November 23, 2023 – The federal government’s new proposed Alternative Minimum Tax (AMT) reforms would create disadvantages for charities and hit large capital gains hard, according to a new C.D. Howe Institute report.
In “Capital Gains and Charitable Donations: The Silent Targets of Federal AMT Reforms,” the C.D. Howe Institute’s Alexandre Laurin and Nicholas Dahir investigate these proposed changes, which were first introduced in Budget 2023 to “ensure the wealthiest Canadians pay their fair share of tax,” suggesting that these individuals currently pay less than they should.
Specifically, the authors examine who exactly would be targeted by these reforms as well as how much more they would pay, how much more tax revenues would be raised and how potential behavioural responses would affect the fairness and effectiveness of this proposed tax change.
Overall, Laurin and Dahir find that the reformed minimum tax would primarily target charitable giving and occasionally large capital gains – with the latter primarily falling on individuals who report occasional instances of very large capital gains exceeding $500,000 in a year.
“The official objective behind the AMT is to ensure a fair tax contribution from all individuals and entities,” says Laurin. “What is not clear is how disallowing the use of entirely legitimate tax provisions like loss utilization, tax credits for charitable donations and partial inclusion of capital gains enhances fairness. No change was made to this proposed set of rules in the 2023 Fall Economic Statement; therefore these proposed reforms still threaten to hurt our charitable sector.”
This proposed alternative minimum tax regime introduces two provisions targeting charitable giving: it disallows half of the charitable donation tax credit and includes 30 percent of capital gains on donations of publicly listed securities.
“Our estimates indicate that about 10 percent of the overall value of charitable donations and almost half of the overall value of donations of publicly listed securities will be impacted by the reduced tax incentives for charitable giving in the proposed AMT,” explains Laurin.
As charitable donations respond significantly to tax incentives, the authors suggest that the proposed AMT could decrease the overall value of charitable donations in Canada by 4 percent, and donations of publicly listed securities might see a decline of 22 percent.
“A 4 percent decline in overall charitable donations could severely harm the charitable sector,” says Dahir, adding that this would have equated to almost $500 million less in donations in 2021.
Examining Budget 2023’s estimated $625 million in additional revenue from the AMT reforms in 2024/25 and $745 million by 2027/28, Laurin and Dahir’s model the proposed regime. Making three adjustments to their initial estimate of $1,047 million for the 2024/25 fiscal year, the authors find that their projections for revenue gains are somewhat comparable to Budget 2023’s projections – but are lower and decreasing ($710 million in 2024/25 and $595 million in 2027/28).
“The proposed AMT is an awkward attempt, at best, to impose heavier taxation of capital gains,” says Laurin. “By disallowing half of prior-year capital loss offsetting, the AMT artificially inflates the net capital gains of taxpayers – a form of double taxation – penalizing those who might have a mix of good and bad years. Knowing they might not be able to offset all future gains with past losses might deter some investors from taking risks or investing in assets where the return is uncertain.”
Instead, Laurin and Dahir conclude that if the federal government wants to tax large capital gains and reduce the tax incentives for charitable donations, it should express these goals explicitly and transparently, rather than by stealth.
For more information contact: Alexandre Laurin, Director of Research, C.D. Howe Institute; Nicholas Dahir, Research Assistant, C.D. Howe Institute; Lauren Malyk, Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.