in an effort to encourage more charitable giving by younger and new donors, the federal government has created a new tax credit. But the “first-time donor supercredit,” as it is called, may not be as useful as its name suggests, according to some tax specialists.
“It’s nice that it’s available,” says Doug Carroll, vice president of tax and estate planning with Invesco Canada Ltd. in Toronto. “But I would question whether it’s going to move the needle in terms of getting people to donate.”
The supercredit, which was introduced in the 2013 federal budget in March, allows first-time donors to receive up to 25% more than previously eligible on a donation claim of up to $1,000. For example, if a taxpayer claims $500 under the current regime for existing donors, the first $200 is multiplied by 15% for a tax credit of $30. The remaining $300 is then multiplied by 29%, for a credit of $87. That creates a total tax credit of $117 on the entire donation. However, under the new supercredit, the entire $500 would be multiplied by an additional 25% for a credit of $125. Added together, the donor would receive a total tax credit of $242.
To qualify for this new supercredit, donations must be made in cash and claims must be made between 2013 and 2017. Furthermore, neither the donor nor the donor’s spouse or common-law partner can have claimed a donation on his or he income tax return within the past five years.
The opposite effect?
Rather than encouraging people to donate, however, some tax experts fear the donation cap and red tape around this new credit will, in fact, do the opposite.
The supercredit is meant to encourage young and new Canadians to get into a habit of giving, says Malcolm Burrows, head of philanthropic advisory services with Bank of Nova Scotia’s private-client group in Toronto. However, the new credit may be too complex and lead to frustration for potential donors, he says, and also might encourage them to think of the tax benefit alone rather than the act of giving.
“I frankly think it’s a waste of legislation,” says Burrows. “I don’t think it should be in the Income Tax Act. I don’t think it’s helpful at all.”
Raising the topic
But John Waters, vice president and head of technical expertise for tax, estate and trust planning with BMO Nesbitt Burns Inc. in Toronto, sees value in at least raising the topic: “For advisors, it’s definitely something to be aware of, and maybe mention to your client. But it’s not going to form a huge conversation around donation.”
One conversation financial advisors could have regarding the supercredit is with clients who have children with taxable income. In particular, Carroll says, advisors can bring this new credit to the attention of clients who perhaps are looking to introduce their children to charitable giving and whose children have yet to make a donation.
“For many people,” Carroll says, “making donations is a core part of how they live their lives. That might be a way to share this news and get tighter with those clients, [as well as] introduce yourself to the next generation.”
In most cases, however, tax credits and strategies already in place will be better tools in tax planning and for encouraging habitual charitable giving for clients, Waters says. For example, he says, you are in a good position to discuss broader tax topics, such as legacies built through estate planning and wills, while other strategies, such as donating securities that have appreciated, could be more useful to donors.
“It’s always better to donate an appreciated security than cash,” Waters says, “because you can eliminate the capital gains on an eventual sale. But this [new] credit does not apply to anything other than cash donations.”IE
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