On December 7, 2015, the Honourable Bill Morneau, Minister of Finance (“Minister”), announced changes to the federal personal income tax rates for individual taxpayers as of January 1, 2016. The announcement was accompanied by the release of a Notice of Ways and Means Motion to Amend the Income Tax Act and a Backgrounder containing additional details on related changes to the federal donation tax credit. Bill C-2, An Act to Amend the Income Tax Act, was subsequently tabled in the House of Commons by the Minister on December 9, 2015 to amend the formula currently used to calculate the donation tax credit in subsection 118.1(3) of the Income Tax Act (“ITA”).
The current formula for the donation tax credit permits a non-refundable credit of 15% for the first $200 of a taxpayer’s donations and 29% for the amount of donations over $200 up to 75% of the individual’s net income. Twenty-nine percent is the current top tax rate for those with income above $138,586, but the proposed amendments will result in changes to the current tax rates, including a tax rate of 33% applying to income over $200,000. The Department of Finance’s Backgrounder states that these amendments will “allow higher-income donors to claim a 33-per-cent tax credit on the portion of donations made from income that is subject to the new 33-per-cent marginal tax rate.” Although taxpayers can generally carry forward and claim donations made in the previous five years, the Backgrounder further states that the “change will be effective for the 2016 and subsequent taxation years.”
While these amendments were presumably intended to neutralize any negative impact of the increased tax rate on donations from high income earners in 2016 and beyond, it will be interesting to see how the Canada Revenue Agency (“CRA”) will implement the changes once they become law. In particular, since taxpayers do not currently have to provide all supporting documents at the time of filing, it remains to be seen whether the increased benefit to high income earners will also be accompanied by increased scrutiny of their tax returns in order for CRA to ensure that the donations claimed at the 33% tax rate do not pertain to previous tax years.