Canada: Thoughts On Improving The Incentives To Give

Last Updated: March 21 2012
Article by Adam Aptowitzer

Most people in the sector are aware (or perhaps petrified) of the Parliamentary committee investigating charitable donation incentives. The committee invited submissions on charitable donation incentives, and several worthwhile submissions were made (available on the Parliamentary website). We too have made a submission (available here) and the author has been invited to appear in front of the Parliamentary committee to discuss our comments. Given the importance of the committee's inquiry generally, we are taking the time to provide this précis of our thoughts.

Understanding the System

Any donation incentive program must have two key elements; understanding and trust. Understanding is fundamental to any incentive, and complexity is itself a disincentive. The less people understand about the benefits they will receive from a particular type of behavior the less likely the reward is to motivate their behaviour.

In this regard one suggestion made by both our firm and by Jamie Golombek of National Post fame is to eliminate the two tier donation tax credit. As readers are no doubt aware, the first $200 of donations in a year are credited differently than the remainder of donations in a year. The difficulties in explaining this to potential donors is so cumbersome so as to act as a disincentive to people interested in the tax effects of small donations.

The suggestion made in this regard is to provide for donation tax credits at a single tax rate (the highest). While we doubt there is much opposition to the principle of simplification of the Income Tax Act generally, in these times of financial austerity a suggestion which, by implication, results in less tax revenue may require some persuasion (to put it mildly).

Another factor in improving understanding of the system is to put the decision making process in the right context. Right now, it is donations made by the end of the year that are given credit on the tax forms filed for the year. Generally speaking, deadlines are a great time to focus people on the issue at hand. Unfortunately, the end of December is a time when people may be in a sentimental mood to donate but they are not usually educated about the tax aspects of giving.

One way to change this may be to allow for donations made in the first sixty days of the year to be used against taxes in the previous calendar year - similar to the RRSP system. As we can see from the sale of RRSPs this has spawned an entire industry which uses the end of February deadline to educate donors about the tax aspects of contributing. By moving the donation deadline date to the same as that for RRSPs not only would charities have a better opportunity to increase their educational efforts about the system but donors would be able to make donation decisions with a clear head and with full information about their tax affairs of the previous year.

Trust in the System

The second key element in an incentive program is trust. Not just trust that the reward for behaviour will be bestowed (which we assume is a given in this context), but also that the money donated will in fact be used for the purposes it is intended. In this context, lack of trust in charity regulation is a disincentive to most people. (This is partially because people are not made better off by donating - they still are out of pocket by donating).

So, to properly motivate people to give there must be certain elements in place. First, people must feel an affinity with the cause they are being asked to support. As society changes - for instance becoming more secular, or immigrant populations becoming acculturated - the definition of 'charity' must evolve as well in order to not only meet new societal ills but also to appeal to new groups of donors.

In the past, we have relied on the Courts to extend the definition as new potential charities came to the courts seeking approval. For one reason or another, this process has effectively ground to a halt and so some action must be taken to reset the definition. The most obvious way to do this, and one which has been done in other jurisdictions, is to legislate a definition of charity appropriate to the times. We have made the suggestion that this is an appropriate way forward for Canada.

 However, perhaps the greatest factor in eroding trust in the sector is the bad press that results from a poorly regulated sector. As we have written before, constitutionally the power to regulate charities is given to the provinces, but as the provinces have effectively abdicated their jurisdiction in the area the Federal government uses its taxing power to regulate - to the extent possible.

Our suggestion is to involve the Provinces in the regulation of charities by creating a joint Federal Provincial regulator. In this way, regulations could be drafted to address areas of concern to the Regulator and Canadians generally in ways which would ultimately increase the level of trust Canadians have in their charities. And, as the level of trust in the sector increases so does the incentive to give.

This would have the added benefit that Parliament, together with the Provinces, could pass nuanced regulations in other areas of concern such as political advocacy, fundraising, and transparency.

Removing the Disincentive to Donating

Finally, we did have one comment directly on the topic of tax incentives. There is currently a limit on the total donation tax credit that can be used in any year (except the year of death and the year preceding it). The general limit allows a taxpayer to offset the tax owing on up to 75% of taxable income, but over time exceptions to this limitation were made for donation of certain types of assets. The effect is to create a disincentive for the donation of cash in favour of certain capital assets. At this point, the limit has been raised to the point where it is practically meaningless as few people or corporations are in a position to even approach this limit. Nevertheless, as it only serves as a disincentive to giving cash it should be removed. One would likely find the greatest impact will be the indirect promotion of social enterprise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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