Why we shouldn’t increase the donation tax credit
Dear Imagine Canada,
Thank you for the public engagement on the question of increasing the charitable donation tax credit (DTC) to encourage more Canadian to give. It's an important and, I'm afraid, perennial question. I had the good fortune of co-chairing an Imagine Canada committee on this topic 14 years ago, which produced the stretch credit proposal. We looked long and hard at the idea that higher tax credits would increase charitable giving in Canada. Unfortunately, we could find no evidence in practice or the literature that this was the case.
There are a few reasons:
1. Tax is not a primary motivation. The vast majority of donors are inspired by other factors: cause, trust, generosity, emotions, tradition, connection, etc. And who does the asking and when. For ordinary donation, people don’t calculate tax savings. They respond. Witness the growth in unreceipted crowd funding. As a sector when we emphasize tax savings – an economic rationale – we undercut the core values of the sector. Telling Government that tax is primary motivator for giving creates (greater) cynicism. And cynicism undercuts political support for the sector. Civil society relies on generosity and volunteerism, which are primary motivators of giving. We must have faith in our core values, which don’t include financialization of giving.
2. Our system is opaque. Due to the complexity of the DTC regime few Canadians know how much tax they are saving. Especially not at the time they are giving. Ontario has DTC five tiers, for example, and they are dependant upon income levels, total donation amounts, spousal sharing rules, surtaxes, and ability to claim donations against next income over the top threshold. In other words, it is confusing and opaque. Sure, this could be changed, but it requires rewriting the Income Tax Act and getting alignment with provinces and territories – and a massive public awareness campaign.
3. Our system is already generous. The DTC is more generous than the old tax deduction that pegged the tax saving to a donor’s average tax rate. The DTC – especially for generous middle income Canadians – is higher than their average tax rate. Certain provinces - especially Alberta - already have elevated tax credit rates. Again, there is little understanding of this advantage.
4. Rewarding existing behaviour. An DTC increase would reward existing donors for existing behaviour with bigger tax savings, but at greater cost to government. This is attractive public policy goal is to reduce taxation. If the goal is to increase donations for charities, increased DTC won't be a major help. It's bad charitable ROI.
5. Tax saving matter with exceptional donation. Donors who make exceptional donations from assets do indeed consider tax savings. As a charitable gift planner, I know this process inside and out. The relative value of these gifts is material. This is why, since 1996, the ITA has focused on incenting donations from assets, not income. Extra incentives change behaviour at this level, and charities get more money (although the distribution is unequal).
Past Policy Responses
Our Imagine Canada committee determined that the only way to increase the DTC responsibly is to design it to change donor behaviour - to reward donors to increase the value of their donations. Our policy proposal was the ill-fated “stretch credit”. Imagine promoted it for two years, to no effect. Instead, in 2013, the Harper government took some of the ideas and implemented a 5-year pilot incentive called the First Time Donor Super Tax Credit (FTDSTC) in 2013. The FTDSTC was dumb. It was an over-engineered, miserable failure that seemed to primarily encouraged rich parents to give money to kids to donate. The silver lining: it gave us more data that even a "super" DTCs would not deliver the goods or change behaviour.
We collectively need to turn around the long-term decline of donor rates. It is a big challenge. Giving rates are affected by many factors, including: inflation, housing costs, demographic, wealth inequity, lower volunteer rates, loneliness, and loss of social capital and trust. Bumping the DTC is not the answer. Please don’t burn sector political capital by asking to raise the DTC rate. It’s fine the way it is.
April 4, 2025