THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, April 11, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello, everyone, and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
I’d like to introduce members of the committee with us today: Senator Loffreda, the deputy chair; Senator Bellemare; Senator Gignac; Senator Marshall; Senator Massicotte; Senator Miville-Dechêne; Senator MacAdam; Senator Ringuette; and Senator Yussuff. Also visiting us today are Senator Oudar and Senator Varone. They’re new senators, so they’re checking us out. Thank you for taking an interest in this.
Today, we’re looking at the topic of the alternative minimum tax, or AMT, and the impacts on charities. We set about to tackle this issue when it was proposed in Budget 2023. It’s now implemented, but there are consequences, so we want to look at that. High-income individuals who make charitable donations account for about 10%, I think, of the overall value of donations. This alternative minimum tax is impacting their ability to do that. There were some concerns that the provisions will actually end up damaging the charitable sector — weighing that off in terms of how much revenue will be raised. That is what we are here to look at today.
We have the pleasure of welcoming in person Bernadette Johnson, Director, Advocacy and Knowledge Mobilization, at Imagine Canada; and we have with us also Alexandre Laurin, Director of Research, C.D. Howe Institute. He is joining us virtually. Thank you to you both. We’ll begin with opening statements, starting with Ms. Johnson. The floor is yours.
Bernadette Johnson, Director, Advocacy and Knowledge Mobilization, Imagine Canada: Thank you, Madam Chair and committee members, for the opportunity to speak to the current and potential impacts of the alternative minimum tax, or AMT, changes in donations to the charitable sector.
As you are aware, charities perform necessary work. This became evident to all of us during the pandemic. Mental health supports, education and skills training, youth and child services, theatres, food banks, churches and mosques, senior support — the many services delivered by these 86,000 organizations are too long to list.
The charitable sector is a vital engine of our economy. Collectively, charities and non-profits employ 2.4 million Canadians and contribute 8.3% to Canada’s GDP.
In Budget 2023, the government announced a proposed recalculation of the alternative minimum tax to further the stated policy objective of tax fairness. This recalculation included two tax incentives that were designed to encourage donations to registered charities. It proposed adjusting the inclusion rate for capital gains resulting from the donations of public securities from 0% to 30% and limiting by half — so 50% — the application of the charitable donations tax credit.
Donations are a critical component of our sector’s funding ecosystem. Government and philanthropic grants, while valuable, tend to compensate for predefined project-related activities, as over the last two decades, support for charities operating costs has decreased. Donations provide charities with independence, enabling them to pay staff and rent, invest in technologies needed to run programs and flexibly design services in direct response to community needs.
Charities are not opposed to tax fairness. Similar to government, charities are expected — indeed, they are legally obligated — to pursue public benefit, but they also require funding to do this effectively. The donation tax incentive regime has evolved with the charity’s funding ecosystem over decades. It’s a symbol of the relationship between our two sectors.
The tax incentives at risk with these changes are essentially federal subsidies for the services charities are mandated by the government to provide for Canadians.
Statistically, the sectors’ donor base has been shrinking, as fewer Canadians give each year and in lower amounts. Higher-income individuals have typically made up for the shortfall through the gifting of relatively larger amounts. However, the latest Statistics Canada data shows that this is also changing. Overall, donations fell in 2022 by just over 3%.
It is challenging to predict the impacts of these changes on our sector’s revenues. One conservative estimate is that the changes to the AMT would amount to a 3.5% to 5% reduction in overall donations. For the entire suite of proposed changes to the AMT — so all of the credits and deductions that are proposed to be included in the new calculation — the government will raise an additional $3 billion over five years in tax revenue, or about $600 million each year. At the same time, the inclusion of just these two donations incentives for charities in the new calculation will cost the sector almost as much in lost revenue at $500 million annually. These are funds that will be held back by would-be donors.
So charities will lose more than government will earn in new tax revenue if donations and incentives are included in the new AMT calculation.
A 2013 report by the House of Commons Standing Committee on Finance on tax incentives offered that charities, at least to some extent, deliver services that governments used to provide. The tax revenues allocated to these activities in the past have been replaced by tax measures that facilitate donations.
“What is the government planning to replace these charitable revenues with?” many charities ask.
Although these proposed changes have not yet been adopted by Parliament, they are already having an impact. Some donors are holding back on planned gifts, at least until anticipated changes are confirmed. Others are renegotiating their pledges. A donor recently told a children’s hospital in B.C. that instead of giving a lump sum as planned toward the hospital’s new program, their donation would be spread out over multiple years. Because they can no longer rely on this upfront investment, the hospital is unable to launch its new program. A conservation research institute we spoke with recently told us that by the end of the first quarter, they tend to receive four or five gifts of securities. So far, they have received none.
Our recommendation is that the government, first, maintains the current 0% inclusion rate for capital gains on donations of public securities, and second, maintains 100% of the charitable donations tax credit in the calculation of the alternative minimum tax.
