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Recent Income Tax Changes Affecting Charitable Gift Giving
Adam Aptowitzer, December 19, 2005
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| The combination of budget surpluses and a political election has led to a variety of tax announcements that were alternately designed to garner votes in the upcoming election and address serious issues of economic policy. However, the interconnectedness of the various parts of the income tax system has led to unintended consequences for the giving of charitable donations. |
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| In the mini – budget of 2005 the government proposed that the lowest income tax rate (on income up to $35,595) be reduced from 16% to 15% (retroactive to January 1st 2005). The charitable donation tax credit on the first $200 of income is equal to the donation multiplied by the lowest income tax rate. Hence, the reduction from 16% to 15% effectively reduces the value of the tax credit on the first $200 donated to a charity in Canada. While the amount is not significant in dollar values (on a $200 donation the difference is $2), the reduction in value is a direct blow to efforts by charity sector groups to erase the distinction between the rate applicable on the first $200 and those over $200. There may also be a psychological effect to those in the lower income tax brackets as to the tax benefits of charitable donations. |
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| Of much greater impact was the federal government’s policy decision with respect to the treatment of dividends from public corporations and certain private corporations. The Department of Finance announced this decision (click here) in late November with much fanfare. The policy decision arose from the controversy regarding the different tax treatment of distributions from income trusts versus dividends from publicly listed corporations. To understand the government’s decision one must first understand how dividends are taxed. |
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| The system is designed so that whether or not an individual earns income through a corporation, the same amount of tax is paid. However, as corporations pay tax at a lower rate than individuals, when an individual receives a dividend from a corporation it pays the difference in tax between what the corporation pays and what the individual would have paid if he or she earned the income directly. Until November, this was accomplished through a mechanism whereby the individual was taxed on 125% of the dividend but received a tax credit equal to 16.67% of the dividend. Under the new rules, an individual will be taxable on 145% of the dividend received but this will be offset by an enhanced dividend tax credit equal to 19% of the amount received. (To see a recent Drache LLP article on the subject click here). |
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| While the mechanism is complicated, the net effect on the maximum amount for a charitable donation tax credit is simple to calculate. The charitable donation tax credit is limited to 75% of income (but certain types of donations, including donated capital gains, have different rules). With respect to dividends, this is 75% of the grossed up amount. Until November, this meant that the limit was 75% of 125% of the dividend, now this will be75% of 145% (or 108.75%) of eligible dividends. |
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| Example 1 |
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| Naomi receives $100,000 in dividend income from a public corporation but has $300,000 in cash savings. The Charitable Donation Tax Credit Limit under each regime is: |
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| Before November announcement: $ 93,750 |
| After November announcement: $ 108,750 |
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| Example 2 |
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| Isaac has employment income of $200,000 and dividend income of $100,000. The Charitable Donation Tax Credit Limit under each regime is: |
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| Before November announcement: $243,750 |
| After November announcement: $258,750 |
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| While the net effect of these changes does not necessarily mean an increase in charitable giving, it certainly helps donors with high dividend income to offset their taxes owing by donating the dividends received rather than the capital from which the dividends arose. For younger donors this may prove attractive as the capital can still provide security and many years of dividend income when employment income drops to zero. |
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| For more information in structuring donations to take advantage of these new rules, please feel free to contact me at: |
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| Adam Aptowitzer |
| Drache LLP |
| Barristers & Solicitors |
| 283 McLeod Street |
| Ottawa, ON |
| K2P 1A1 |
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| (T) 613.233.2675 x17 |
| (F) 613.233.6752 |
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| aaptowitzer@drache.com |
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