1. E
HICH-INCOMETAXPAYERSBENEFITMOST:
Charitable tax credit system unfair to low-income earners
ByThomosAppleyard
ast October, the Harper government announced that
it is considering boosting charitable tax credits aspart
of a package of reforms to shift funding of non-profit
organizations away from government towards the citizenry
ald private sector.
The tax credit policy review should consider and repair
the ways in which the current tax policies used to encourage
charitable giving are wasteful, profoundly unfair to low-
income Canadians, promote regional inequities, and distort
the role of the non-profit sector as the nexus of social capital.
Donors of cash are currently granted non-refundable tax
credits in the amounts of 15.25%on the first $200claimed in
a given tax year, and29'/" on any additional donations. These
credits are increased by provincial and territorial credits.
Tax receipts can be shared between spouses or common-
law partners and postponed up to five years in order to
accumulate receipts to maximize the amount of donated
money that is credited at the 29"/"rate. Because the credit is
non-refundable, Canadians who do not pay income tax (most
commonly low-income Canadians) receive no benefit.
With a 2006 policy change, donors of public securities
and environmentally sensitive land can donate the full value
of the asset without having to pay capital gains tax on the
increased value of the asset.Gifts in kind can be credited at
the fair market value with a documented appraisal.
Volunteerism, or donation of time/service, on the other
hand, is not credited in Canada's income tax system, except
for volunteer fire-fighters.
Despite the lack of support for volunteerism, Canada's
tax credit system is already touted as the most generous tax
incentive in the world. The cost of these individual tax credits
to government is approximately $2.15billion at the federal level.
This does not include provincial/territorial costs, or federal
costsassociatedwith private sectorgiving. An important policy
consideration is whether the tax credit policy leadsto additional
charitable giving which exceedsthese considerable costs.
The lmpact on Giving
An important consideration in whether the tax credit policy
makes sense is that many people would give to charity
regardless of tax credits. The evidence for this is very clear.
First, according to Statistics Canada, on average,low-income
Canadians give by far the highest percentage of their income
to charity (1.6%for people <$2Q000;0.5%for people >$10O000)
even though many receive no tax credit for this donation.
Second, only 46"/'of donors stated that they or someone
else would claim a tax credit for their charitable donations
in Statistics Canada's major survey on charitable giving.
This means thatmost donorsdonqtedespitethe lack of ability or
intention to claim tax credits.
The same survey found that the main reasonswhy people
give to charity arefeeling compassionfor peoplein need,wanting
to help a cause in which one believes, and wanting to make
a contribution to the community. Income tax credits fell well
behind thesereasonsasthe sixth most common reasonfor giving.
TheC(PAMonitor 18
The important consideration, then, is the degree to which
the tax credit effectively encouragest?larginal charitable giving
(that which would not happen, anyway). Sinceit is impossible
for the Canada RevenueAgency to determine how much giving
by aparticular donor is marginal, the entire donation mustbe
credited at significant cost to the public purse (admittedly, the
first part can be credited less, as is the case for many donors
in the current two-tier system of tax credit). The value of the
marginal giving has to make up for the cost of the tax credit
being given to donors for donations that would have been given
anyway - andthe costassociatedwith the marginal donations.
This is a tall order for line 349 on a tax return.
The ability of the charitabletax credit to achievethis is based
on the priceelasticityof charitablegiahtg.A landmark Canadian
review of the literature found that "the bestevidencetells us that
the amount [of charitable giving stimulated by the Canadian tax
credit] is considerablylessthan the government losesin revenue."
Donationof Money
The tax credit system is comparable to a matching grants
program, where the government contributes based on the
amount that the donor contributes. There is, however, an
important caveat.Charitable receiptscan onlybe used to receive
a non-refundable tax credit, meaning that many low-income
donors do not receive any tax incentive to donate. This is the
casefor over one-third of Canadians. Of note, another term for
non-refundable is uastable;here,many Canadians are forced to
waste their tax receipts.Additionally, the first $200of donations
is credited at a much lower rate than additional donations.
One reason for this was to reduce the amount of subsidy
given to donations that would have been given without the
tax credit in place; however, the threshold point is the same
for everybody, notbased on incomg making this a veryblunt
tool to achieve this goal (a tool that could be easily corrected
to adjust to the taxpayer's individual situation).
It is clear that this policy choice has a very regressive
impact. Those donors who can afford to give more than $200
receive a larger matching grant on a dollar-for-dollar basis
than those who cannot afford to donate this much. Granted,
donors can accumulate receipts for up to five years, and share
receipts with spouse or common-law partners, but these
tools are eligible for all taxpayers, even very-high-income
taxpayers, who maybe able to afford to delay the taxbenefit.
Thejustification for a lower matching grant for low-income
earnersis unclear,especiallyin the light of the relative generosity
of low-income earners. The justification for having the credit
asnon-refundable is similarly unclear and should be changed.
There are many refundable tax credits, including those for GST,
and for HST and rent in Ontario. The idea that a donor should
not be given any incentive to give to charity simply becausehe
or shehas a low income (which may be quite different from the
amount of wealth he or she has)is profoundly unjust.