The charitable sector supports tax fairness. This can be achieved without threat to the charitable services and programs that deliver on federal priorities, help our communities thrive and support quality of life for all Canadians.
Thank you for studying this important issue.
The Chair: I appreciate your remarks and your patience in waiting for us to have an opportunity to study this.
I will now ask Mr. Laurin, who is joining us remotely, to go ahead. The C.D. Howe Institute has looked at this issue and prepared a study. Please go ahead with your remarks.
Alexandre Laurin, Director of Research, C.D. Howe Institute, as an individual: Honourable members of the committee, thank you for the invitation.
I would like to begin by stating that my remarks are based on a study I co-authored with my colleague, Nicholas Dahir. This study was published by the C.D. Howe Institute in November last year. You may find it online on our website.
In that study, we analyzed the fiscal and distributional impacts of the proposed alternative minimum tax, AMT. We found that the new AMT regime will mostly fall on individuals who report occasional consensus of very large capital gains exceeding $500,000 a year, and that charitable donations will be impacted.
Assuming that the new AMT rate and the new AMT income threshold are in place, the higher capital gains inclusion under the AMT would generate 80% of all additional revenues, followed by the charitable donation-related provisions being the second-most important source of additional revenues. Because the impact on charities is the focus of this hearing, let me start with that.
Among many changes, the proposed AMT would introduce two provisions targeting charitable giving. It would disallow half of the charitable donation tax credit and include 30% of capital gains on donations of publicly listed securities.
High income individuals who are targeted by the proposed AMT are significant contributors to charity. We calculated the proposed AMT would capture almost 10% of the overall value of charitable donations, including 50% of the value of donations of publicly listed secures.
Many studies explored the response of donors to tax incentives. We applied a mid-range response factor. We estimated that the proposed AMT could reduce Canada’s charitable donations by 4% with donations of publicly listed securities potentially declining by 22%. This 4% drop would amount to nearly $500 million of charitable donations lost in 2021.
After accounting for changes in donating behaviour, we calculated that AMT donation-related provisions would yield only $60 million in additional taxes. The $500 million impact on the charitable sector far exceeds the modest $60 million in additional taxes expected from the AMT.
The result is a significant policy imbalance, with the charitable sector facing a much greater burden than the incremental revenue generated. Therefore, I am of the view that donation-related AMT provisions merit, at a minimum, a serious reconsideration.
Let me turn briefly to another interesting finding regarding the proposed AMT. We found that nearly 80% of AMT revenues would be derived from persons with substantial capital gains, that is, more than $500,000 of gains in a single year. Since, year over year, a small minority of capital gains recipients represent a majority of the total reported gains, the AMT may apply to more than a third of the total value of all of the reported capital gains in a year.
The AMT would mostly act as a hidden tax on very large and lumpy capital gains. Some will argue that this approach brings economic fairness, sure. Yet, it does raise questions when we consider that many taxpayers report gains of smaller values spread across multiple years.
If the aim is fairness and equity, why target occasional large capital gains rather than smaller, more frequent gains that may accumulate to the same value but over many years?
Finally, individuals will be motivated to align their realization of their capital gains with years of significant ordinary income, or to distribute realizations over multiple years to prevent an exceptionally high gain in a single year.
That’s just two of many other possible behavioural reactions.
I’ll wrap up here to avoid running over my five minutes. Thank you for the opportunity. I look forward to your questions.
The Chair: Thank you.
Before we begin, I want to remind people of what I said yesterday, a reminder from those who do the captioning in real time for us. We had a meeting about this last week, which is why I’m bringing it to everybody’s attention.
This captioning helps those who are hard of hearing that are watching, but it’s also part of our transcription process. They two best practices they asked of us, in order to help them, is to speak clearly and concisely, one at a time, and try not to alternate between English and French in the middle of a sentence; it is very complicated for them to go back and forth.
Thank you for bringing those issues to our attention. We will try our very best.
We will begin with our deputy chair, Senator Loffreda, who has a question.
Senator Loffreda: Thank you to our panellists for being here this morning.
As our chair did repeat at the start, our general mandate is banking, commerce and the economy. My concern is the effect the AMT will have on our economy; the impact it will have on the economy; the extent to which it will affect resources to our hospitals, universities and other important institutions offering services to all Canadians; and, long term, will the government be obliged to increase funding to these institutions because of the reduced donation levels that you both discussed?
You both put out numbers. I have both the Imagine Canada budget pre-submission letter here and the e-Brief from C.D. Howe. You have mentioned numbers, the $500 million impact. But if we look at the overall budgets of our institutions, numbers don’t mean anything unless we compare it to trends, ratios or compare it to total budgets.
How will it affect our institutions, per se, the individual hospitals, universities, and not just the overall impact? As stakeholders, to what extent were you consulted? Is the government aware? I do see the pre-submission letter or pre‑budget submission that Imagine Canada put forward, your November e-Brief. To what extent was the government aware of this? Are you still in contact with them to make them further aware of the impacts on our economy?
