All About Estates

Donation Tax Credit Mismatch

It is a truism that Canadians who donate enough to charity at death can eliminate tax. This outcome is due to the 100% contribution limit for gifts by will and direct designation gift of registered funds and life insurance.  Since 2015, however, Ontario, Quebec, New Brunswick and Yukon have increased the top marginal tax rate, but not top donation tax credit rates.  In many cases estates with large donations to charity will have insufficient tax credits to offset the tax owing, particularly in the final two lifetime returns. The mismatch has a number of implications.

Planning

According to PWC, as of 2016 the gaps were as follows:

Ontario

Top Marginal Rate (from $220,000)                 53.33%

Top Donation Tax Credit Rate                           50.41%

Gap:                                                                         2.92%

Quebec

Top Marginal Rate (from $200,000)                 53.31%

Top Donation Tax Credit Rate                           51.56%

Gap                                                                           1.75%

New Brunswick

Top Marginal Rate (from $200,000)                 53.30%

Top Donation Tax Credit Rate                           51.56%

Gap                                                                            1.74%

Yukon

Top Marginal Rate (from $500,000)                 48.00%

Top Donation Tax Credit Rate                           45.80%

Gap                                                                           2.20%

Alberta, by contrast, has a positive gap with a 48% top marginal rate and a 54.0% tax credit rate.

Frankly, for most estate donors altruism is a greater motivator than taxes.  As a result, many donors do not calculate the tax implication of their gift at the time of planning. There are, however, plans predicated on donating a sufficient amount to eliminate all taxes at death.

Donate to Eliminate Plans

Over the last decade, certain professional advisors and charities have promoted the idea of including a “donate to eliminate” clause in the will that provides the executor the post-mortem ability to determine the value of the gift. It’s prudent to recalculate the tax savings in light of a possible tax credit/marginal tax mismatch. Moreover, an assessment should be made to ensure the drafting is still valid after the introduction of the “estate donation” rules in 2016.

Tax Policy

From a tax policy perspective the gap between tax credit and marginal rates is worrying.  Does the gap represent a trend that other provinces will follow?  Is this the beginning of a subtle erosion of donation tax incentives for high-income Canadians?

Canadian donation tax credits generally match or exceed top marginal rates.  This has been true since the introduction of the donation tax credit in 1988 and contribution limits of 75% to 100% in 1997. For the majority of middle income donors any ordinary gifts over $200 result in a donation credit that is higher than the average tax rate.

In addition, the guiding principle of Canada’s donation credit system has been to offset the tax owing. Put another way, the tax policy assumption is that donations provide the same public benefit as taxes. Hence, donations can fully offset taxes. The emergence of the gap implies provincial governments are rethinking this assumption.

The gap means the wealthiest Canadians must pay some tax even if they donate a large percentage of their estate to charity. This is hardly a radical concept. It’s important to remember that the Canadian tax system is markedly more generous than the U.S. system.  All Canadian estate donors will receive some tax benefits and some may still eliminate tax at death.  By contrast, approximately 1 in 300 donors in the U.S. receive an estate tax deduction for a gift by will.

Canadians charities and donors have it pretty good, but we need to be vigilant about maintaining the integrity of charities so the tax benefits are justified.

About Malcolm Burrows

Malcolm is a philanthropic advisor with 25+ years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. malcolm.burrows@scotiawealth.com

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