November 14, 2023
By MakeWay’s Research and Policy team
Updates to the Alternative Minimum Tax reduce preferential tax rates for the ultra-wealthy, will likely have minimal impacts on charities
Earlier this year, a Statistics Canada report on economic disparity showed that the gap between rich and poor was accelerating at the highest rate on record. And while the income gap decreased from its historic high in recent months, the overall wealth gap continues to widen. In 2019, the Parliamentary Budget Office reported that the top 1% of families in Canada held 24.8% of the wealth, while the bottom 40% of families owned only 1.1% of the wealth. A significant issue unto itself, economic inequality also has serious knock-on effects such as weakened social cohesion, increased mortality rates and other negative health outcomes, overall economic instability, and slower economic growth. In Canada, income inequality also cuts along racial lines.
It is within this context that the federal government introduced amendments to the Alternative Minimum Tax (AMT). While these changes are relatively minor and are insufficient for addressing the underlying systemic issue, they attempt to improve one aspect of Canada’s tax policy: the amount of tax paid by the wealthy. According to federal government projections, the AMT changes will raise $2.6B in public revenues over five years by increasing tax on individuals with incomes over $450k/year, which amounts to about 32,000 Canadians or a little less than 0.1% of the population.
Some groups in and around the charitable sector have expressed concerns that the AMT changes may disincentive wealthy donors from making large gifts to charities because of two components:
- non-refundable tax credits such as the charitable tax credit are reduced from 100% to 50% for AMT payors; and,
- when AMT payors gift securities to a charity, 30% of the capital gains will be included in the payor’s adjusted taxable income instead of the previous 0%, while other in-kind gifts from AMT payors see their capital gains inclusion rates move from 80% to 100%.
Critics believe these changes will especially impact large transformational gifts from the ultra-wealthy. While acknowledging that they do not know the degree to which the new AMT changes will impact donations, the Canadian Association of Gift Planners (CAGP) suggests “as much as one-third of the $11.8 billion of annual charitable giving by Canadians will be negatively impacted.” Imagine Canada estimates a decrease of a half a billion dollars. Let’s put these numbers into context.
How much of the sector’s revenue will the changes impact?
Data from the 2021 T3010s shows the charitable sector received approximately $334B in revenues. Out of this total, $228B or about 68% came from government sources, while tax-receipted donations of all sizes accounted for $20.7B or about 6.2% of total charity revenues. This means that, according to CAGP’s predictions, approximately 1.2% of charitable sector’s revenue is at risk, while Imagine Canada’s estimates predict that this number is about 0.15%.
The idea that either number translates to a serious impact for the charity sector as a whole or will produce a situation where organizations will be forced to cut programs or close their doors, seems unfounded, or at least, overstated.
Which charities will the changes impact most?
The data on gifts of publicly listed securities (PLS) shows a clear trend. The federal government’s Report on Federal Tax Expenditures 2018 finds, “donated securities are largely directed to charities with high annual revenue.” The report estimates:
In 2015, approximately two-thirds of the value of these gifts was received by charities with annual revenue exceeding $10 million. Moreover, the median donation received by charities of this size was eight times larger than the overall median. By comparison, charities with revenue no greater than $250,000 received roughly 1% of the value of gifts of PLS.
The report continues to illuminate the issue by highlighting the type of charity that receives gifts of securities: “The donations primarily benefit large charities which fall under the public and private foundation designations.” The report concludes that, “since foundations spend proportionally less on charitable expenditures than charitable organizations, directing gifts of PLS towards foundations generally entails a longer delay before the funds reach their ultimate beneficiaries.” This means that gifts of securities are most likely to go towards foundation endowments or donor advised fund portfolios and may have limited immediate impact on community-level programs.
It’s not just gifts of securities—other large gifts mainly benefit the largest charities. Of the 25 transformational gifts cited by CAGP as examples of gifts at risk under the proposed changes, 17 were donations to hospitals and universities. Imagine Canada seems to support that this is the most relevant subset of charities as well. In their 2024 pre-budget submission, they provide the following with respect to the AMT changes: “Various institutions, including community foundations, hospitals, universities, museums and festivals, which rely on large donations to provide critical services to Canadians may be impacted.”
How badly will AMT changes hurt these charities?