Ms. Johnson: Thank you for the question. I’ll start by saying we weren’t consulted. To our knowledge, nobody representing the charitable sector was consulted prior to these proposed changes. We’re not aware of any study that was conducted either, prior to these proposed changes in Budget 2023.
With respect to dollar figures, it’s a challenge to determine. The economic modelling that has been attempted by different institutions, including C.D. Howe, they are estimates. It is challenging to predict who will be covered by the broadening of the new AMT and what that will mean for how much they choose to donate to charities moving forward.
I would say it’s not just the real impacts of those who are subject to the AMT and how that affects their behaviour, it’s the uncertainty as well around these changes; they were announced a year ago, and charities are now four months into their 2024 fundraising.
The uncertainty about who will be captured under the new AMT changes, which donors will be captured, is a question that fundraisers and charity staff can’t answer. They don’t know the personal finances of every donor. Some donors are anonymous.
Even though the new AMT changes will maybe only be applied to, say, 30,000 to 60,000 individuals — I’m not sure — that is cold comfort to charities that need to do their budget planning for the year.
In trying to put some dollar figure to what you’ve asked, the revenue from donations for the charitable sector is approximately $12 billion annually. That has dropped recently. Statistics Canada recently released T1 data for 2022 that showed that this has decreased to below $11.5 billion, so we’re already in a constrained donations environment.
The Chair: Mr. Laurin, do you have any comment on that you’d like to add?
Mr. Laurin: Sure. We were also taken by surprise by the changes that were announced in Budget 2023.
I would add a few words on the impact to the economy, because that was the preface to your question.
One impact it may have on the economy is the impact on risk-taking, because it affects both capital losses and capital gains. I didn’t talk about capital losses in my remarks, because I only have five minutes. It also affects capital losses, 50% of the claims of capital losses that were carried forward will be disallowed. That creates a kind of imbalance because then 100% of the gains are included, but taxpayers will not be able to claim all of the losses that they have.
The net capital losses are artificially inflated, and — in my opinion as well as according to many others that I talked to when we distributed that e-brief for comments — this kind of imbalance between the treatment of capital losses under the AMT and the 100% inclusion would have an effect on risk‑taking. Anything that has an effect on risk-taking may have an impact on the economy as well.
I’m not saying it’s going to be a huge impact. The AMT is minor in the overall scheme of things, but if it does — as we calculated — affect a third of all capital gains every year, it’s more substantial than we think, just for that little portion of the income tax system — the capital gains. It also has a major impact on charitable giving as well because of the reasons that we just heard. Many important donors are high-income taxpayers as well.
The Chair: Thank you for that.
Senator Marshall: My first question is for Mr. Laurin, although I have a question afterwards for Ms. Johnson.
I was really taken aback by all the changes in the different deductions. They have all changed for the benefit of the government, and you’re saying in your opening remarks — or this is what I understood you to say — that it’s not the same individuals every year. It just depends on who is doing what. Are there unintended consequences with regard to taxpayers even though it’s not the same people every year that are going to be impacted by this new regime? Do you think that there are people looking at this, who are seeing where the government is going? I mean, there’s nothing there for the benefit of the taxpayer. It’s all for the benefit of government revenues. Do you think that’s an encouraging sign for people to leave the country or for corporations who have their head offices here — multinationals — to move to another jurisdiction? I’d like to know what the broader economic impact would be, looking at the trend line.
Mr. Laurin: Thank you for the question. I don’t want to sound too alarmist. It is, in reality, a very small fraction of the tax system — the AMT — with very few taxpayers affected.
There will be ways for taxpayers to change their behaviour, and, as we’ve already heard today, some charitable donors would do it, but there will be ways to minimize the impact of the AMT for some taxpayers who are well prepared. Principally, those taxpayers who would move to another country would be well‑prepared taxpayers, so maybe they’ll plan their affairs differently so that they’re not disproportionately affected.
But these changes are a problem. We don’t want a tax system to be inviting behavioural changes that are not warranted. If you look at this from a big-picture view, the AMT is small. It’s like you said: If it does, in fact, turn out that it does what we think it will do, it will primarily impact people who have those large capital gains. But those large capital gains are occasional; they don’t happen every year. So as you said, it’s not always going to be the same people, year after year, who would be significantly impacted by this. It’s not necessarily only the economic impact here that is interesting; it’s the fairness argument.
If that’s the case, then we need to hear a little bit more justification for the fairness argument that was put forth by the government, if, in fact, year after year, on a longitudinal basis it’s mostly different people that are affected by it. That’s a different story.
The Chair: To return to the emphasis, it affects few taxpayers, but it’s $12 billion.
Senator Marshall: The change that’s under the alternate taxes, you see capital gains, now it’s 100% included, and now from donations that are publicly — it’s 30% included. It sends to me a message that this is for the AMT regime, but what is coming for people who are taxed under the regular tax system?
I’m reading a message into the details of this, so that’s what my concern is.
