It’s Giving Season: Tax Credits for Charitable Donations vs. Political Contributions

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By: Alexandra Tzannidakis

In the public mind, the idea of tax credits for giving to ‘good causes’ sometimes leads to confusion and conflation of charitable tax credits and political tax credits. The truth is that charities and political causes are legally very distinct concepts (there is no such thing as a political charity) and although an individual can get tax credits for donating to both, the schemes that govern the reporting and calculation of these credits are quite different.

With the holiday season upon us, many Canadians are turning their minds to both good-will and the end of the tax year. The next time you reach for your wallet to make a donation or contribution, think back on this summary of the differences between the two and reflect on what the tax implications will be.

The facts discussed here apply only to donations and contributions made by individuals. This is just a summary, and certain other rules may apply. Continue reading

The Penny Drops

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It is common knowledge that taxation authorities around the world are playing catch up with the developments of new technology. One of the most interesting areas of such ongoing technological development has been the advent of Bitcoin. But at least in the case of Bitcoin it seems that the Income Tax Act’s broad general definitions mean the Department of Finance is ahead of the game for once.

Bitcoin is a type of virtual currency. It is not issued by any central bank nor subject to the monetary policy of any government. It can be purchased using regular currency from others that are prepared to sell some but the ‘printing’ of new currency is limited and based on mathematical algorithms which will cap the total number of bitcoins in circulation. Some vendors accept Bitcoin as payment based on the USD / Bitcoin conversion rate as determined by a number of exchanges and transactions for goods or services are effected by the electronic ‘transfer’ of Bitcoins. Continue reading

Unfiled HST/GST

If you operate a business, whether you are a small business or a large corporation, you must file your HST/GST returns.  If you have unfiled  HST/GST returns you will run into issues with the CRA, and also incur impending interest charges, steep fines and penalties.   Unfiled HST/GST returns should not be taken lightly.  Consult an expert to explore your options.

Beyond the Grave: Balancing Confidence and Flexibility in Gift Planning

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Balancing Confidence and Flexibility in Gift Planning

By:  Adam Aptowitzer

One of the unstated pillars of gift planning is to find ways of assuring a donor that his/her wishes will be carried out after death.  Unfortunately, this can be a double-edged sword. While it may help convince a donor to give now the future needs of a charity can be difficult to anticipate. Consequently, it is important to balance flexibility with respect for the donor’s wishes when discussing gift planning arrangements.

Typically when donors are considering their end of life gift planning they attempt to include a number of strings by which to effectively direct their donations from beyond the grave. Generally speaking, when the donation is large or the gift has personal, sentimental value to the donor (such as artwork) the strings attached will be significant. These strings may even make little sense to implement but are often a reflection of the importance of the gift to the donor. For example, we have seen conditions attached to the gift of artwork with the proviso that it be on continuous display. When the charity consulted experts it became clear that such continuous display would be damaging to the artwork in question.

Charities often feel compelled to include a number of these strings prior to being even asked by the donor as a way to ease into the conversation about gift planning.  At times, this involves placing restrictions on the control of a foundation which may accept the gift and conditions on the use of the funds it holds.

While this may induce a certain level of confidence in the donor so that he or she can have some reasonable level of assurance that their wishes will be respected the fact remains that the charity itself cannot, with certainty, foresee the future. It may be that the charity will need to access the funds of an endowment in case of either an unanticipated emergency or opportunity.  While there exist measures for charities to encroach on the endowment with permission of a court, there is no guarantee that such permission will be forthcoming (see below).

Moreover, the doctrines which allow such encroachment are not available in every circumstance. Consequently, charities should negotiate clauses which allow for encroachment on the capital of a gift notwithstanding the impact this may have on the donor’s confidence. One would hope that so long as the objects of the charity are being pursued donors may wish that the charity has the flexibility to adapt to changing circumstances.

In a recent British Columbia case, a charity received a long-term endowment gift from a donor.  When circumstances arose that the charity saw another use for the money it approached the donor (who was still alive) and asked for their consent to use the money in a different manner. The donor agreed. However, the province took the position, based on a statutory statement of what is likely the law in all provinces, that the purpose for which the property is being used cannot be changed except if it becomes impossible or impracticable to use the funds for the original purpose for which they were donated.

That this can happen should give both the donor and the charity pause in their thinking that all gifts are necessarily for the best long-term pursuit of the charity’s objects. The fact remains that the best intentions of donors and indeed those of the charity may be frustrated by unanticipated events both good and bad and by the abilities of others to interfere with the workings of a charity. Gift planning arrangements should take into account these types of situations and the donor must trust that the charity will, in good faith, act to implement the spirit of the gift for as long as possible but that the charity itself should not be handcuffed to the directions given by the donor.

Drache Aptowitzer lawyers are familiar with these kinds of gift planning arrangements and are available to help in the construction of your documents.

 

Being Audited?

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An audit is the CRA’s way to confirm the truthfulness of the tax return filed. CRA auditors will demand books and records and often a meeting as a way to confirm the return. Not all of these requests are appropriate and we have successfully challenged them in the past. As lawyers, we also provide a different perspective to a CRA position than accountants and even than the auditors who are usually accountants themselves. Our work often resolves an audit before it reaches the next stage.

Objecting to an Amount of Tax

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If the CRA believes you owe more tax it will send you a Notice of Reassessment. It is very important that you file a Notice of Objection on time and to the right office (if you disagree about owing the tax). More importantly, the Notice of Objection must deal with all of the legal and factual issues that the CRA has raised. A successful objection must also canvas the legal principles that you can rely on that the CRA did not raise. Drache Aptowitzer LLP lawyers may be able to help you if miss the deadline and draft a submission to convince the CRA to drop the assessment or otherwise reduce the amount owing.

