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Charities might be concerned with the latest federal budget

This article was originally published May 8th, 2013 in the Guelph Mercury.  To download the PDF of this article click HERE.  To view this article online click HERE.

Charitable organizations in Canada were lobbying for a “stretch tax credit” for charitable giving in the most recent federal budget.

The reality is, the current fiscal context didn’t allow for it. Instead, a “super credit” was announced as part of the March 21 budget as a means to strengthen incentives to giving to Canadian charities.

Imagine Canada, a national charitable organization that works to support charities in the country, was pleased the government recognized the need to provide better incentives, not only to wealthy Canadians, but modest and middle income Canadians to start giving. Imagine Canada’s message has been that philanthropy shouldn’t just be for the wealthy. The agency suggests that message has been heard loud and clear and believe that if well-communicated, the super credit can serve as a powerful message to all Canadians about the importance of giving and that even small donations can make a real difference.

According to Statistics Canada, in a report released in April 2012, the total amount of financial donations in 2010 that individuals made to charitable or non-profit organizations stood at $10.6 billion, about the same amount as in 2007. In 2010, the average annual amount per donor between the ages of 15 and 24 was $143, while the average annual amount per donor between the ages of 55 and 644 was $626 in 2010

Giving to charity is a study in population demographics. There are many reasons why people give: a level of awareness that a need exists; feeling that one is able to make a difference; the relative cost of the donation; disposable income; strength of altruistic or pro-social values; a desire for social recognition; psychological benefits related to giving; or just simply being asked.

The reality is being employed, having a university degree and belonging to a higher income household increase both the probability of making donations and the amounts given.

It is possible to make larger donations if you have greater financial resources. In 2010, according to Statistics Canada, the top 25 per cent of donors gave at least $358.

However, the cumulative amount of their donations comprised 83 per cent of the total amount collected by all charitable and non-profit organizations in 2010. The top 10 per cent contributed 63 per cent of all donations and the people who were more likely to belong to the top donor category had mostly the same characteristics as those who tended to make the largest donations. They included people aged 75 and over, widowers and widows, university graduates and people whose annual household income was at least $120,000.

In 2010, a tax credit from the government was an important motivation to donate for only 23 per cent of donors, but the top reason for not giving more was that “they could not afford to give more.”

In looking at the 2013 federal budget tabled by Finance Minister Jim Flaherty, the key highlight that is going to negatively impact charitable giving in Canada is the proposed revenue from closed tax loopholes and enforcement. Two highly technical proposals in the budget take aim at ordinary investors and small business owners, and the reason they haven’t received a lot of media coverage is that few people understand them.

The first deals with a subtle change to the dividend tax credit to amend the formula that will affect small businesses. Don’t own a small business? Don’t worry, the Canada Revenue Agency will still get you. A second technical change aims at eliminating “character conversion transactions.” Most people have no clue what that means, but if you own a mutual fund you may already be actively using this strategy.

Character conversion transforms highly taxed types of income, such as interest, into more tax-friendly forms like capital gains, only half of which are taxable and the practice is widespread.

The tax savings to investors using non-registered accounts is significant under the current system. Let’s say you own a mutual fund, earn over $81,000 a year and you receive $500 in capital gains distributions last year from a mutual fund account you own. Your tax bill would be $100. Unless that fund company that sold you that fund figures out a way to get around the proposed rule changes, your tax liability on that same amount in 2014 will be $200. Exactly double.

Ottawa expects to collect $175 million in additional taxes over the next five years as a result of this move and will add another $2.34 billion from small business owners through changing the dividend tax credit. That is a lot of money coming out of the same pockets that represent the majority of donors in Canada.

Having a tool to encourage conversation is beneficial, but despite the rhetoric and the introduction of the so-called “super credit,” unless those 15-to-24-year-olds who make up most of the first-time donors start printing money in their parents’ basement, the Canadian charitable giving landscape is about to change drastically.

Kevin Cahill is a Guelph-based financial planner.