August 14, 2023

How Could Budget 2023’s Proposed Taxation of Donated Securities Affect Not-for-Profits?

Back in March, the Government of Canada’s Budget 2023 proposed several amendments to the Income Tax Act which could, if implemented, raise the Alternative Minimum Tax (AMT) paid by individuals by taxing capital gains embedded in securities that are donated to a registered charity.*

Historically, donating securities to registered charities has been an efficient (and attractive) way for individuals to give, as it has not attracted any tax on capital gains: donors got the maximum deduction for their philanthropy and charities received the full value of the gift. So we wanted to hear from stakeholders in the not-for-profit sector. (How) could this impact donor activity and by extension, charities’ ability to serve their constituents?

First: the proposed changes

The one consistent message we received from tax professionals and not-for-profit leaders alike, is that the mechanism for charging this new tax is complex. That complexity is one reason few have been writing about it, and why clients are not raising it with their advisors. They just don’t understand it. One thing you can count on though is that the folks at CRA will understand it come tax time, so it’s best to be prepared!

Here are a few highlights:

• When calculating an individual's tax bill, CRA assesses your tax owing based on "normal" taxation rules, and then does a second calculation, where it applies a more stringent test for individuals with higher income. If under this second test, the tax owning is higher than your normal tax return, you pay that higher amount. That extra bit is called the Alternative Minimum Tax (AMT).
• The AMT mechanism has actually been around for years. In 2023, the government proposed amending the AMT calculation to:
  • apply a 30% inclusion rate for capital gains for individuals, for securities they donate to charity (up from 0%)
  • cut the benefit of non-refundable tax credits (including the donation tax credit) in half (i.e., down 50%)
• It also is proposing to raise the income threshold for the second calculation, from $40,000 to $173,000, and raise the relevant minimum tax rate from 15% to 20.5% (i.e., if you pay more than a 20.5% tax rate, you shouldn’t be impacted).
  
• AMT paid in one year can be recovered in future years under certain conditions.
• None of these 2023 changes have been enacted yet, but the government tabled legislation in early August 2023 to do so. If passed, they’d apply for 2024 tax years+.
• This isn’t tax advice – please ask your tax professional before making any decisions around this topic.

How might these changes impact not-for-profits?

Caroline Riseboro, President and CEO of Trillium Health Partners Foundation, for one, is apprehensive. “With charitable giving participation rates in decline for over 20 years, there is a strong dependence on large donations to make up the gap,” she says. “Currently, 60% of charitable donations in Canada come from those with assets of $1 million or more, and the charitable sector is increasingly dependent upon high-net worth individuals to donate to causes like healthcare, secondary education, the arts, environmental groups and community-based organizations to ensure the quality of life of many Canadians.”

Ms. Riseboro also points to the importance specifically of donated securities to donors’ overall giving plans, saying “it is through gifts of appreciated securities that donors have increased the size of their donations in recent years, which have increasingly benefitted the social good. However, longstanding donors are already raising concerns about this change to the tax code, and how it may mean less funds directed to charity.”

We reached out to BC Cancer Foundation as well, which said in a statement that while they are “confident that donors will continue to invest in the causes that are most important to them, there is concern around how the proposed AMT measures will impact the scale of some gifts,” and stressed that “it is more important than ever for donors to work with their financial and tax advisors to fulfill their charitable wishes.”

The BC Cancer Foundation has seen a marked increase in gifts of securities over the past decade, which increased by nearly 450% as donor awareness about the benefits of this giving vehicle has increased. They noted as well that the size of these donations is often higher than gifts through alternative vehicles due to the tax advantages. “They represent an incredibly valuable source of funding for cancer research and innovations to care,” they wrote us. “With philanthropy playing a substantial role in fuelling advances in healthcare, a negative impact on donations would be regrettable for the health of our communities.”

Andrew Chunilall, CEO of Community Foundations of Canada (with whom Leith Wheeler partners as national sponsor of CFC’s Vital Signs program), is also hearing some concern. Given the personal nature of the AMT, the complexity of the calculation, and potential ability to recover AMT in future tax years, he thinks the impact on donor behaviour is, at present, difficult to determine. Early signals show many donors are tuned into the conversation and are assessing its impact broadly — including on their own charitable giving.

Chunilall turned to the topic of taxation of capital in general, which he agrees with philosophically, saying “I’m a proponent of taxing capital because that helps pay for roads and health care and education and I think most Canadians would get behind that. It’s the level of taxation of capital, as well as when taxation is triggered (i.e., charitable contributions) that is a concern because we don’t want to disincentivize the deployment of capital and the risk taking, because that’s what makes the economy go around.”

With all that said, would Chunilall prefer a 0% or a 30% inclusion rate? “I think in my sector you’d say, the highest level of optimization is the 0% inclusion rate, [to have] more dollars going through philanthropic organizations or social service agencies to enable them to do the essential and good work they do for community.”

The Budget document itself focuses on the government’s aim of targeting higher-income taxpayers with the changes, estimating “more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million per year.”

If the changes result in lowering charitable giving among those same taxpayers, though, it could end up making for bad policy. Says Trillium’s Riseboro, “While the Government may be motivated to ensure everyone pays their fair share of tax, the unintended consequence of this tax change may mean those who depend upon charitable organizations for their well-being (which is the majority of Canadians) could be adversely impacted.”

The changes (if passed) would go into effect in early January, meaning the time is short for donors to take advantage of the zero-capital gains tax on donations of securities: 4 ½ months from the time of writing. Perhaps we’ll see a surge in 2023; perhaps not. Either way, we hope to see continued growth in philanthropy, tax incentives or not.

NOTE: The information contained herein should not be treated by readers as investment, tax, or legal advice and should not be relied on as such. You should consult legal or tax professionals regarding your specific situation.

* The government also tabled legislation in early August to implement the proposed changes. To read about the potential impact on individual taxpayers please see this quarter’s edition of our Planning Matters newsletter, “Understanding Proposed Changes to Taxation of Charitable Giving” to learn more about the potential impact on individuals.