Unfiled Tax Returns or Missing Information

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Canadians that have unfiled tax returns or information missing on a filed return often cannot sleep at night. The consequences of either of these situations can lead to large financial penalties or criminal charges. Fortunately, there are ways to come clean with the CRA. It is important that this process be handled by a lawyer so that any information conveyed is protected by legal privilege. Drache Aptowitzer LLP lawyers can help guide you through the process.

Back to the Tax Basics

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Lawyers and advisors in the charitable sector often discuss high level tax topics in articles and seminars – but, for many, tax remains a dark and mystical art. Indeed, even those who once professed an understanding of the system may, over time, lose touch with the basics if they do not remain current on developments. This is a somewhat reasonable reaction to the complexity of anything tax related, but ostriches do not have a good track record at avoiding difficulties. A donor’s reason to understand the tax implications of a donation are clear but even charities interested in attracting donations need a thorough understanding of their tax implications.

Fundamentally, there are two major types of tax differences between the Provinces. The first are the actual tax brackets and the second are the tax rates.

A tax bracket is the level of income to which specific percentages are applied to determine tax owing. Each Province has its own determination of how to break up income and the number of these breaks range from 3 to 5. Income is typically taxed on a progressive level so that if a taxpayer’s total income falls in the third bracket he or she would pay the maximum tax in the first two brackets and the applicable tax rate is then only applied to the difference. The same procedure is followed in the Federal level which has its own tax brackets that may or may not coincide with a given Province. These rates are usually (although not everywhere) given a cost of living adjustment every year. An example of how the Federal and Provincial rates brackets work is below.

Example 1

Bracket
Number
Federal
Income Level
Provincial
Income Level
1 0 – $30,000 0 – $35,000
2 $30,001 – $75,000 $35,001 – $65,000
3 Over $75,000 Over $65,000

 

The second area of difference relates to the difference in tax rates charged. For the most part their application is fairly simple except that Ontario and PEI have surtaxes as well. In these cases, the taxpayer calculates her taxes owing and if the calculation is greater than the threshold amount she multiplies the total taxes in that bracket by the surtax rate. Effectively, this has one going through the same mathematical exercise with the results of the first set of calculations.

Taking our previous example and assigning tax rates to them

Example 2

Bracket
Number
Federal
Income Level
Federal
Tax Rate
Provincial
Income Level
Provincial
Tax Rate
1 0 – $30,000 0 % 0 – $35,000 0 %
2 $30,001 – $75,000 15% $35,001 – $65,000 9 %
3 Over $75,000 20 % Over $65,000 11 %

 

Then somebody with taxable income in the year would pay the following amounts of tax.

Bracket Number Federal
Income Level
Federal
Tax Rate
Tax
Owing
Provincial
Income Level
Provincial
Tax Rate
Tax
Owing
1 0 – $30,000 0 %  $0 0 – $35,000 0 % $0
2 $30,001 – $75,000 15% $6750 $35,001 – $65,000 9 % $2700
3 Over $75,000 20 % $1000 Over $65,000 11 % $1650
Total $7750 $4350

 

To this we would apply surtaxes (on the Provincial tax of $4350) like this:

Provincial
Surtax Level
Provincial
Surtax Rate
Tax
Payable
0 – $1,999 0 % $0
$2,000 – $3,000 20% $200
Over $3,000 36 % $486
Total $686

 

The total tax owing then is $7,750 in Federal taxes, $4,350 in Provincial tax, and $686 in Provincial surtax for a grand total of $12,786.

Charitable contributions work to offset the taxes owing. So in a situation where a person earns a dollar and then donates that dollar (ignoring for the purposes of this example the effect of source deductions) the person is taxed at the appropriate rate and then deducts from that tax the relevant amount of the credit. That credit amount is determined as follows.

For the first $200 of donations in the year the taxpayer is entitled to a credit at the lowest Federal and Provincial rates. In our example above it would be 15% Federally and 9 % Provincially. Effectively what this means is that the governments are foregoing their share of tax for the benefit of the charity. Where the donor gives more than $200 the actual tax rate Federally and for most of the Provinces is the highest tax rate (although in some Provinces it is the second highest rate). Where it is the highest rate the relevant government is again foregoing the tax due to it in favour of the charity. In those Provinces where it is the second highest rate the donor is out of pocket the donation plus some additional amount of tax that the Province does not forego. Obviously, in those Provinces with a surtax the credit works to reduce the amount of tax and then, indirectly, the amount of surtax.

These basics are important to understand the effect of donations, not only of cash, but of publicly traded securities, environmental property, cultural property and many of the other technical aspects of donations. Hopefully, with a renewed understanding of these fundamentals both donors and charities will be in a better position to navigate the tax minefield of charitable giving.

By: Adam Aptowitzer

Litigation in Court

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Tax disputes are heard in the Tax Court of Canada. The process prior to actual Court time is useful to move a matter closer to settlement or prepare for a Court hearing. Drache Aptowitzer LLP lawyers have a tradition of success in both areas. Court rules often require that the taxpayer be represented by a lawyer and the chances of success are highest when that lawyer is experienced. Drache Aptowitzer LLP lawyers have been lead counsel for cases heard at the Tax Court of Canada, the Federal Court of Appeal and the Supreme Court of Canada.