Cross Border Philanthropy: The More We Are Different, The More We Are the Same – Part II
[Part I is available here.]
This paper is divided into two sections — Corporate Giving and Individual Giving.
Background and Historical Overview:
Both the American and Canadian charitable tax laws stemmed from Queen Elizabeth I in the early 1600’s. As each country has grown and evolved, these tax laws have changed as well. The basis for the current laws governing Canadian corporate giving were written in the 1930’s and while there have been changes, the core values placed upon corporate giving have not altered much. This is something that I alluded to in my previous article and highlights the most noticeable distinction between the two sets of tax laws – the inherent structures that govern them. The American approach to philanthropy has underpinnings of the capitalist mentality of United States governance, whereas the Canadian charitable system is shaped by a more socialistic view.
In the States, your deductions cannot exceed 50% of your gross income. Canadians can claim tax credit between provincial and federal governments for charitable donations for a combined amount not exceeding 75% of total net income. There have been some changes in recent years to the income tax act as it pertains to charitable giving both in Canada and the United States.
In 2006, the Canadian Federal Government removed the capital gains tax on the donation of publicly traded shares to registered charities. Imagine Canada ( www.imaginecanada.ca/) recently released a study reviewing the implications of this change. For a copy of this report please visit (www.dexterityconsulting.ca/node/85). The study found that by providing philanthropic investors with the opportunity to donate shares without being penalized, they have been more inclined to donate to charities. What has been the challenge for nonprofits eager to capitalize on this opportunity is their ability to accept the donations without too much overhead or administration. As more charities become increasingly donor savvy and as individuals see their charitable dollars as investments, the transfer of stocks between individuals and charities will be easier to explain and process.
It is important to note that for both US and Canadian donors, the stocks that are donated must have been held by the individual for a minimum of one year.
For individual tax filers in both Canada and the US, only those who itemize their donations can receive a deduction. Additionally, in both countries, only those donations that were paid out can be receipted in that year. So, if a pledge of $1,000 is made, but only $300 of it is paid in the tax year being filed, then you can only claim $300. It is very important that both charities and donors understand that a pledge is not the same thing as a donation. In fact, in Canada and the US, approximately 3% of all pledges made are never collected on.
In Canada, unclaimed charitable donations can be carried forward to offset future taxable income.
One final note: if you are donating in-kind services in either Canada or the United States, you cannot claim the value of those services. If you want to claim your services, then you must issue an invoice. The charity will pay you, and you can then turn around and make a cash donation in the same amount. Both governments require a paper-trail for professional services provided in-kind.
In September 2006, Theresa Man wrote a paper entitled, “Corporate Giving: A Tax Perspective.” In this paper she states, “[The Income Tax Act Canada] assumes a “social responsibility” view of the corporation, rather than a “profit maximizing” approach in allowing deduction for corporate charitable contributions because such deductions do not act as an adjustment to accurately measure income for the year, but as a tax incentive or tax expenditure designed to provide further encouragement to corporate charitable giving irrespective of business considerations.”
The section of law pertaining to corporate giving was written in the 1930’s. “In general, a corporation is entitled to a tax deduction from its taxable income, up to a maximum of 75% of its net income, plus 25% of certain taxable capital gains, and 25% of any capital cost recapture.” Under US income tax law Section 170 (e) (3), the amount claimed by a corporation for charitable contributions cannot exceed 10% of the taxable income. In both countries, the law goes on to explain that a charitable deduction cannot exceed the revenue generated by the company.
In Canada, if a company is seen to get more than 80% of the value back in benefits from the donation, then NONE of the donation can be claimed.
For a complete listing of the IRS charitable donation deduction changes and how these can be applied to you and your business please visit: www.irs.gov/newsroom/article/0,,id=164997,00.html.
Individual and corporate donations to political associations (i.e. Conservative Party) are tax deductable in Canada. In the States, they are not. Corporate donations to political parties in the States are tax deductable.
In both Canada and the US, corporations can carry forward unused donation deductions, which must be claimed within five years. However, sponsorships in Canada must be claimed in the year that the sponsorship was contracted.
In both countries, only qualified charities can receipt donations. For a list of qualified agencies, please visit www.cra-arc.fc.ca in Canada or http://www.irs.gov/ in the US. It is up to the donor to ensure that the charities that they are supporting are legitimate. In Canada, a case is pending around the Banyan Tree Foundation and the incorrect receipting to their donors and subsequent filing of donations and deductions received. In some cases, thousands of dollars in back taxes are owed and it is falling on the shoulders of the donor, not of the foundation.
The most important thing for donors and charities to note is that when it comes to charitable receipting and income tax, receiving appropriate legal and tax advice is paramount. The government websites for both the US Treasury and the Canada Revenue Agency are chock full of information for the individual and corporate donor. The downside to these web sites is that there is information overload. The best website I have found to help navigate the charitable tax waters is http://www.carters.ca/. This law firm is affiliated with Gammon and Grange in Washington, DC.
1 Department of the Treasury, Charitable Contributions, Publication 526, pg. 3, 2007
2 Canada Revenue Agency, Giving to Charity: Information for Donors, January, 2008, http://www.cra-arc.gc.ca/tx/chrts/dnrs/svngs/menu-eng.html
3 This percentage is based on personal observation. I am unsure if there is other scientific statistical documentation to support my claim.
5 Man, Thersa; Corporate Giving: A Tax Perspective, pgs. 2-3, September 2006, www.charitylaw.ca/articles.
Ibid., pg. 5
6 Department of the Treasury, Charitable Contributions, Publication 526, pg. 3, 2007