Charitable Tax Credits – Who Gives?

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By Cate Prichard

“Ottawa looks at rewriting rules on charitable giving,” the Globe and Mail announced last Friday, kicking off a running series on the evolution of philanthropy in Canada and abroad. Federal charities policy is front page news. According to the Globe’s reporting, the federal government is proposing, among other reforms, to make changes to the tax rules governing charities in order to increase the personal tax credit for charitable giving. According to a follow-up article, the House of Commons finance committee has approved “a study of whether to change Canada’s charitable tax credits to encourage more giving […which is] expected to take a broad look at expanding the tax credit.” I believe that any discussion of changes to charitable tax policy in Canada would be the poorer for failing to consider the history of that policy.

The federal government currently funds registered charities in two ways: by direct funding grants (which are also available to other voluntary groups which do not meet legal and regulatory criteria for charitable registration), and indirectly through the tax system. The most significant tax advantage enjoyed by registered charities is the power to issue tax receipts to their donors, receipts which entitle donors to claim tax credits when filing their annual income tax returns. Let us be clear: through the medium of charitable tax credits, the federal government forfeits revenue annually in order to encourage the funding of registered charities by private donors. This represents a significant indirect subsidy of registered charities.

The federal government has opened a discussion about the charitable tax credit, and it is imperative that this discussion be informed by the history of changes and proposed changes to this policy. It is only in the context of this history that we can fully appreciate the choices at hand. The question before us is not simply one of expanding or limiting the charitable tax credit in order to encourage the donation of more or less money to charity; it is also a question of how the tax benefit should be structured, who should be encouraged to give, and what that says about our priorities as a society.

Charitable tax exemptions were part of Canada’s first income tax law, the Income War Tax Act of 1917. Initially providing taxpayers with exemptions for donations to a specified list of charitable organizations, the Act was amended in 1930 to extend the exemptions to all charitable organizations meeting a legal test established in English common law. As first established, charitable tax exemptions took the form of a tax deduction. Donors were permitted to deduct the cost of their charitable donations (up to 10 per cent of income) from their gross income, before calculating their tax payable. As a tax deduction, the value of the tax exemption for charitable giving varied between taxpayers according to the taxpayers’ income tax rates. In a simplified example, if a taxpayer made a donation of $100 to charity and that taxpayer was taxed at a rate of 50%, the donation would cost the taxpayer $50 and the federal government would forfeit $50 of tax revenue to make up the difference. If, by contrast, the same taxpayer was taxed at a rate of 20%, the donation would cost the taxpayer $80 and the federal government would forfeit $20 to make up the difference. Thus the higher a taxpayer’s income, the less expensive it was for them to make charitable donations, and vice versa.

By the 1970s, this situation was increasingly disconsonant with changing social values concerning the place of voluntary organizations in the practice of Canadian citizenship, and in the fostering of democratic participation in Canada. Following the Second World War, Canadians had become increasingly concerned with fostering equitable political participation – often through broad-based political engagement with the state through voluntary organizations. Through direct grants to public interest groups, limits on the amount that any one individual could donate to a political party, and the introduction of tax credits for political donations, efforts were made to ensure that everyone had an equal opportunity to have his or her voice heard the public life. Following the postwar expansion of government services, charities, forced into a process of self-reflection and redefinition, had increasingly begun to understand advocacy on behalf of their clients as a key part of their role in Canadian society. But if charities were to be vehicles of representation and (non-partisan) political expression, they needed to be equitably accessible to all members of society. The surest way to make certain that charities represented the interests of the greatest number of people was to involve as many people as possible in the funding of those charities. Charities were increasingly seen as one vehicle among many to enhance democratic participation in Canada.

Out of this new commitment to equity emerged a proposal to allow taxpayers a choice between claiming their charitable donations as either the traditional tax deduction, or as a 50% tax credit. This proposal was put forward by the National Voluntary Organizations (NVO) – a group formed in 1974 to represent the interests of the voluntary sector to the federal government. Substituting the charitable tax deduction with a 50% credit would have worked to equalize, in part, the cost of giving between taxpayers in different income groups. The group framed their proposal as a way to make the practice of charitable donation more equitable and to make charities themselves more democratic and responsive. If charities were supported by a broader group of citizens, they thought, charities could not help but become more expressive of a broader range of interests and points of view.

For a variety of reasons, which I am in the process of exploring in the course of my research, despite having some significant support in parts of the federal government, the NVO’s proposal was not implemented. In 1988, however, the tax deduction was replaced with a graduated tax credit, under which the first $250 of charitable donations would receive a credit of 17%, and donations exceeding that amount would receive a credit of 29%. Subsequent changes to the policy preserved this graduation. Though this tax structure was arguably more equitable than the original tax deduction, it nonetheless continued to favour those earning higher incomes. The goal of fostering democratic participation by equalizing the cost of giving between income groups had fallen by the wayside.

If the new policy proposed by the federal government follows in this vein, increasing the tax credit rates while preserving this distinction between donations of differing amounts, Canada’s charitable tax policy will continue to privilege the involvement of those with more to give. That might be a price that we are willing to pay for the benefit of increased donations from the richest Canadians. It comes down to a question about priorities and about what we want our charitable tax credits to do; by simply increasing the value of the tax credits and preserving their current structure we could use them to encourage increased giving by the highest earners as a substitute for or a supplement to our current structure of progressive taxation. But Canadians of the 1970s had a different vision of the place of charitable tax credits in civic life, one in which charitable giving could possibly have served to increase the democratic potential of Canadian society. In 2011, what do we value more – increased giving or increased participation? We need to talk about it.

Cate Prichard is a PhD student in the Department of History at York University. Her thesis explores the relationship between the Canadian federal government and the voluntary sector between 1930 and 1988 through a close examination of changes and proposed changes to charitable tax exemptions as a policy.

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Want to know more? For information about the changing place of charity and charitable fundraising following the expansion of government social programs after WWII, please see Shirley Tillotson’s book Contributing Citizens: Modern Charitable Fundraising and the Making of the Welfare State, 1920-66, published in 2008 by UBC Press. For a history of and commentary on the history of charitable tax deductions and credits in Canada, please see Peter Elson’s book High Ideals and Noble Intentions: Voluntary Sector-Government Relations in Canada, published this year. Finally, for a description of the “citizenship regime” of the 1970s, please see Jane Jenson and Susan D. Phillips’ article entitled “Redesigning the Canadian Citizenship Regime: Remaking the Institutions of Representations” from Citizenship, Markets, and the State (eds. Crouch, Eder and Tambini), published in 2001.

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