Canada’s charitable sector is in trouble. Food bank usage remains alarmingly high. Volunteerism is down. And charitable giving has fallen.
Last year, the charitable umbrella organization Imagine Canada released a report on trends in charitable donations between 1997 and 2022. The trendlines are not pretty.
The report showed an “unbroken” decline in the number of people claiming an income tax deduction for charitable giving over 25 years, falling from 26 per cent in 1997 to 17 per cent in 2022.
The report also found a growing dependence on a small number of large donors. More than 70 per cent of donations came from the nine per cent of donors who gave $5,000 or more.
In the face of these trends, the federal government could and should make two simple changes to the tax code to encourage more giving.
First, it should give taxpayers the option of making their charitable donations tax deductible, rather than having them trigger a non-refundable tax credit.
This is actually how charitable donations used to be treated. But in 1988, Ottawa switched to making charitable donations eligible for a non-refundable tax credit.
Its motivations were well-intentioned. A tax credit was considered more fair, ensuring all taxpayers receive roughly the same tax benefit from a donation, regardless of income. It also aimed to create a substantial incentive for low- and middle-income earners to give, according to a paper in the Canadian Tax Journal.
However, since that change was made, Canada’s tax and means-tested benefits systems have grown enormously more complex. This makes it much more difficult for people to understand how much a tax credit offsets the amount of a donation.
This can be illustrated by the example of a senior wanting to make a donation from a retirement savings account. The withdrawal of funds from an RRSP, for example, would trigger taxable income.
This withdrawal could lead to clawbacks in the senior’s Guaranteed Income Supplement benefits. (Such clawbacks can result in a loss of 50 per cent or more of the withdrawn amount — far exceeding the tax credit available.)
An RRSP withdrawal might also disqualify the senior for Canada’s new dental-care program, which phases out for families earning between $70,000 and $90,000.
These two scenarios are by no means exhaustive and do not cover provincial benefits and their own associated clawbacks and phaseouts.
By contrast, granting Canadians the option of taking a tax deduction rather than a tax credit would help ease the mental burden of figuring out the optimal amount to donate. And it would better ensure that a donor is not penalized for making a donation.
Some might query whether such tax changes would actually move the needle on charitable giving. Are most Canadians thinking about their taxes when they give?
In fact, research suggests they are.
The 2024 Canadian Tax Journal paper shows the bottom 40 per cent of income earners are actually the most responsive to changes in the tax benefits of giving. This counterintuitive finding should inform tax policy.
The journal recommends Ottawa make the non-refundable tax credit simpler. We agree: that is, give donors the option of choosing a tax deduction instead of a tax credit; but for those who choose the credit, make it simpler.
Currently, the system grants a credit of 15 per cent for the first $200 of donations in a year and between 29 and 33 per cent on donations beyond $200, depending on income. We, like the journal, think Ottawa should scrap the $200 threshold and treat all donations equally.
With these two simple changes, Ottawa could boost charitable giving at a time when charitable giving is in decline — and when charitable work remains essential to Canada’s social fabric and civic health.
As Canadian Affairs has explored in our reporting, charities address needs that the government does not, cannot or should not fill. At times, charities are better than the government at serving the needs of society.
But charities need help. The government can and should help the helpers.