There are important implications in who receives these
matching grants in the form of tax credits, in part becausehigh-
(Continuedon Pogel9)
February2012

2. Better to transfer f2.15 billion to the non-profit sector
(Continuedfrom Poge18)
income and low-income donors support
different types of organizations. High-
income donors tend to donateto hospitals,
higher education, and arts and culture
organizations, while low-income donors
tend to support religious organizations
and social welfare agencies.
Donation of Assets
There are a couple of types of asset-
donation that will be considered here:
publicly traded securities and gifts in
kind.
As mentioned PreviouslY, a 2006
policy changeallows donationof publicly-
lraded securities to be made without
paying tax on the capital gains. In other
wordE a receipt is provided to the donor
that includes an amount of donation
that the donor was never taxed on' If
the donor had earned the moneY used
in the donation through employment or
businessincome rather than capital gains,
the receipt would be for less money' In
other words, the charitable tax credit
program Provides matching grants, and
ihe size of the grant depends on how the
donor earned income, with abias against
income earned through employment'
There are clear inequities in this
oolicv. Low-income Canadians are far
-ot"iik"ly
to earn higher proportions of
their income through employment than
capital gains. The policy change further
-
underlines the fact that higher-income
Canadians have their charitable choices
subsidized by lower-income taxpayers
who donate a larger proportion of their
income. This also increases the risk of
an affluent minority deciding the mix
of services available, rather than the
community as a whole.
The donation of gifts inkindrequires
a valuation of fair market value. This is
a reasonable rule, but bureaucratically
cumbersome. The requirement makes
the donation of amateur artwork
difficult, and very nrely is a charitable
tax credit given for the donation of used
clothing to Goodwill, sleeping bags to
the homeless, or canned goods to food
banks.Although thebureaucratic reasons
for this are clear,theseare donations that
many people can afford to make, unlike
gifts of environmentally sensitive land'
It is the land, however, that geis the tax
credit and the capital gains exemption,
TheCCPAMonitor
while the donations of basic needs (food,
clothing, sleeping bags) are ignored.
Donation of Service
Canada's income tax system provides
no incentive for the donation of services
(volunteerism) other than fire-fighting.
This is also true in the United States,but
U.S.law does allow volunteers to claim
expensesassociatedwith volunteering
against income.
The lack of credit given for volunteer
activities works against low-income
people who may not be ableto contribute
through gifts of money,but cancontribute
through gifts of service. While a smaller
proportion of low-income Canadians
currently volunteer, the average hours
volunteered is highest among moderate
and low-income volunteers. Other than
fire-fighting, none of this giving is
recognized by the income tax system.
There are also regional distortions
in this arrangement. For example, the
people of the Yukon are very generous
with their volunteerism - 58%
compared to a 46"/"national average,
while their donor rate at 78% trails the
84% national average. In other words,
despite the extraordinary generosity of
time that the people of the Yukon show,
they subsidize the charitable choices of
high-donor provinces and territories'
Non-profitSectorlmPlications
In general, the likelihood of a donation
having personal meaning to the donor is
inversely related to the likelihood that the
incometax systemwill recognizeitsvalue.
In this way, the statefails to demonstrate
an appreciation for the social capital
developmentrole of the sectorthrough the
sector'sparticipants. The state supports
the forms of gift that require very low
personal involvement: the donation of
cash or securities,as long as moderate-
to high-income donors donated them'
Donations of potentially scarcedollars by
low-income Canadians are not credited.
Donations of items with sentimental
value (e.g.,used clothing of a deceased
spouse) ate normally not credited.
Donations of personally made items,
such as art being donated by artists or
meals donatedby chefs,are cumbersome
or impossible to have credited. Most
importantly, the form of giving that
19
develops the greatest amount of social
capital for participants, the donation
of time/service, is not credited (fire-
fighters excepted).
The development of social capital is
predicated upon conceptsof meaningful
interaction, as well as bonding within
groups andbridging among them. The
systematic discrimination against some
groups and against more personally
meaningful tyPes of contribution
represent a serious threat to the sector's
ability to generate social capital.
It is worth considering the premise
that giving that has meaning for donors
does not require the extra incentive of
the matching grants program. This is
likely to account for a significant amount
of giving. Howevet if this is the case,
perhaps the $2.15billion spent federally
on the matching grants program is not
eliciting sufficient less-meaningful giving
for donors to merit its coststo Canadians'
Recommendations
It is clear that the tax credit program is
riddled with problems: it is regressive,
can make only dubious claims of its
ability to raise private giving, and
undermines the principle of the non-
profit sectorasthe nexus of social capital.
Solutions to these problems include:
. Base the threshold for higher
crediting of donations on the
individual taxpayer's situation, not a
fixed, non-indexed amount of $200.
. Make the value of the tax credit the
same,regardlessof the amount given.
o Make the tax credit refundable.
r Reversethe capital gains exemption
for the donation of securities and
environmentallY sensitive land.
. Provide a tax credit for the donation
of services.
Onepolicythatshouldbeconsidetedtuould
befor thegoaernmentto cancelthecharitable
tax credits program altogether.The $2.15
billion price tag to the program, plus
orovincial/territorial costs, could be
reinvested in the non-profit sector.
(ThomasApPleYardhasa Master of
SocialWorkfrom theUniaersityofToronto
anda Masterof BusinessAdministration
from Yorkl)niaersity'sSchulichSchoolof
Business.Heliuesin Torontoruhereheruorks
in thet'ieldofemergencymanngement.)LH
February2012