Ms. Johnson, have you met with officials from the Department of Finance since this came out, because the government’s focus is on more tax revenue, and Canadians are going through an affordability crisis. I mean, it’s going to be a double impact on charities.
I don’t see it getting any better unless the government does something significant. My question is: What kind of response are you hearing from the Department of Finance officials? Are they listening but not hearing or are you more optimistic?
Ms. Johnson: We’ve been in touch with the Department of Finance on an ongoing basis. We have a good relationship with the Department of Finance and the minister’s office. They are hearing the sector. There was a consultation on the proposed changes to the Income Tax Act following the tabling of the budget in September, and we heard that the charitable sector’s submissions or submissions about donations to charities that weren’t from charities but from allies of the sector or donors themselves, were a sizeable — more than 90% — this is just hearsay — percentage of what was submitted to the consultation overall. This is an issue that charities and professional allied services, accountants, fundraisers, gift planners, donors — the ecosystem — are passionate about this issue.
I think it’s being heard.
[Translation]
Senator Bellemare: I have the same question for our two witnesses today. I’d like to try to understand the impact on charitable organizations. You’ve given us figures for all charitable organizations. If I understand correctly, there are many foundations in charitable organizations, including university foundations, as Senator Loffreda explained, but also smaller foundations with more specific objectives.
Do you know the distribution in terms of foundation size or charitable sectors? Is the tax impact equal for everyone, or are certain foundations particularly affected by this?
If you had data…. You work with the sector and Mr. Laurin does research, so I don’t know if there’s any data out there on this particular issue.
[English]
Ms. Johnson: We don’t have data yet specifically to answer your question, particularly since the changes haven’t been adopted. But it’s an excellent question.
Foundations are likely to be impacted. From what we gather from T3010 data, which is the annual tax form that charities need to submit, donations of public securities are primarily directed toward philanthropic foundations, but not exclusively. There are operating charities as well. So the sector makes a distinction between foundations that tend to grant to charitable organizations and then operating charities that receive the grants and carry out charitable activities. They are the organizations that deliver charitable programming.
The donations are likely to affect both foundations and operating charities. The donations of public shares tend to be directed primarily to private foundations, but not exclusively, as I say. We do know of a couple anecdotal cases where there are organizations that are relatively small, under $2 million operating budget annually, which is small.
Our arts theatre organization, for instance, in West Vancouver used a public share capital campaign fundraising campaign and benefited from the donations of public shares. They are quite worried about these proposed changes because it is a useful tool that they can use. They are not a funding organization or a foundation, but they are concerned.
[Translation]
Mr. Laurin: Our data sources don’t allow us to study the distribution of different foundations or charities. Unfortunately, we would have liked to do that, but we didn’t have the data. These are not the right methodologies to do that.
[English]
Senator Yussuff: Thank you both for coming here. I hear the concerns that you’re raising and I understand the worry. But for the vast donation that donees make, they mostly come from small donations from individuals who do it in many forms. I’ll just use a typical example. The United Way campaigns get deducted at the workplace. Most of those people will not be impacted by this change, but it will have an impact at the end of the day.
It would be fair to say that we don’t know yet — I hear your point that you are seeing some data or at least anecdotally hearing there have been some reductions in contributions that have already impacted, but other factors might be causing that, the economy, inflation, what have you. We don’t have a full set of data yet to analyze and see the impact of. Am I right in asserting that point?
Ms. Johnson: Absolutely. The changes haven’t taken effect; we don’t know if they will. Maybe we will find out next week, and we won’t know until the data is available from the year after which the changes take effect.
This is a speculative, informed conversation based on what we know about the dynamic nature of the funding environment and stories from charitable organizations that have gotten in touch.
Senator Yussuff: I’ll use myself as an example, so I’ll be transparent. Most of my donations I get the tax credit for because I’m not in that category of what this is hoping to impact.
The reality is it’s a fine balance between tax fairness and how we get Canadians to pay their fair share. I’m hoping your conversation with the department about your worry that they take it seriously because the charitable sector does really important work in this country in a variety of ways. Without them, either government will have to step in or otherwise we would have a larger crisis in the country on the social side.
My point would be: Has the department made any commitment when they would have data to show — since this was in the last budget — when they might be able to do a measurement to see your argument and others making the argument? Have they made any promises so at least we will have something tangible to get our teeth into to say this didn’t work, it missed the target completely, we need to go back and look at this and figure out how to do it a bit better to ensure we’re not punishing the sector but at the same time allowing individuals who want to make a contribution, do their fair share, but also pay their fair taxes?
Ms. Johnson: Yes, in discussing changes to the Income Tax Act with the Department of Finance, it will be challenging. They need to be a bit opaque about what their plans are, so we don’t know what they will do. They have heard the sector loud and clear about what we would like to see, the two provisions related to charitable donations be removed from the recalculation of the AMT. Tax fairness is something that the charitable sector supports, but we do assert that that can be achieved in the absence of threatening donations as well.
