.
The budget move has mobilized the charitable sector more than at any other time in recent memory. First off, they’re wisely pushing donors to give now, bearing in mind the changes Jan. 1. Secondly, they’re lobbying madly for a rethink.
More than 30 signatories from the sector wrote the prime minister to not “critically dampen Canadian charitable giving during an already challenging period” with measures “counterintuitive to hinder private giving.”
We can decry how the tax code is used for tax avoidance, even at times for tax evasion, but the reality is we and other countries are complicit in an institutional pact between government and the charitable sector as the latter increasingly moves into activities once the preserve of public spending.
The needs across our charities are more than the public purse can withstand, so incentives and benefits are necessary if they’re to take in the available income wealth and help those neediest that government programs do not reach.
What the budget did was rev up the engine of tax increases without adequately contemplating what awaits downstream. A tax foray into the preserve of the rich sounds like a good idea for a government until it realizes the donations are essential as an adjacent economy to deal with social conditions that ought to be its remit.
The next number of months will be a test of a government that hasn’t historically excelled at dialling back episodes of class warfare. We can only hope that the more it understands that for every rich Canadian it plumbs there will be victims it didn’t anticipate benefiting from charities – big and small, near and far, now and later – the more it might let common sense prevail.
Kirk LaPointe is publisher and executive editor of BIV and vice-president, editorial, of Glacier Media.