No one wants to see less charitable giving. However, whether the changes will limit the critical services these organizations provide is up for debate since gifts from individuals account for a very small percentage of their overall revenues. In the case of universities, which recently saw record-high surplus revenues, donations from individuals account for approximately 1% of funding, grants from foundations make up around 4%, and provincial and federal governments together provide about 40%. Hospitals rely even more heavily on government funding; more than 70% of their funding comes from general tax revenues, the category of revenue that the AMT changes propose to increase.
Will the ultra-wealthy stop donating to charities?
Reporting from the Canadian Knowledge Hub for Giving and Volunteering shows that 34% of respondents with household incomes over $125k say tax credits motivate their giving. Compare this to other motivating factors for the same income group, such as personal belief in the cause (87%), personally affected by the cause (74%), compassion for people in need (83%), and contribution to the community (74%). For households with incomes over $125k, the tax incentive ranks sixth among the eight available motivations, surpassing only religious reasons and spiritual beliefs, which are at 29% and 27%, respectively. In the section that asks, ‘What keeps Canadians from Giving More?’ we find that only 18% of this same population selected tax credit was not enough as their reason.
While in Canada we do not have discrete data regarding the donation motivations of Canadians who earn more than $450k per year, information from other jurisdictions could give us some clues. A 2013 UK study titled Richer Lives that examines the giving habits of the wealthy, for example, found that “Only a third (32%) of all the donors we spoke to cite tax reliefs on charitable donations as an incentive behind their giving decisions.” Similar results are found in two US studies: the 2022 BNY Mellon Study, which found the tax incentive as ranking seventh among ten factors for giving by high-net-worth individuals (assets over $5M USD), and a 2021 Indiana University & Bank of America study that shows only 14.5% of affluent donors (average income over $500k USD) say they are always motivated by a tax receipt, compared to 58% who report they are always motivated by their belief in the mission of the organization. This data on tax receipts as a motivating factor for giving is fairly consistent with the aforementioned Canadian segment of people who earn over $125k.
There is some data that does show how tax receipts can be connected to giving patterns; however, there is very little regarding the ultra-wealthy. A Canadian study from 2012 showed that, outside of gifts to religious charities, the tax incentive can indeed influence donating. Additionally, one study published in 1978 shows how low- and middle-income households decrease their donations when the aggregate cost of donating (i.e., the donation amount relative to the tax benefit) increases.
But there is some important longitudinal context required. Speaking on the US and studies on tax incentives there, Rob Reich points out in his article Would Americans make charitable donations without tax incentives? that “These short-term studies, however, failed to take into account the fact that donors often return to their original levels of giving once they get used to new tax laws.” If we are assessing the possible impacts of the AMT changes on donation behaviours and their long-term effects on the health of Canadian charities, it’s important to understand that donor behaviours may have a tendency to rebound over time.
This information regarding donor behaviours and tax receipts should also be understood in light of the fact that, according to the Standing Committee on Finance’s 2013 report Tax Incentives for Charitable Giving in Canada, “from a global perspective, Canada provides the most generous tax support for charitable donations by individuals.” This could make the tax incentive slightly more important in Canada relative to other jurisdictions, but it could also suggest that the ultra-wealthy have received outsized benefits for years.
Bottomline, what does it really mean for the ultra-wealthy who donate to charity?
The old AMT tax rate was 15%; the changes propose a tax rate of 20.5%. Under the new rules, when AMT payors make charitable contributions, their tax rate is reduced to less than 20.5%. In relation to the rest of the population, the average single worker in Canada paid 25.6% in income tax while the average single-income married worker with children paid 21.5%. Our view is that the changes merely reduce the size of the tax incentive for the rich so their tax contributions are closer to those of regular people.
Changes are good for economic equality, good for society
Based on our analysis, donations still provide a tax savings for the wealthy when compared to not donating and the ultra-wealthy still enjoy a preferential tax rate, especially given their significant access to non-wage income relative to the average person.
Nobody knows for sure how the rich will respond. But the evidence suggests that the AMT changes might impact an extremely small portion of the charitable sector’s overall revenues, affecting a tiny segment of the wealthiest charities, for whom these gifts represent a minimal proportion of their income. And even this possibility is based on speculation that wealthy donors would rather pay tax than make charitable contributions. If this does happen, it might not be a bad thing for charities anyhow, since many deliver programming intended to fill gaps that should be addressed by government programs paid for by tax revenues.
Charities probably needn’t worry too much. And while these changes won’t solve the growing issue of economic inequality, maintaining preferential tax treatment for the ultra-rich will only make the problem worse.
