Ontario Donation Tax Credits - Proposed Rationalization

Proposed Change

The Canadian donation tax credit regime is generous, but opaque and needlessly complex. The March 28, 2018 Ontario Budget proposed a welcome reform for an intricate system. Too bad the idea is from a government that polls predict will likely to be voted out of office in eight weeks.

Ontario’s current system of donation tax credits is the most byzantine in the country due to a combination of a unique surtax regime and the federal donation tax credit tiers imposed by the Income Tax Act. The system is so complex even Canada Revenue Agency’s online donation calculator has errors for Ontario. When combined with the Federal tiers, Ontario has five donation tax credit rates that depend on how much you give and how much you earn. Most other provinces have two tiers that are added onto the three federal tiers, which result is three tiers.

Current System

At the moment, Ontario taxpayers who donate less than $200 get a provincial rate of 5.05%, which combines with the 15.0% Federal first tier to produce a combined rate of 20.05%. If a taxpayer donates more than $200 per annum the provincial credit is 11.16%. This sum is added to the Federal credit of 29% to produce a combined rate of 40.16%.

The current Ontario surtax system stealthily increases the provincial rate to 13.39% for taxpayers with net annual income over $85,923 and to 17.41% over $93,208, for a combined total of 46.41%. For taxpayers with net income greater than $220,000 the combined federal provincial rate is 50.41%, although the top tax rate marginal rate is 53.53%. Other provinces match the top donation tax credit with the top marginal rate, which enables full tax owing to be offset. And, just in case it wasn’t confusing enough, the top rate only applies to donations that can be claimed against income in excess of $220,000.

Are you with me so far?

Simplified Bump

The proposal gets rid of surtax tax credit tiers and bumps the top provincial donation tax credit rate to 17.50%. This would produce a three-tier system similar to other provinces.

The primary beneficiary of the proposal would be taxpayers with less than $150,000 in income who donate more than $200 per annum. The new combined rate would be 46.5% for this group, up from 40.16%. The rate increase would also affect estate donations with less than $220,000 in net income on the final lifetime return. The rate increase would be especially helpful if a high percentage of the estate is donated to charity. The claim room will increase if there is a carry back to the penultimate lifetime return and claims in up to five T3 estate returns.

Here’s hoping the proposal is salvaged regardless of the outcome of the June 7th Ontario election.