Your question about data. The House of Commons Finance Committee in their report of the pre-budget consultation process recommended that the federal government commission an independent study of the impact of the AMT changes on the charitable sector. We don’t know what the Department of Finance has done with respect to its own internal study. I don’t think that they are planning to release anything that they might have done. Perhaps an acess to information and privacy, or ATIP, request would help us gain access to that.
We haven’t been in discussions with the minister’s office or the Department of Finance on any plans they might choose to take, any scenario planning that they might consider.
The Chair: Okay, thank you for that.
Senator C. Deacon: I want to get clarity. Budget 2021 showed an awful lot of understanding and I think respect for the challenges being faced by the charitable community. There must be a sense of whiplash from that state to this, where we are today.
I want to clarify, in advance of making this announcement in Budget 2023, there was no consultation in terms of discussion? You’re not aware of any analysis in terms of the work that was done? Nobody in Finance Canada came to you and said, “We are contemplating changes related to tax fairness, we want to understand if you see an implication here,” none of that occurred?
Ms. Johnson: There was no consultation of us or anyone that we know. If there was analysis done — I’m sure there was some form of analysis done — we don’t have access to that. We don’t know what form it took.
Yes, the 2021 budget compared to 2023’s budget was quite different.
Senator C. Deacon: This is important to me because I believe charities that are getting public support gives the rest of us confidence that the work they are doing is being basically vetted by a lot of donors who are saying, “Yes, I believe in this,” and it saves government from having to intervene. I’m troubled by the fact that this seemed to have been done in a vacuum of lack of understanding of the implications of the decision. I certainly hope they will be listening. Thank you for your testimony.
I don’t know if you’ve got anything to add, Mr. Laurin.
Mr. Laurin: Yes, sure. One of my criticisms is that there hasn’t been any analysis, and that’s important to consider because in 1985 Finance Canada did release a pretty good study for the time. Nineteen eighty-five is a long time ago, and the technology was not what it is now, but they still managed to have a longitudinal analysis of the impact on taxpayers of the AMT when it was introduced in 1985. There was good analysis being done and good understanding of what the impact would be.
Now if we look at what happened in 2023 or before, because the study should have been issued in 2022, there was none. That would have been great. We would have been able to debate this topic with more information instead of me coming here and saying, “It will affect people with capital gains,” this and that. This is me looking at the Statistics Canada tool that is made to make these kinds of analyses, but it’s not a replacement for a good Finance Canada study.
Senator C. Deacon: Thank you. I’m very troubled by the lack of consultation. Thank you.
The Chair: Thanks for your comments.
Senator Ringuette: I don’t see this as a lack of consultation. There was an announcement. Sometimes, this committee has a portion of the budget bill to review.
Did you appear in front of any committee, either of the House of Commons or the Senate, that studied last year’s budget bill? That’s my first question.
The normal process is that you have legislation, and then the department draws regulation that is published in the Gazette. I guess the law is not implemented yet. They are probably consulting you because they are looking at drafting regulations. It’s not in place yet, colleagues. That’s one thing.
The Chair: Just to be clear: It’s been passed.
Senator Ringuette: Madam Chair, I have the floor, thank you very much.
Last month — I do my own income tax, because it’s not a lot to report — when I looked at the donations that I, as an individual taxpayer do, I get a roughly 25% tax credit.
Mr. Laurin, can you explain this to me: How does my individual taxpayer donation tax credit compare to the corporate tax credit for donations? Have you done that comparison?
Mr. Laurin: Yes.
Senator Ringuette: When you talk about tax fairness, that has to be part of the calculation.
Mr. Laurin: Yes, the AMT does not apply to corporations or corporate income. It only applies to personal income; it is the personal income tax system only.
One of the behavioural changes that we might see is that people may incorporate their activities in order to avoid the AMT if they plan well ahead. Again, all of this requires one to plan well ahead.
It’s also my understanding that the bill hasn’t yet been tabled; I’m not sure, but I don’t think there’s legislation that has been tabled for study. I think it was just a proposal, but I might be wrong on that.
Senator Ringuette: You’re saying that there are no comparative studies, and instead of being behind by a year, we are kind of ahead. So there is a consultation process being done, because, Ms. Johnson, you just said that you are being consulted right now.
I didn’t get my answer to the comparative study that should be done in regard to my money donation in comparison to a security donation.
I’m trying to seek answers from you. When you talk about tax fairness, I want to know how fair it is in comparison to ordinary Canadians’ donations and tax credits.
Mr. Laurin: We all get the same tax credit for charitable donations. If you donate in excess of $200, you get a credit at a rate equal to the top marginal tax rate. Everyone gets that.
Most people will not be impacted by the AMT, because the AMT only impacts a very small minority of people. However, what’s happening is that a lot of people who have a lot of income in one single year happen to also be donating in that year. It’s mostly those donations that will be affected, and that is, for some, a significant hit to the charitable sector.
If you don’t think 4% of donations is significant, then it’s not. If you think it is, then it is.
The Chair: Thank you. We’re out of time on this session here.
