Funding Charities through Tax Law: When Should a Donation Qualify for Donation Incentives?

By Parachin, Adam | Canadian Journal of Nonprofit and Social Economy Research, Spring 2012 | Go to article overview

Funding Charities through Tax Law: When Should a Donation Qualify for Donation Incentives?


Parachin, Adam, Canadian Journal of Nonprofit and Social Economy Research


ABSTRACT

Canadian income tax law provides incentives for taxpayers to make charitable donations. Since only those donations to charities qualifying as charitable "gifts" are eligible for donation incentives, the definition of giftbodes significant revenue implications for charities and government alike. The Income Tax Act does not, however, define the term gift. The tests applied by courts and regulators to identify gifts in the absence of a statutory definition are contradictory, unnecessarily restrictive, and inconsistent with the tax policy behind donation incentives. The recent attempt to improve the law through the proposed "split-receipting" rules has achieved little in the way of meaningful reform. The ideal solution is to adopt a statutory definition of "charitable donation" that will both broaden and clarify the range of eligible donations.

RÉSUMÉ

La loi canadienne de l'impôt sur le revenu prévoit des incitatifs visant à encourager les contribuables à faire des dons. Étant donné que seuls les dons faits aux oeuvres de bienfaisance qui se qualifient en tant que « dons » de bienfaisance peuvent donner droit à ces incitatifs, la définition du terme « don » est porteuse d'importantes répercussions fiscales, tant pour les organisations caritatives que pour le gouvernement. Toutefois, la Loi de l'impôt sur le revenu ne définit pas le terme « don ». Les critères appliqués par les cours et les autorités de réglementation pour identifier ce qui constitue un don, en l'absence d'une définition établie par la loi, sont contradictoires, inutilement restrictives et incohérentes avec la politique fiscale concernant les incitatifs accordés au titre des dons de bienfaisance. La récente tentative d'améliorer la loi avec les règles proposées sur le fractionnement des reçus n'a eu que peu de résultats pour mener à une réforme significative. La solution idéale est d'adopter une définition législative du terme « don » qui permettrait d'élargir et de clarifier la portée des dons admissibles.

Keywords / Mots clés : Charity; Gift; Donation; Tax; Incentive(s) / Charité; don; impôt; incitatif(s)

INTRODUCTION

Reform is coming to the tax rules governing charitable donations. The House of Commons Standing Committee on Finance has announced that it will study tax measures surrounding charitable giving in 2012. The study brings the prospect of much needed improvement to an underdeveloped aspect of tax policy. In thinking about reform options it is helpful to begin by identifying the three essential features of tax codes providing incentives for charitable gifts.

1. Eligible Donees: To what kinds of institutions must a taxpayer donate in order to qualify for a donation incentive?

2. Design Features of Donation Incentive: Should the incentive take the form of a tax deduction, tax credit, or matching state grant? If a credit, what should be the amount(s) of the credit? How, if at all, should capital gains tax apply to donations of capital property?

3. Eligible Contributions: What sorts of contributions to eligible donees should qualify for donation incentives?

A case could be made for reform in relation to each of these issues. The first issue-eligible donees-raises for consideration the legal definition of charity. Under the current provisions of the Income Tax Act1 (the "ITA") a donation to a not-for-profit will be eligible for donation incentives only if the not-for-profit qualifies as a charity at common law.2 Most, if not all, analysts would agree that the common law definition of charity is an area where there is considerable room for improvement. However, this is a highly complex and politically sensitive issue of tax policy that should be studied as a discrete topic rather than as just one part of the Standing Committee's broader study of donation incentives.

The second issue-the design features of donations incentives-will very likely be the issue attracting the lion's share of attention. …

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