For those who don’t know there is a concept called tax expenditures. It is an estimate of the cost to a government of certain tax concessions. How much does it cost the Federal government to give a tax break such as the donation tax credit? Since 1979 the Department of Finance has been putting out reports on these costs.
These estimates are helpful but they are only a small part of the story. These estimates are about lost tax revenue to the Federal government for the issuance of official donation receipts. It does not include lost income tax revenue to the provincial governments. It also does not include lost tax revenue to the municipalities when they allow non-profits or charities to pay less or no property tax. Obviously, it also does not include the cost of direct grantmaking by different levels of governments to charities which amount to about $160 billion per year. Furthermore, there is no estimate as to what the costs are because non-profits and registered charities are exempt from income tax. When a sector has revenue of $300 billion and assets of about $500 billion and it is not paying income tax on income and capital gains there is a large cost for that.
So the tax expenditure numbers are very interesting but keep in mind their limitations. Another thing to note is that although for example, 5.2 million people and 98,000 corporations may have claimed a donation tax incentive, many more people donated but did not claim the incentive. Perhaps more interesting and we will probably never know the answer to this one – probably a small number of people who are already very wealthy got most of the tax benefits from the donation tax incentive. It is quite obvious that the tax benefits are not equally shared.
Here is the information for individual donations and trust donations:
| Measure | |
|---|---|
| Description | The Charitable Donation Tax Credit is a non-refundable tax credit on donations to registered charities, registered Canadian amateur athletic associations and other qualified donees. In 2020, the formula for determining the credit for individuals is linked to the lowest, second-highest and highest federal tax rates. The credit rate is 15% on the first $200 of total annual gifts and 29% on total annual gifts over $200, with the exception of donors with taxable income exceeding $214,368 who may claim a 33% tax credit on the portion of total annual donations over $200 made from taxable income greater than $214,368.
In general, the credit may be claimed on donations totalling up to 75% of an individual’s net income (up to 100% of net income for donations of ecologically sensitive land and cultural property or in certain other circumstances) and may be carried forward for up to 5 years (up to 10 years for donations of ecologically sensitive land). |
| Tax | Personal income tax (including trusts) |
| Beneficiaries | Individual donors |
| Type of measure | Credit, non-refundable |
| Legal reference | Income Tax Act, section 118.1 and subsections 248(30) to (41) |
| Implementation and recent history |
|
| Objective – category | To achieve a social objective |
| Objective | This measure is designed to support the important work of the charitable sector in meeting the needs of Canadians (Report of the Royal Commission on Taxation, vol. 3, 1966; 1987 Tax Reform). |
| Category | Non-structural tax measure |
| Reason why this measure is not part of benchmark tax system | Tax credits are treated as deviations from the benchmark tax system.
The tax benefit from this measure can be obtained in a taxation year other than the year during which it accrues. The tax benefit from this measure is transferable between spouses or common-law partners. |
| Subject | Donations, gifts, charities and non-profit organizations |
| CCOFOG 2014 code | 705 – Environmental protection; 706 – Housing and community amenities; 707 – Health; 708 – Recreation, culture, and religion; 709 – Education; 710 – Social protection; Other various codes |
| Other relevant government programs | Many federal government entities provide direct funding to registered charities, non-profit organizations and international development associations through various programs. |
| Source of data | T1 Income Tax and Benefit Return
T3 Trust Income Tax and Information Return Canadian Cultural Property Export Review Board Environment and Climate Change Canada |
