On December 7, 2015, the Minister of Finance, Bill Morneau, confirmed the intention of the Liberal Government to move ahead with their proposal to reduce the 22% personal income tax rate to 20.5% to strengthen the middle class. He further announced an increase in the tax payable by the wealthiest 1% of Canadians by announcing an increase in the tax rate on taxable income over $200,000 to 33%. The Notice of Ways and Means Motion introduced before Christmas confirmed these changes will be effective January 1, 2016.
Before these new rules were introduced, many sector organizations wondered whether the Government would also introduce amendments to the rate of the charitable tax credit, raising the concern that if the Government did not also amend the credit rates for charitable gifts wealthy donors may be less likely to support their favourite causes.
The good news is that the Department of Finance recognized this issue and introduced amendments to s.118.1(3) which governs the rates applicable to the charitable tax credit. These changes were identified as being directly consequential to the increase in the top rate of tax. It is worthy to note the identification of the importance of this issue and commend Finance for addressing it, particularly given the short time frame the Department had to put these changes together.
The revised credit mechanism is somewhat complicated. Rather than simply increase the rate of the credit for gifts over $200 to the highest tax rate - which is how it had worked previously - we now have a calculation which, in effect, applies a credit of 33% (the top rate) to the extent that individuals have income taxed at that rate.
How will it work? Canadians will be eligible for a credit of 15% on the first $200 of gifts and 29% on gifts that are above $200 unless such gifts are eligible for a credit of 33%. How do you know if your gift is eligible for a 33% credit? That is where the calculation comes in. It is easiest to explain this by way of an example and, helpfully, the notes tabled by the Department of Finance with the draft legislation contained the following:
In the case of an individual that has $215,000 of taxable income and makes $20,000 in total gifts in 2016, the individual’s tax credit under subsection 118.1(3) is calculated as the total of:
- $30, being 15% of the first $200 of total gifts
- $4,950, determined as 33% of $15,000, being the lesser of
- the amount by which the individual’s total gifts exceeded $200 ($19,800), and
- the amount by which the individual’s taxable income exceeded $200,000 ($15,000); and
- $1,392, determined as 29% of $4,800, being the amount by which the individual’s total gifts for the year ($20,000) exceeds the total of $200 and the amount of the individual’s total gift to which the 33% rate applied ($15,000)
In this case, the individual’s 2016 tax credit for gifts would total $6,372 ($30 + $4,950 + $1,392).
The logic in the new calculation is clear. It allows top rate earners a credit that reflects the top rate of tax that they pay. It should be noted that the Act was also amended to confirm that these changes donot apply to donations made in years prior to 2016, even if they are carried forward to 2016. Clearly, Finance realized some might see that as a planning tool.
Charities should appreciate this change being made so quickly and without a subsequent need to press for the amendment to be made. Canadians who give to charity may find the calculation confusing but at the end of the day, it is justified for top taxpayers.
To conclude, and to be complete, the Notice of Ways and Means Motion tabled also confirms the Liberal Government’s previously announced reduction in the limit on amounts that may be contributed to Tax Free Savings Accounts from $10,000 in 2015 to $5,500 for 2016 and subsequent years.