‘Tis the season for giving, and as the year ends, many Canadians are planning substantial donations. However, they should consider maximizing those donations in 2023 while full tax relief for charitable giving is still guaranteed. The federal government has yet to table its legislation for reforming the alternative minimum tax (AMT), but if it sticks to its commitments laid out in the 2023 budget, tax relief for charitable giving will be curtailed for some high-income filers in 2024.
Donating to charities can lower our taxes. The charitable tax credit lowers taxes by about half of the amount of donations in excess of $200. And, donated accrued capital gains from gifts of publicly listed securities are exempted from taxable income.
All taxpayers can fully benefit from these tax provisions, regardless of their AMT status. But the proposed AMT would limit the exemption to 70 per cent of capital gains from the donations of publicly listed securities, and cut the charitable donations tax credit in half.
The AMT is computed alongside the regular tax, and filers must pay whichever amount is higher. The proposed changes to the AMT, according to the federal government, are aimed “to ensure the wealthiest Canadians pay their fair share of tax.” Most notably, the new AMT calculations would come with a simultaneous increase in both the minimum tax rate (to 20.5 per cent from 15 per cent), and the basic amount of income excluded from tax (to $173,000 from $40,000), while capital gains would be fully included in taxable income.
Relatively few people are subject to the AMT now and fewer would be subject to it if the proposed changes are passed – we estimate fewer than 40,000 people. Our analysis of the expected fiscal and behavioural consequences of the proposed AMT reforms indicates that the reformed AMT burden will fall largely on those with occasionally large capital gains: almost 80 per cent of the revenue raised from the reformed AMT would come from filers reporting over $500,000 in capital gains income in a year, and for those filers the likelihood of being caught by the reformed AMT jumps to 80 per cent – nearly tripled compared with the existing system.
Almost all AMT payers would earn over $300,000 in gross income, and almost all of them are also reporting charitable donations. If the AMT is implemented as planned and based on current donation patterns, we estimate that about 10 per cent of all reported charitable donations, and almost half of all the donations of publicly listed securities, will be affected by the reduced tax incentives for charitable giving.
One would think that reducing tax relief for charitable giving under the AMT would generate substantial revenues, but this is not the case. We estimate that these donations-related provisions generate only about 8 per cent of AMT revenues, amounting to approximately $60-million in 2024.
Charitable giving is known to respond significantly to tax incentives. When tax incentives raise (or lower) the after-tax cost of a donation, individuals often give less (or more). This means that some big donors will likely change their charitable giving behaviour in response to the new AMT.
We estimate that the overall value of donations in Canada might decrease by 4 per cent and the value of donations of publicly listed securities could drop by more than 20 per cent. While these figures may seem modest, in 2021, this impact would have meant almost $500-million less in donations to charities. Certainly, raising an additional $60-million in tax revenues (which could be much less as people can carry over AMT liability for up to seven years) does not justify costing charities half a billion dollars.
This change is hardly justifiable, and worse yet, it has not undergone sufficient debate. The AMT proposals will affect a limited number of taxpayers annually, which may explain why they have received limited public scrutiny. But their impact on charitable giving will be far more wide-reaching. The proposals deserve a more robust discussion, informed by serious analysis – something that Finance Canada has not yet provided, unlike the comprehensive white paper it issued in 1985 before introducing the AMT in 1986.
Ottawa needs to better explain underlying objectives and effects. Meanwhile, high-income individuals planning a substantial donation this holiday season should expedite their contributions to secure their inclusion in this year’s tax return. Delaying to next year may result in forfeiting important tax benefits.
Alexandre Laurin is director of research at the C.D. Howe Institute, where Nicholas Dahir is research officer. Their latest report “Capital Gains and Charitable Donations: The Silent Targets of Federal AMT Reforms” is available at www.cdhowe.org.