Senator Massicotte: Thank you to the witnesses.
I’m trying to get a handle — I think we all are trying to get a handle. If you take someone’s income, for instance, and you add $20,000 to it, how much of that 20,000 is going to be paid in extra taxes?
Give me another example. I’m trying to get a sense of this: If you increase it by $10,000, how much income tax will you pay additionally?
Mr. Laurin: It depends upon many factors. Suppose you have a $50,000 income and no other types of deductions or credits. If that’s your assumed starting point, then the next 10% of income will be taxed at your federal and provincial marginal rate. That is not affected by the AMT.
To be affected by the AMT, you have to have an income at least in excess of $173,000. For the proposed AMT, not the existing one, you would have to have income in excess of $173,000 at a minimum to start to be affected by it. You won’t be affected by the new AMT if you are under that income threshold for it. Again, the income threshold starts at $173,000. That’s for the proposed one, not the existing one.
Suppose now that you have an income that is composed of pretty much only ordinary income, and it’s $250,000. You have a few other deductions and things of that sort — a few tax credits — that are only maybe 50% claimable — but still 50% is claimable so you might end up paying nothing on the next $10,000. You might not be subject to the AMT at all.
However, if you have capital gains — the treatment of capital gains changes so much under the AMT — if those capital gains are substantial, the chances that you will be caught with the reformed AMT are very significant. There is like a 75% probability you will end up paying AMT.
Those are the only individuals who will be really impacted by the changes. If it weren’t for charitable donations — because charitable donations are kind of — it’s even strange to me that they decided to include the charitable tax giving credit in the AMT, because why would you do that?
All the revenues come from the capital gains provision, because it’s such a big change. If you wouldn’t have that inclusion rate for capital gains being raised from 50% to 100%, then the AMT would raise — we calculated it, and I think it was only 25% of what it is proposed to be raised.
So the AMT changes would be pretty much nothing if it weren’t for the changes to the capital gains.
All of this because that threshold of income that is not affected by the AMT — the $173,000 — that’s a huge increase from 40. That’s a big difference right there. That’s what drives the new AMT to much higher income levels.
So different people are affected by both AMTs. The existing one is not the same people as the people who will pay AMT under the new one. That’s one thing. For the new one, it will be people who have these spurs of big income in a particular year, and most of that income will be derived from capital gains. This is what we see from looking at the data.
Senator Massicotte: Did you follow that?
The Chair: Do you have your clarity?
Senator Massicotte: It was hard to follow. There were so many numbers. I think I was better off. Now I’m not sure.
The Chair: What are you asking? What is it that you need to identify?
Senator Massicotte: If I increase the income by $20,000 and my charitable donation goes up by $1,000, what’s the difference? How much money did I pay?
The Chair: My understanding is he can’t do that unless he knows what other deductions you have, but give it another shot if you want, Mr. Laurin.
Mr. Laurin: It depends on your starting situation, clearly. It will be different for different individuals depending on their sources of income. Not all incomes are taxed the same. It will depend on your deductions. It will depend on your credits. There are all sorts of different things like that, but you would need to have very high income to begin with.
The Chair: Thank you. I think that is clear.
[Translation]
Senator Miville-Dechêne: First, I’d like to say that I have a great deal of empathy for charities and NPOs, which do some of the work that the state doesn’t do to help those most in need. Any measures that might hinder their funding seem suspicious to me, in principle.
Mr. Laurin, if it’s possible, I’m going to ask you to put your knowledge in plainer language for me. In your opinion, why did the government include in the budget this measure which, by the way, hurts charitable organizations? Is it to curb tax evasion, to tax capital gains more? I’d like to understand that part better.
Mr. Laurin: We don’t necessarily know the reason. The reason cited in the budget is to make things more equitable; they want to make the regime more equitable.
Senator Miville-Dechêne: Is that what this does? Are the richest people paying more tax?
Mr. Laurin: In my opinion, it’s different. It’s really about addressing substantial capital gains that only happen occasionally. We don’t know everything because every person is different; some may have had two big gains over 20 years, two big gains over 10 years, or only one in their lifetime. It all depends. That’s one impact of the reform. It’s not the only one — there are others — but it’s the most important one, in my opinion. Is this major impact coming in waves? I don’t know, but it could be, as it could be the intention, but a more hidden intention that they don’t want to reveal too much about. It’s possible; anything’s possible.
If that’s really the intention, it would be better to disclose it, to say it openly so we could debate it. For people who care about fairness, I don’t think many will say — if they want to tax the rich and big capital gains more, they’re still hitting the target. Whether that’s fair is another question, because in this case they are avoiding taxing people who are rich too, but who have capital gains spread over several years.
So this raises several questions. Unfortunately, I have to speak hypothetically because the only reason the government mentions in the budget is fairness and achieving a more equitable distribution of tax revenue.
Senator Miville-Dechêne: Thank you for your attempt at an answer; I understand it’s not that obvious. Thank you.
