Tax Treatment of Charitable Contributions in Canada: Theory, Practice and Reform

Abstract:     
In Canada, tax recognition for contributions to charitable organizations takes four separate forms: (1) a deduction in computing the donor's net income from a business or property where the contribution is made for the purpose of gaining or producing income from the business or property; (2) a deduction in computing taxable income where a corporation makes an eligible gift to a qualified donee; (3) a non-refundable credit where an individual makes an eligible gift to a qualified donee; and (4) a full or partial exemption from capital gains tax otherwise payable where the donor makes a gift of specific kinds of property to a qualified donee. This paper reviews each of these approaches in light of a theoretical analysis of the rationale for tax recognition of charitable contributions.

Part II considers different rationales and approaches for the tax recognition of charitable contributions, considering deductions theoretically appropriate where a gift is made for the purpose of gaining or producing income, but otherwise inappropriate. Concluding that tax recognition for charitable contributions is best justified as a way of subsidizing both the quasi-public goods and services provided by charitable organizations and the social and cultural pluralism that these organizations advance, this part presents a normative argument for the kinds of recipients donations to which should be eligible for tax recognition, the kinds of contributions that should qualify for this recognition, and the form that this recognition should take. Part III reviews statutory rules and judicial decisions governing the tax treatment of charitable contributions in Canada, examining eligible recipients, qualifying gifts, and different methods of tax recognition: the deduction for corporate donations, the credit for individual donations, and special rules for gifts of property that has appreciated in value. In light of the theoretical approach proposed in the second part of the paper, Part IV concludes by recommending specific reforms to the current statutory scheme.

Keywords: Income tax, charitable contributions

JEL Classifications: H24, H25, H30, H41

Working Paper Series