Source: http://www.fin.gc.ca/taxexp-depfisc/2014/taxexp1402-eng.asp
Timestamp: 2016-06-01 01:37:37
Document Index: 441287887

Matched Legal Cases: ['art 2', 'art 2', 'art 1', 'art 1', 'art 2', 'art 1', 'art 3', 'art 4', 'art 4', 'art 4', 'art 5', 'art 5', 'art 6', 'art 7', 'art 7', 'art 4', 'art 7', 'art 8', 'art 8', 'art 9', 'art 9', 'art 10', 'art 11', 'art 12', 'art 13', 'art 6', 'art 14', 'art 14', 'art 2', 'arts 6', 'art 14']

Archived - Tax Expenditures and Evaluations 2014 - Part 2: Tax Evaluations and Research Reports	Skip to content
Archived - Tax Expenditures and Evaluations 2014 - Part 2: Tax Evaluations and Research Reports
The charitable sector is an important contributor to Canadian society, playing a vital role in providing valuable goods and services to Canadians in areas such as health care, education, poverty relief and the protection of the environment. In recognition of this important role, Canadians support charities directly by donating cash and goods and by volunteering their time. Governments in Canada also provide assistance to charities through direct grants and contributions as well as by way of a number of tax preferences targeted to the charitable sector.
A key component of the tax-based assistance provided by governments in Canada to the charitable sector is the Charitable Donation Tax Credit. Canadians who donate to registered charities and other qualified donees can claim a non-refundable credit in respect of their charitable donations on both their federal and provincial personal income tax returns. By lowering the after-tax cost of giving, these credits encourage people to donate more to charities and support the financing of the charitable sector. In 2012, Canadians claimed the federal Charitable Donation Tax Credit in respect of donations worth $8.6 billion.
This report presents an evaluation of the effectiveness of the federal Charitable Donation Tax Credit. The focus of the evaluation is on the ability of the credit to encourage individuals to donate more, taking into account the cost of providing the credit. This analysis was prepared subsequent to the Government’s commitment, made in response to a recent recommendation of the House of Commons Standing Committee of Finance, to redouble its ongoing efforts to monitor charitable giving trends and characteristics.1 Section 2 of this report provides background information on the federal Charitable Donation Tax Credit and other personal income tax measures intended to encourage charitable donations by individuals. Section 3 reviews the trends in charitable giving in Canada between 1995 and 2012 based on tax return information. Section 4 analyzes the effectiveness of the Charitable Donation Tax Credit, on the basis notably of an in-depth review of available statistical studies of the impact of tax incentives on charitable donations.
This section describes the key federal personal income tax measures intended to encourage charitable donations by individuals, namely the Charitable Donation Tax Credit and the capital gains exemption for donations of certain types of assets. Other federal tax preferences are targeted at the charitable sector, notably the income tax exemption for registered charities and other qualified donees and the deductibility of charitable donations by corporations in calculating their corporate taxable income. These tax measures fall outside the scope of this report and are therefore not reviewed in this report.
2.1 Charitable Donation Tax Credit
Tax incentives for charitable donations in Canada were first introduced with the Income War Tax Act, 1917 when a deduction was implemented for “amounts paid by a taxpayer during the year to the Patriotic and Red Cross Funds, and other patriotic and war funds approved by the Minister”.2 Several modifications were made to the tax treatment of charitable donations over the years, most notably as part of the 1987 tax reform when the then-existing deduction for charitable donations made by individuals was converted into a tax credit effective for the 1988 taxation year. This change was motivated in part by a desire to ensure that the amount of tax assistance provided in respect of charitable donations was independent of the donor’s income level.3
Since 1988, charitable donations made by individuals to registered charities and other qualified donees have therefore been eligible for a non-refundable tax credit that individuals can claim to reduce their federal tax payable. In 2015, the credit available in respect of the first $200 of donations claimed in a year is calculated at the lowest personal income tax rate (15% in 2015), while the credit in respect of donations in excess of $200 is calculated at the highest personal income tax rate (29% in 2015). Relatively few donors are subject to the highest personal income tax rate of 29%, which implies that most donors who donate over $200 can obtain, for the amount that exceeds $200, a credit that more than offsets the federal tax payable on the income that financed that portion of their donations. The credit is available for donations made in a year up to a limit of 75% of the donor’s net income for the year (100% in the year of a donor’s death and the immediately preceding year), and donations not claimed in the year they were made can be carried forward and claimed in one of the subsequent five years. An individual can claim the credit in respect of his or her own donations as well as the donations made by his or her spouse or common-law partner. This pooling of donations could permit spouses or partners to exceed the $200 threshold, and therefore can allow the spouses or partners to obtain a higher credit than if each were claiming the credit separately.
