Frequently Asked Questions About the Stretch
- What is the Stretch Tax Credit?
- Why do we need the Stretch Tax Credit?
- Isn’t there already a Super Credit for new donors?
- How much difference would the Stretch Tax Credit make, and how much would it cost the government?
- Who would benefit from the Stretch?
- If there are concerns about the cost, is there any way of limiting the Stretch Tax Credit?
- Could the Stretch Tax Credit be implemented on a temporary basis to test how effective it is at achieving its goal of changing donors’ behaviour?
- How would we track the Stretch Tax Credit?
- How would we ensure that people are not abusing it?
- How would the Stretch Tax Credit apply in the case of spousal transfer of tax credits?
- Is the Stretch Tax Credit open to manipulation by people who, for example, reduce their donations to zero the year before it comes into effect, and then claim it on their entire donation the next year? Or those who skip years to build up their donations?
- How will Canadians be made aware of the Stretch Tax Credit?
What is the Stretch Tax Credit?
The Stretch Tax Credit is a proposal to increase the federal charitable tax credit on giving that exceeds a donor’s previous highest giving level. The tax credit would increase from 15% to 25% for eligible amounts below $200, and from 29% to 39% for eligible amounts above $200.
Why do we need the Stretch Tax Credit?
Charities are one of the fastest growing segments of the economy as the demand for their services continues to rise. If communities and individuals are to continue to benefit from the services and supports that charities provide, we need to ensure that charities are properly financed. We can achieve this in part by providing Canadians with an extra incentive to stretch their giving, as the proportion of Canadian tax filers claiming charitable donations is declining and the amount they collectively donate has gone down. Research shows that more than half of donors would increase their giving if there were better tax incentives. The Stretch will encourage Canadians to think strategically about their giving and to give a bit more – to “stretch” their giving – wherever possible.
Isn’t there already a Super Credit for new donors?
In 2013, the federal government introduced the First-Time Donor’s Super Credit. This boosts the federal charitable tax credit by 25 points (to 40% for donations below $200, and 54% for donations above $200) for eligible donors. But the Super Credit is only a temporary measure – it will expire after 2017 – and only those without a history of claiming donations can receive it.
The Stretch Tax Credit, on the other hand, would be available to help all donors stretch their giving year after year, including those with a long history of giving, involvement, and commitment.
How much difference would the Stretch Tax Credit make, and how much would it cost the government?
The Stretch Tax Credit is an innovative approach that has not, to our knowledge, been tried anywhere else, making projections difficult.
The Chief Economist for the Charitable and Nonprofit Sector has studied the impact of the Stretch Tax Credit under a number of scenarios. Our most conservative estimate is that the Stretch would generate $234 million a year in new giving. Using the same method by which the Super Credit was costed, the incremental cost to the federal government would be $40 million a year.
Some key points to remember:
- The Stretch will only trigger a federal government investment if people give more than they have in the past.
- Even if the figures are higher than our conservative estimate, the Stretch remains an extremely efficient way for the federal government to leverage and catalyze vital community investment across Canada.
Who would benefit from the Stretch?
An increase in donations would generate new investment in communities across Canada and around the world, helping charities prevent and alleviate social problems and greatly enhancing quality of life through increased access to cultural, learning and sporting activities.
Charities of all sizes and in every region will benefit from greater support, particularly those that rely more on a large number of smaller donations to fulfill their mission.
Average Canadians and their families will benefit from reduced income taxes. Previous changes to charitable tax credits, such as those encouraging large donations of shares and securities, have primarily benefited wealthier Canadians. The Stretch Tax Credit will enable working families and middle-income Canadians in particular to give more to their charities of choice.
If there are concerns about the cost, is there any way of limiting the Stretch Tax Credit?
The cost estimates prepared by our Chief Economist are based on a Stretch Tax Credit with no cap. If the cost to the federal government needs to be capped, we have in the past suggested that the Stretch Tax Credit could be limited to donations below $10,000 a year. That is, once an individual reaches that donation level, increased donations would no longer attract the Stretch Tax Credit. This would, in effect, put a lifetime cap on how much benefit an individual could receive, but would also cap the incentive to give more for those whose donations already exceed $10,000.