[English]
The Chair: Senator Gignac, I know you wanted to get in on this.
[Translation]
Senator Gignac: Thank you for the clarifications, as this measure is not yet in effect. Perhaps we’ll see it next week. Obviously, the perception is that the well-off will be affected by this measure. There are some impacts, but they are seen as fair.
I’d like to talk about a facet that hasn’t been mentioned much so far and perhaps also shed some light on the impact. It’s worth thinking about. I’ve been made aware of it by organizations in Quebec, such as university foundations for fundraising campaigns. I was also made aware of it by Quebec’s finance minister, given that every time there’s a taxation change in the federal government, the Quebec government has to decide whether or not to harmonize its policies.
It’s obvious that a change of this kind has far more indirect consequences on the public finances of Quebec and the provinces, since the charities, homelessness organizations, universities and hospitals that raise funds are all under provincial jurisdiction. If there’s less money for university centres, hospitals and our major universities that…. This also has a financial impact when it comes to foreign students, because there will be fewer of them and less revenue. All this will have an indirect medium-term impact on the provinces’ public finances.
I’m asking a question and also making a comment; witnesses, please feel free to speak. For the federal government, there aren’t many consequences; it’s a net gain of $600 million in revenue per year. Any expenses will be borne by the provinces, because hospitals won’t be able to keep up. Mr. Laurin, am I on the right track with my interpretation?
Mr. Laurin: There could certainly be consequences for the provinces, because these are the administrations that handle services to the public. You mentioned the $600 million that this measure will generate, but that amount will continue to decrease. I don’t know how to say it in French.
[English]
It can be carried over. It is a carryover provision.
[Translation]
This provision ensures that after 20 or 25 years, the government will generate almost no revenue, because there will be a large pool of alternative minimum tax that can be claimed in future years.
Senator Gignac: Have you spoken to the provincial governments about this federal government proposal? At the end of the day, when things aren’t going so well, people won’t go knocking on the federal government’s door; they’ll go to the provincial ministries of finance. Have there been any efforts to approach or discuss this with provincial governments?
Mr. Laurin: No, not really, but it must be said that the provinces also have their only minimum tax, and it’s a fraction of what the federal government collects. In other words, if there are gains in tax revenue, there will also be gains for the provinces — except Quebec, of course.
[English]
The Chair: Senator Gignac, have you concluded?
Senator Gignac: I don’t know if Ms. Johnson has anything to add. You do not really deal with the federal government, except for that situation, but do you have any reaction to what I mentioned previously?
Ms. Johnson: We don’t deal with the provincial level governments, so unfortunately we haven’t considered the impact on the provincial government, but it’s a good point that charities that operate across Canada in certain sub-sectors, like health and education, do deal with provincial government transfers. Since health and education fall under provincial mandate, the impact of these changes, if those subsectors become insecure in any way, what would the effect be at the provincial level? It’s a good point. That is out of our jurisdiction. We deal with the federal government, but I appreciate the point.
The Chair: Thank you.
Senator Varone: Not all charities are created equal, and there is a certain subset of charities that take advantage of the existing tax laws. This is where the alternative minimum tax becomes very relevant, and I wanted your opinion on it.
I’ll just give you one example. Catholic Charities is a widespread organization — I’ll probably burn in hell for saying this — but, you know, they take donations yearly, and they’re not subject to tax. They also compete with the private sector with a variety of different business lines that they have, whether they be cemeteries, funerals and funeral homes. Especially within the funeral home business, they have located their funeral homes within the context of cemeteries, wiping out a whole generation of funeral home operators, because they don’t pay tax — not income tax, royalty tax or any other form of tax.
A minimum tax to this effect would be relevant, and I would like to hear your position on those charities that do compete with private sector organizations and the relevance of a minimum tax.
Ms. Johnson: Well, the alternative minimum tax is applied to individual income tax, so I’m not sure if I understand your question.
Senator Varone: Well, if Catholic Charities is engaged in the business of direct solicitations but also have an arm that competes directly with the private sector, should they be subject to a minimum tax? That’s my question.
Ms. Johnson: Many of the charities do generate earned revenue. They’re called “social enterprises.” That is a potential, and the arts and culture subsector do this very well with sales of tickets for their shows, for instance. Charitable organizations, when they generate income through earned revenue or any other revenue source, the revenue generated has to further a charitable purpose, so it cannot be accrued for the purpose of private benefit. They’re not allowed to develop a profit. Any profit that is gained, or any surplus that is gained, has to be reinvested for a charitable purpose.
In that sense, they’re not really competing with the private sector, and charities themselves would not be subject to the alternative minimum tax. As you say, they don’t pay taxes, and the AMT is only applicable to individual taxpayers.
The Chair: Mr. Laurin, did you have any further comment?
Mr. Laurin: No, that was accurate.
The Chair: I think that’s some of the confusion here. It’s not a corporate tax; it’s a minimum tax on individuals.