Only donations made to registered charities and other qualified donees are eligible for the tax credit. Registered charities include charitable organizations as well as public and private foundations, while other qualified donees include other entities such as Canadian municipalities or the United Nations and its agencies that, while not registered charities, have the authority under the Income Tax Act to issue official donation receipts.4 To qualify as a registered charity, an organization must pursue at least one of four purposes: 1) relief of poverty (e.g., food banks, soup kitchens, low-cost housing units); 2) advancement of education (e.g., colleges, universities, research institutes); 3) advancement of religion (e.g., places of worship, missionary organizations); or 4) other purposes beneficial to the community that the courts have recognized as charitable at law (e.g., promotion of health and the arts, protection of the environment). There are over 86,000 registered charities in Canada.
All provinces and territories provide tax credits for donations with similar rules as for the federal Charitable Donation Tax Credit, although at different credit rates. Table 1 shows the provincial and territorial credit rates for 2015 as well as the combined federal-provincial/territorial credit rates for each province or territory. Table 1
Charitable Donation Tax Credit Rates, by Province and Territory, 2015
Federal and provincial/territorial rates
Combined federal-provincial/territorial rates
First $200 of
9.80-10.78
16.70-18.37
24.80-27.78
45.70-47.37
5.05-7.88
11.16-17.41
20.05-22.88
40.16-46.41
7.04-7.39
12.76-13.40
22.04-22.39
41.76-42.40
Note: Based on information available as of December 2014.
1 The range reflects the fact that the effective credit rate can be higher than the statutory rate for provinces and territories that impose surtaxes. Surtaxes increase the value of the credit as they are calculated as a percentage of provincial/territorial income taxes net of the provincial/territorial Charitable Donation Tax Credit.
2 The combined federal-provincial rate for Quebec is adjusted to reflect the 16.5% federal tax abatement.
Sources: Canada Revenue Agency; Department of Finance calculations.
In response to an extended review of tax incentives for charitable giving in Canada by the House of Commons Standing Committee on Finance (see footnote 1), the federal government introduced in Budget 2013 the temporary First-Time Donor’s Super Credit to encourage new donors to give to charity. This credit supplements the Charitable Donation Tax Credit with an additional 25% tax credit for a first-time donor on up to $1,000 of cash donations. In total, a first-time donor is entitled to a 40% federal credit on cash donations of $200 or less and a 54% federal credit for the portion of donations over $200 but not exceeding $1,000. The additional credit applies to cash donations made on or after March 21, 2013 and may be claimed only once in a taxation year between 2013 and 2017.
2.2 Capital Gains Exemption for Donations of Certain Eligible Assets
Individuals donating certain assets that have appreciated in value can be eligible for an exemption from tax in respect of the capital gain realized on the donated assets. Assets eligible for a capital gains exemption include publicly listed securities and certain exchangeable shares, certified cultural property, and ecologically sensitive land. This exemption, which is also available for provincial income tax purposes, can be claimed in addition to the Charitable Donation Tax Credit, further reducing the after-tax cost of donating eligible assets.5
In addition to the capital gains exemption, donations of certified cultural property and ecologically sensitive land can fully be claimed as credit on up to 100% of net income. The carry-forward period for the unclaimed portion of donations of ecologically sensitive land is ten years, instead of five years for other gifts.