Could the Stretch Tax Credit be implemented on a temporary basis to test how effective it is at achieving its goal of changing donors’ behaviour?
While it would be technically possible to implement the Stretch Tax Credit on a temporary basis, it would not be advisable to do so as it will take time for taxpayers to become fully aware of the Stretch Tax Credit, and for behaviour to be influenced. Too short a trial period could result in eliminating the Credit just as it is gaining traction.
If the Stretch Tax Credit is not effective in meeting its public policy objectives, it will not cost the Treasury anything. A sunset clause would be redundant in this situation.
How would we track the Stretch Tax Credit?
Data from tax forms could be collated – as it is in many other instances – to determine what percentage of taxpayers claim charitable tax credits, what percentage claim the Stretch Tax Credit, and the overall trend in giving (both aggregate amounts claimed, and the median and mean donations). This information would allow policy-makers to determine how successful the Stretch Tax Credit is at meeting its public policy objectives.
How would we ensure that people are not abusing it?
The Canadian income tax system relies on self-assessment and honesty, backed up by the prospect of random audits and re-assessments. There is no reason to believe that the Stretch Tax Credit would be more open to abuse than any other aspect of the income tax system
We have recommended the establishment of individual baselines, based on donations claimed in the year prior to implementation of the Stretch Tax Credit. This would essentially eliminate the possibility of artificially lowering one’s giving after implementation, in order to take undue advantage of the Stretch Tax Credit in subsequent years.
How would the Stretch Tax Credit apply in the case of spousal transfer of tax credits?
The Stretch Tax Credit would only be available to the individual in whose name an official tax receipt is issued. Although CRA administratively allows spouses to claim each other’s donation receipts, the Stretch Tax Credit would not be shared between spouses.
Donation receipts would still be able to be claimed by either spouse. This restriction would only apply to the Stretch Tax Credit.
Is the Stretch Tax Credit open to manipulation by people who, for example, reduce their donations to zero the year before it comes into effect, and then claim it on their entire donation the next year? Or those who skip years to build up their donations?
We do not believe that Canadians are likely to play games and rearrange their charitable giving – thus punishing the charities they support – to gain a disproportionate tax benefit. The establishment of an individual baseline, based on an individual’s giving prior to implementation of the Stretch Tax Credit, would ensure that an individual’s actual giving history is taken into account.
To some extent, people are already able to manipulate the system, by accumulating their receipts or by making a larger donation one year (qualifying for the 29 percent tax credit) as opposed to smaller donations (that only accrue the 15 percent tax credit) over a number of years. Our proposal only allows the Stretch Tax Credit to be claimed in the year the donation is made; where people skip years of giving, their donations could also be averaged to determine eligibility for the Stretch Tax Credit.
(For example, if an individual’s baseline annual donation was $100 and they gave nothing in the first year of the Stretch, but then $200 in the second year, this could be treated as two $100 donations and thus no Stretch Tax Credit would apply.)
If a lifetime cap were put in place, this would also limit any potential abuse.
How will Canadians be made aware of the Stretch Tax Credit?
There are many avenues available for educating Canadians about the Stretch Tax Credit.
- The federal government already runs publicity campaigns and has a website devoted to promoting and explaining the various tax credits available to Canadians. The Stretch Tax Credit could be included in these efforts.
- CRA produces numerous guides to assist individuals in filing their income tax. These guides already contain information on tax credits and the Stretch Tax Credit could be included.
- Financial planners and tax preparation experts can be made aware of the Stretch Tax Credit and could then, in turn, educate their clients. This information would also be available in tax preparation software.
- Charities will have a vested interest in promoting the Stretch Tax Credit directly to existing and potential donors. These grassroots awareness campaigns can be extremely effective.
- While it would require some investment, the Canada Revenue Agency could, in Notices of Assessment, provide updates to individuals about their eligibility for the Stretch Tax Credit. This would be similar to existing efforts to make people aware of their RRSP contribution eligibility.