New federal tax changes create major challenges for Canadian charities



The federal government makes frequent tax changes that are intended to deliver specific policy outcomes. In some cases, these have been designed to increase the flow of donations to registered charities across the country. In 2006, for example, Ottawa eliminated the capital gains tax on publicly traded securities donated to a charity, while providing a donation tax credit for the value of those securities.

But as tax and personal finance columnist Tim Cestnick noted in a recent Globe and Mail column , Ottawa is again changing donation-related tax rules—with the potential for a significant negative impact on charitable funding in Canada. As Cestnick explains:

“ …  for donors earning more than about $173,000 starting Jan. 1, 2024 … the 2023 federal budget introduced rules that will increase the tax cost of donating qualifying securities to charity. Specifically, any capital gain on these donated securities will no longer be tax-free, but rather 30 per cent of the capital gain will now be taxable. But there’s more. The donation tax credit, which would normally be available for this generosity, will be cut in half.”

The changes are part of the government’s plan to tighten existing alternative minimum tax (AMT) rules to ensure that every Canadian pays their fair share—limiting tax credits, deductions and exemptions, to name only a few intended goals. Unfortunately, and unfairly, charitable donations have long been perceived as a tax shelter used by the wealthy to mitigate tax obligations. But as we’ve noted in previous blogs, nothing could be further from the truth. Donations are the product of transformative individual generosity and they cost donors money—yes, even the wealthy.

Cestnick uses the following example to illustrate how the tax changes could impact major donors:

“Henry has an annual income of $1.33-million [Cestnick assumes that his fictional philanthropist is based in Ontario, wants to donate $1 million in stocks in the following year to several charities and is in the top income tax bracket]. Under the current rules, Henry’s total tax bill (federal and Ontario) on his income next year would be $672,050 less a donation tax credit of $495,200, for net taxes of $176,850. Under the proposed rules, his tax bill for next year would be $261,350, or $84,500 more because of the changes.

If you do the math under the new rules, the extra tax can be as high as 10 per cent of the donated amount. In Henry’s example, the extra tax was 8.45 per cent ($84,500 on $1 million) of his donation.”

The AMT-focused changes are problematic, but the pressures on charities are being exacerbated by another piece of legislation. Bill C-32, which recently became law, introduced significant changes and an expansion to trust reporting rules. As many of our philanthropists understand, most trusts in Canada are required to file an annual income tax and information return (called a T3). Now, those same reporting rules will apply to express trusts, such as those used by charities to hold donor funds for distribution at set times for specific purposes. Failure to comply with the new reporting rules could result in fines of $2,500 per return, or 5 per cent of the value of the trust.

For a donor advised fund—or as they’re known at Canada Gives, ‘Foundation accounts’—the implications are significant. In many cases, our donor clients request that grants be made from their Foundation accounts at set intervals to support the causes that matter most to them and their family (these are typically classified as internal express trusts). This sort of strategic, long-term giving delivers immense value to the sector, providing the kind of consistent, stable funding that allows charities and non-profit organizations to engage in long-term planning to meet their operational mandates. Under the new rules, a T3 and Schedule 15 information form may need to be filed for each express trust.

Determining whether that T3 treatment applies to individual express trusts will likely require the services of a qualified charity lawyer and accounting firm, not to mention hundreds of hours in extra administrative work—a costly prospect for any foundation that intends to channel as much funding to the charitable sector as possible. To be clear, these legal, accounting and administrative costs will funnel money away from cash-starved Canadian charities and qualified donees.

As Cestnick points out, the new reporting requirement makes Canada a global outlier.

“In the United States, there’s no separate reporting requirement for such trusts, and Britain has specifically excluded internal express trusts from filing requirements. There is absolutely no tax policy being achieved by requiring charities to file returns this way. Charities are already required to file a Registered Charity Information Return (Form T3010) annually, which has all the information CRA needs to properly oversee the charitable sector.”

The question is: why? Why haven’t charities and non-profits been exempted from the new rules? If these policies will hurt charities—and, in turn, Canadian communities—surely there must be a more effective way to achieve Ottawa’s tax and reporting goals without placing an unmanageable burden on organizations across our sector. It’s a question we’ve been encouraging our Foundation families to post to their members of parliament and Finance Minister Chrystia Freeland.

The Canada Gives Team

For more information on the federal government’s tax and reporting rule changes, contact a member of our team today.