2.3 After-Tax Price of Charitable Donations
The tax incentives described in Sections 2.1 and 2.2 have the effect of lowering the after-tax price of giving. Chart 1 shows how the after-tax price of a $1 donation has evolved since the introduction of the federal Charitable Donation Tax Credit in 1988. The after-tax price is calculated under the assumption that the $1 donation would be creditable at the highest federal and provincial credit rates (i.e., 29% for the federal credit).
Variations in the after-tax price of cash donations at the top credit rate since 1988 have been limited. Taking into account the federal credit and the average credit for the provinces and territories, the after-tax price declined from 54 cents per dollar of cash donations in 1988 to 48 cents per dollar by 1996.6 This decline was due to increases in provincial top income tax rates, as well as to the introduction of or increases in federal and provincial surtaxes. The after-tax price increased to 54 cents per dollar by 2002, reflecting federal and provincial tax rate reductions implemented in the late 1990s and early 2000s, and has remained relatively stable at that level since then.
Chart 1 also shows the after-tax price of donating $1 worth of publicly listed securities to illustrate the impact of the exemption from capital gains tax for gifts of eligible assets. In 1997, capital gains realized on gifts of publicly listed securities were first made eligible for a reduced inclusion rate of one half the normal capital gain inclusion rate (which was then three-quarters). As a result, the after-tax price of gifts of such securities was 39% lower than the after-tax price of cash donations. The gap between the after-tax prices of cash and asset gifts narrowed as of 2000, in large part due to the reduction in the inclusion rate for capital gains from 75% to 50%. Gifts of publicly listed securities were made fully exempt from capital gains tax in 2006, and since then the after-tax price of such gifts has been 43% lower on average than the after-tax price of cash donations.7
Chart 2 shows the after-tax prices of donations for donors resident in selected provinces (not including the impact of the federal Charitable Donation Tax Credit). After-tax prices of donations may vary significantly from one province to another. Outside of the territories, the after-tax price ranges from a high of 87 cents per dollar of donations in Newfoundland and Labrador to a low of 76 cents in Quebec in 2015. There have also been significant movements over time, which reflect the different changes in tax rates and reforms that were implemented by provinces. For example, Quebec converted its charitable donation deduction into a tax credit in 1993 and reduced its threshold for donations eligible for the highest tax credit rate from $2,000 to $200 in 2000. Alberta increased its tax credit rate from 12.75% to 21% in 2007. Chart 1
After-Tax Price of a $1 Donation, 1988 to 2015
Notes: This chart shows the after-tax price of a $1 donation assuming the donor's total donation exceeds $200 ($250 between 1988 and 1993). For ease of illustration, the after-tax price of publicly listed securities as illustrated assumes that the entire donation is considered a capital gain. The after-tax prices of donations of ecologically sensitive land and cultural property are equal to donations of publicly listed securities but the capital gain exemptions for the donation of these assets were implemented in different years (1977 for cultural property and 2000 for ecologically sensitive land). The provincial average price is weighted by the share of total donations claimed in each province. Based on information available as of December 2014.Source: Department of Finance Canada.
After-Tax Price of a $1 Donation, by Province (Excluding Federal Tax Incentives), 1988 to 2015
Notes: Prior to 2001, the after-tax price of a $1 donation is calculated based on the tax-on-tax system for provinces other than Quebec. The average of "other provinces" is an unweighted average. Based on information available as of December 2014.Source: Department of Finance Canada.
2.4 Fiscal Cost of Tax Incentives for Individual Donations
The fiscal cost for the federal government of tax incentives for charitable donations by individuals is estimated at more than $2.5 billion in 2014, 98% of which is comprised of the cost of the federal Charitable Donation Tax Credit. The cost of the capital gains exemption for donated assets is estimated at $52 million, while the cost for the First-Time Donor’s Super Credit is estimated at $7 million. A detailed breakdown of the overall fiscal cost of federal tax incentives for charitable donations for 2009 to 2014 is provided in Table 2.
Tax Expenditures Associated With Federal Tax Incentives for Charitable Donations by Individuals, 2009 to 2014
An “S” indicates that the absolute value of the tax expenditure is less than $2.5 million.