| Estimation method | The value of this measure in respect of donations other than cultural property and ecologically sensitive land by individuals is estimated using the T1 micro-simulation model. The value of this measure in respect of donations of cultural property is calculated by multiplying an estimate of donations made in the year by the 29% credit rate. The value of this measure in respect of donations of ecologically sensitive land is estimated by multiplying total donations by the 29% credit rate. The value of this measure in respect of donations by trusts is estimated using the T3 micro-simulation model. No breakdown is available of the tax expenditure accruing to trusts by type of donations. |
| Projection method | Projections for individuals are obtained using the T1 micro-simulation model in the case of donations other than cultural property and ecologically sensitive land. Projections in respect of donations of cultural property and ecologically sensitive land are made based on the historical trend in the number and value of donations; in particular, projections in respect of cultural property are made based on an average of past donations. Projections for trusts are based on projected growth for individuals. |
| Number of beneficiaries | About 5.2 million individuals and 3,000 trusts claimed this credit in 2018. |
| Millions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 (P) | 2020 (P) | 2021 (P) | 2022 (P) |
|---|---|---|---|---|---|---|---|---|
| Donations by individuals by type of donations | ||||||||
| Publicly listed securities | 190 | 240 | 315 | 270 | 410 | 300 | 340 | 390 |
| Ecologically sensitive land | 5 | 10 | 5 | 10 | 5 | 10 | 10 | 10 |
| Cultural property | 25 | 25 | 20 | 15 | 10 | 15 | 20 | 20 |
| Other | 2,425 | 2,455 | 2,560 | 2,685 | 2,670 | 2,745 | 2,835 | 2,900 |
| Subtotal – donations by individuals | 2,645 | 2,735 | 2,900 | 2,980 | 3,095 | 3,070 | 3,205 | 3,320 |
| Donations by trusts | 15 | 15 | 35 | 35 | 35 | 35 | 35 | 40 |
| Total – personal income tax | 2,660 | 2,750 | 2,935 | 3,015 | 3,130 | 3,105 | 3,240 | 3,355 |
Here is the information for corporations:
| Measure | |
|---|---|
| Description | Donations made by corporations to registered charities are deductible in computing taxable income within certain limits. In general, a deduction may be claimed on donations totalling up to 75% of a corporation’s taxable income. The limit is increased by 25% of the amount of taxable capital gains arising from donations of appreciated capital property and 25% of any capital cost allowance recapture arising from donations of depreciable capital property. The net income restriction does not apply to certain gifts of cultural property or ecologically sensitive land.
Donations in excess of the particular limit applied may be carried forward up to 5 years with the exception of gifts of ecologically sensitive land, which may be carried forward up to 10 years. |
| Tax | Corporate income tax |
| Beneficiaries | Corporate donors |
| Type of measure | Deduction |
| Legal reference | Income Tax Act, section 110.1 |
| Implementation and recent history |
|
| Objective – category | To achieve a social objective |
| Objective | This measure is designed to support the important work of the charitable sector in meeting the needs of Canadians (Report of the Royal Commission on Taxation, vol. 3, 1966). |
| Category | Non-structural tax measure |
| Reason why this measure is not part of benchmark tax system | This measure provides tax recognition for an expense that is not incurred to earn income.
The tax benefit from this measure can be obtained in a taxation year other than the year during which it accrues. |
| Subject | Donations, gifts, charities and non-profit organizations |
| CCOFOG 2014 code | 705 – Environmental protection; 706 – Housing and community amenities; 707 – Health; 708 – Recreation, culture, and religion; 709 – Education; 710 – Social protection; Other various codes |
| Other relevant government programs | Many federal government entities provide direct funding to registered charities, non-profit organizations and international development associations through various programs. |
| Source of data | T2 Corporation Income Tax Return |
| Estimation method | T2 micro-simulation model |
| Projection method | The cost of this measure is projected to grow in line with corporate taxable income. |
| Number of beneficiaries | This measure provided tax relief to about 98,400 corporations in 2018. |
| Millions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 (P) | 2020 (P) | 2021 (P) | 2022 (P) |
|---|---|---|---|---|---|---|---|---|
| By type of donations | ||||||||
| Ecologically sensitive land | 1 | 1 | 1 | 10 | 2 | 4 | 4 | 4 |
| Cultural property | 20 | 3 | 5 | 5 | 4 | 5 | 5 | 5 |
| Other | 435 | 440 | 625 | 680 | 710 | 700 | 715 | 790 |
| Total – corporate income tax | 455 | 445 | 635 | 690 | 715 | 710 | 725 | 795 |