If I’ve understood you, Mr. Laurin, I think your point is a simple one, which is that if the government wants to tax large capital gains, it should do so directly and not use the back door of the charities, if you will, to accomplish that. Am I reading you right?
Mr. Laurin: Yes, that’s my main point. That would increase transparency. I would have preferred that personally.
Just as a parenthesis, if I were to be somebody potentially affected by this, I would probably prefer that the government do it through the AMT, because now I have a way to avoid it. If the government does it directly, then I wouldn’t.
The Chair: No, I get it. They’re creating a way for people to avoid what the government says it wants to accomplish.
Mr. Laurin: Yes, because it’s the AMT.
The Chair: It is clumsy, yes.
We will go to a quick second round on this. We’re running through our time here.
Senator Loffreda: It hasn’t been discussed, but I think the goal of the government here is — and it gets complicated; I won’t go too deeply into it — if you purchase, the flow-through shares, for example, on certain initial public offerings, or IPOs, you get a tax credit.
Now, high income earners do that. They’ll go into the mining sector. They will purchase flow-through shares, get their tax credit, immediately sell those shares, get the capital gain and then donate those same shares. . It brings their tax rate from 55% or 53% to 37% or 35%. They get their charitable donation deduction. It gets very complicated.
I think the government is targeting those individuals that use that tax planning strategy — it’s totally legal. I think where they’re missing out, also — and I want your comments on this, and here is my question: We’re looking at charities, and we are looking at non-profit organizations, but we’re going to hurt the mining sector because of those flow-through shares that are not going to be purchased — and to what extent, I don’t know if you have those numbers — but this was an area that I felt would not be attacked or touched individually, because I was asked many times: “Do you feel it would be touched?” And I said, “Why would the government try to hurt, one, mining and exploration in Canada and, two, donations?”
My question is about unintended consequences. Individuals can’t take their shares they own individually and send it to a corporation. The capital gain will be taxed, but they can now create a corporation, buy the shares through the corporation and eventually donate them through the corporation to avoid the tax.
The dividends may be taxable, but corporations are taxed at a lower rate. If I look at all this and take the unintended consequences — the effect on the mining industry, the effect on the charities, which you have brought out very clearly, and the effect on the provincial government — I started by saying governments will have to fund more — the effect on individual tax rates, where if you have to own so many millions in shares individually, why not do it through a corporation, and there are other issues there, too, but I do not want to get into the tax issues.
I want your comments on that, because that is where we missed out, I think; those are the individuals being targeted, because high income earners could do that. They’ll plan accordingly.
The Chair: Mr. Laurin, go ahead.
Mr. Laurin: That’s a very fair point. Unintended consequences is something that we would like to avoid. We don’t want a tax system to be creating unintended consequences or distortions of behaviour. We’d like the tax system to be more neutral with respect to behaviour.
That’s a very good point. The AMT currently — and the proposed one, I think even more — allows some latitude to taxpayers to plan around, so there are behavioural effects to an AMT, for sure, and it is undesirable.
Senator Marshall: Mr. Laurin, can you just clarify something from when you were responding to Senator Massicotte?
The basic exemption is going to increase from $40,000 to $173,000. Is that $173,000 gross income?
Mr. Laurin: It’s your taxable income. It’s the same, yes. It’s very similar.
Senator Marshall: Then you calculate your income under the regular income tax rules, and then you calculate it under the AMT rules, and the higher amount is what you pay?
Mr. Laurin: Yes.
Senator Marshall: I got it. I understand.
Mr. Laurin: It’s the same income, yes.
Senator Marshall: Thank you.
Senator Ringuette: Mr. Laurin, just to clarify — I want to make sure that I understand this properly — what you’re saying is that if an individual decides that they want to donate $500,000 to a university, let’s say, the probability of that individual paying less income tax because of the AMT, he’s better to spread that $500,000 donation over five years than just doing it in one year?
That’s what I understood from your different comments.
Mr. Laurin: Thank you for the question, because this is not what I meant to say.
The $500,000 is a calculation and an example that refers to the amount of capital gains that a taxpayer may have. That’s not a charitable donation comment. It’s not related to that, so thank you for the question.
Senator Ringuette: Thank you.
The Chair: I think that brings us to an end, and I want to thank you both. I know that it was complicated to deal with the tax implications and whether the government would actually be able to accomplish its goals given this, and I do thank you, Ms. Johnson, for raising this issue, because I think we all know how important the charitable sector is in these very difficult times. We’re looking at food banks and all sorts of things across this country, and I hope that there is some further consultation with you now as we proceed. The budget is the budget, and whether they decide to do it, I know, is a different issue, but it’s important that we keep these things distinct. We shouldn’t be using charities to try and make a system presumably fairer on the outside.
We may be back at this with you when we actually see what happens. Our thanks to Alexandre Laurin, Director of Research at the C.D. Howe Institute, who was joining us virtually; and to Bernadette Johnson, Director of Advocacy and Knowledge Mobilization at Imagine Canada.
That brings our meeting to a close.
(The committee adjourned.)