Imagine Canada

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Tax Incentives and the Charitable Sector. Simple Economics.

Tuesday, March 17, 2015
Public Policy
Public Policy

Charities and nonprofits are an important and expanding economic sector in Canada. They account for 8%, or $160 billion, of Canada’s $2 trillion economy. The sector is growing more quickly than the economy as a whole, due to increasing demand for the sector’s services. As Canada’s population ages and becomes more diverse and as our economy becomes richer and more service oriented, Canadians want more of the things that charities do – health care and social services, recreation and culture, poverty alleviation, and care for the natural environment among many high value activities. 

As you can see, Canada’s charities make an impressive contribution to our country’s well-being. Of course, the sector needs to be financed. And if the sector continues to grow more quickly than the economy as a whole to meet growing demand, it will need more resources. It’s simple economics, really. 

So, where will the money come from? 

Charities derive their revenue from three primary sources: government funding, earned income, and donations. Although donations make up the smallest proportion of the sector’s revenue, they still account for over $8.6 billion — definitely not chump change! The donations of millions of Canadians are crucial to support and sustain the work of charities. And donors aren’t only important for their donations; they are key stakeholders and are often also the charities’ beneficiaries and volunteers. 

But donations from individuals are under some pressure.

Donations as a percentage of Canada’s GDP have declined slightly over the past decade. In addition, since younger donors are not replacing older donors as quickly as they might, there are increasingly fewer donors. These trends are worrisome, especially as governments will continue to struggle with fiscal pressure for the foreseeable future. Charities will need more from donors and will need to expand the population of donors. 

All this explains why Imagine Canada is promoting the Stretch Tax Credit for Charitable Giving. It is intended to help Canadians stretch their giving over time by enhancing the federal charitable tax credit for increased giving — boosting the tax credit on eligible amounts from 15 to 25 percent, or from 29 to 39 percent.

 

Will the Stretch actually result in more donations?

Let’s go back to economics for a moment. Imagine Canada recently released a discussion paper which explains the impact the Stretch could have on both donation levels and the public purse. According to the paper, which was written by Brian Emmett, our Chief Economist for the Charitable and Nonprofit Sector, and Harvey Sims, consultant and former Chief Economist of the Privy Council Office with the Government of Canada, donations will increase — significantly.

To make their case, Brian and Harvey, like all economists, consider a donation to a charity as being similar to the purchase of a good or service. There is a price for a donation — the after-tax cost of giving one dollar. Donations, like any other good or service, will respond to the price of making a donation. And the price of a donation is related in a reciprocal way to the tax rate: the higher the rate of the tax credit, the cheaper it is to make a donation. In principle, the lower the after-tax cost of donations, the more people will wish to donate. This is consistent with findings which show that more than half of donors say they would increase their giving if there were better tax incentives.

The logic is simple. People respond to price incentives. Think of that extra big box of cereal you bought at the grocery store because it was on sale or you had a coupon. Donations really aren’t that different. The difficulty for economists, however, is in determining how much of an effect charitable tax incentives will have. 

The Stretch represents a price reduction of about 14% in the after-tax cost of donations and, therefore, has the potential to induce more donations. To determine its impact, we can take a look at the varying levels of donor responsiveness to tax incentives (called donor elasticity) and natural increases in donation levels due to population and income growth. This is discussed in further detail in the discussion paper.

According to the analysis, the Stretch could result in new donations of between $234 million and $1.53 billion (see table below). This is a substantial amount of new investment in the sector!

The challenge now, of course, is to ensure that the Stretch remains on the government’s agenda. Over the last several months, charities across Canada have been contacting their MPs asking them to support the Stretch in the next federal budget. It’s not too late for you to get involved and make your voice heard. Check out our campaign website for more information, tools, and tips to help you reach out to your MP and see who has been putting the Stretch on the map! 

Download the discussion paper (PDF) Tax Incentives for Charitable Donations in Canada with a Focus on the Stretch Tax Credit for Charitable Giving by Brian Emmett and Harvey Sims for further detail on the impact and costing of the Stretch.

 

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