AMT Tax Change: A Wakeup Call for Donors?
November 10, 2023
6 min read
Updates to the Alternative Minimum Tax (AMT) will undoubtedly hurt charities. Will it inspire the development of a stronger, more resilient foundation of charitable support?
Buckle up because the proposed changes to the Alternative Minimum Tax (AMT) are poised to deliver a big hit to Canada’s charitable sector. With Budget 2023’s AMT overhaul knocking on the door, it’s increasingly clear to more people how much we rely on mega-donors to sustain our registered charities today.
Canada has placed an awful lot of weight on tax incentives to get money into the charity sector, but when it comes to growing and nurturing new donors to become confident, resilient and engaged advocates, we’ve been collectively napping on the job.
It’s now more crucial than ever for Canadians to step up and get involved in charitable giving. It’s high time for the charitable sector to focus on developing individuals who are engaged with giving and embrace a lifestyle of giving back. Why? Because when these AMT changes take effect, there will be less tax-driven reasons for people to give and high-net-worth donor money, in particular, will fall off the table.
What’s the Alternative Minimum Tax?
The Alternative Minimum Tax (AMT) was originally introduced in 1986 to prevent high-income taxpayers from using deductions and credits to avoid paying their fair share of taxes. Essentially, it’s a leaner tax calculation with fewer deductions, exemptions, and credits than your regular income tax.
Fast forward to 2006, a capital gains exemption applied to donated publicly traded securities was put in place. This allows donors to side-step capital gains tax on gifted shares while keeping the full value of their charitable receipts to offset other taxes they may owe.
As predicted, this incentive sparked a surge in donations of publicly traded securities, particularly among wealthier donors who are more likely to own them. This (undeniably sweet) deal has been in place since, but that’s likely about to change. So the question is: will the donors attracted to giving back because of juicy tax incentives continue to give when the punch bowl is taken away? In too many cases, the answer will be “no”.
In 2022, the government decided it was time for a tax system check-up to ensure wealthy Canadians pay their fair share. As a result, Budget 2023 proposed legislative amendments to the AMT, set to take effect on Jan. 1, 2024. If imposed, as is widely expected, those who generally make over $173,000 will pay taxes on 30% of the capital gain from donated securities, and donation tax credits will be cut in half. The exact tax owed will vary by province, the capital gains from donated securities, and your income level. That’s a big (and complicated) change when compared with clean capital gains exemptions.
This seems like a good time to mention—if you have any plans to donate publicly traded stocks in the future, consider accelerating those plans into 2023. It will cost you less…or you will be able to give more away. There are advocates pushing against these changes, but there’s no guarantee they’ll be successful.
To benefit from today’s tax code, donations have to be made by December 31st. If you’re not sure what charities you want to support, adding funds to a donor-advised fund like Charitable Impact (I know a guy) allows you to receive a 2023 tax receipt now and distribute it later.
Why it matters?
Fewer Canadians are claiming donations on their taxes—down from 25.8% in 1998 to 17.7% in 2021. That’s about a million donors who’ve quietly exited stage left, and that number continues to drop.
Interestingly, the total dollar amount of donations has increased over that time. How is this possible? It’s due to an uptick in large gifts from high-income individuals incentivized, in part, by easy to understand tax benefits on charitable donations.
According to a report by the Canadian Association of Gift Planners (CAPG), a registered charity that advocates for a tax and legislative environment that strengthens philanthropic giving, approximately 35% of charitable donations could be tied up in the proposed AMT changes. In other words, one-third of the $11.4 billion of annual charitable giving by Canadians may be negatively impacted. That’s upwards of $4 billion every year that might not be around to fund charities to help our communities. Ouch.
Where does this leave us?
Let’s call a spade a spade—the AMT changes will hurt charities. It goes without saying when charities receive less money, they achieve fewer results. Less funding means fewer programs, less research, less support for education, food and housing insecurity, etc. Not to mention, the charitable sector is also likely to lose talented professionals to higher-paying industries.
However, might there be a (long-term) silver lining? Arguably, this shift presents an opportunity to step back and take a good, hard look in the mirror. If Canadians rise to the occasion, we can collectively fill the void to sustain the work of registered charities by taking a proactive role in supporting the causes we care about… not just for tax reasons.
And we do care. Each of us has an innate generosity, and when it’s sparked—by gratitude, empathy, suffering, faith, family, hope, disillusionment, and so on—we’re compelled to act. The challenge lies in finding the right avenues to connect our time, talent, and money with the causes that resonate with us and the belief that we can make a difference. Said differently, the challenge is to make giving back a more consistent part of our lifestyle.
But we can’t expect people to participate in giving and engage in their community if they don’t know how or even where to start. We encourage kids to find their passions and talents by giving them opportunities to learn and explore, like the hockey club in your neighbourhood or the art class in your kid’s school. But are there obvious places to engage and learn about giving back?
We need to nurture a culture of giving in the same way as we do sports, arts and music, and the charitable sector needs to roll up its sleeves and get to work. Developing donors must extend well beyond just more or “better” fundraising; it has to get to the core of who we are and how we choose to use our limited time, talent, and money.
Now, more than ever, we need to invest time and resources to incorporate giving back and volunteering into our culture and way of life. Give more thought to how we can engage communities to get involved in charitable acts, not only fundraising for specific charities.
Ultimately, our goal is to build a foundation of support that doesn’t crumble under pressure (or with tax changes). We’ve got to plant the seeds for a culture of giving that grows more resilient and less fair-weather donors, leading to long-term engagement that connects people into actually participating in the causes they care about most. When folks connect with a cause they care about, the tax receipt becomes a bonus, not the driving force. That’s what leads to donors who stick around, rain or shine, because giving is part of who they are.