Charitable Donation Tax Credit (excluding donations of assets eligible for the capital gains exemption)
3. Trends in Charitable Donations in Canada
This section presents statistics on recent trends in charitable giving in Canada. These statistics were compiled from information reported on federal individual income tax returns from 1995 to 2012.
The number of individuals claiming the federal Charitable Donation Tax Credit increased significantly between 1998 and 2005 but has since been relatively stable at about 5,780,000 on average (Chart 3). The number of claimants according to tax return information is significantly smaller than the number of donors as estimated from direct surveys. For instance, based on results from the periodic Canada Survey of Giving, Volunteering and Participating, Statistics Canada estimates that close to 23.8 million Canadians, or roughly 85% of the Canadian population aged 15 and over, made a financial donation in 2010.8 The gap between the number of donors estimated by surveys and the number of individuals who claim the Charitable Donation Tax Credit can be attributed to several factors. Certain donations reported in surveys are not eligible for the credit, such as donations made to non-profit organizations or to other organizations that are not registered charities or other qualified donees. A tax receipt may not have been requested by donors for certain donations, depending on the ways or venues where the donations are made (e.g., door-to-door soliciting, certain fundraising events). Other reasons may explain why individuals who made eligible donations and were issued a tax receipt would not report these donations on their tax returns. In particular, individuals who cannot benefit from the tax credit because they and their spouse or common-law partner have no tax payable have little incentive to report their gifts on their tax returns. Individuals with positive amounts of tax payable may also neglect to report their donations on their tax returns or lose their tax receipts. Finally, the pooling of donations by spouses and partners and the ability to claim the credit in a given year in respect of donations made in any of the previous five years could both reduce the number of distinct individuals who claim the credit in any given year.
Number of Claimants of the Charitable Donation Tax Credit, 1995 to 2012
Source: T1 return data.
The proportion of tax filers who claimed the Charitable Donation Tax Credit declined from 25.6% in 1995 to 21.5% in 2012 (Chart 4). This decline has raised concerns among stakeholders. However, as shown in Chart 4, part of the decline in the rate of claimants can be explained by the decline in the share of tax filers who have net tax payable and who can therefore benefit from the Charitable Donation Tax Credit. The share of tax filers with net tax payable was significantly lower in 2012 than in 1995, which reflects in part the tax reductions that were introduced at the federal level over that period. When expressed as a share of tax filers with net tax payable (the dotted line in Chart 4), the rate of claimants remained stable between 1997 and 2010, with declines being observed in two short periods only (before 1997 and after 2010).
Charitable Donation Tax Credit Claimants as a Share of Tax Filers and as a Share of Tax Filers With Net Federal Tax Payable, 1995 to 2012 Note: Net federal tax payable is determined before the application of the Charitable Donation Tax Credit. Source: T1 return data.
3.2 Charitable Donations Claimed
Charitable donations reported by individuals claiming the federal Charitable Donation Tax Credit totalled $8.6 billion in 2012 (Chart 5). This is 5.9% lower in real terms than the peak observed in 2007, with most of the decline having taken place during the last economic recession. The decline since 2007 in the total amount of donations claimed as credit is mainly associated with a decrease in the average value of donations in constant dollars as the number of claimants has been relatively stable.
As is the case for the number of donors, the total amount of charitable donations claimed is much smaller than the total amount of donations estimated by Statistics Canada’s Canada Survey of Giving, Volunteering and Participating. In the survey, total financial donations in 2010 were estimated at $10.6 billion, which is $2.1 billion or 25.3% higher than total donations claimed in that year.9 Results from the survey also suggest that total financial donations increased by 1.7% in real terms between 2007 and 2010, while donations claimed on tax returns declined by 3% over the same period.10 These discrepancies may be explained by the same factors that may explain the differences between the number of donors based on survey data and the number of individuals claiming the tax credit as per tax return data. In addition, tax return data are likely more precise than survey data, for example because survey respondents may not always remember exactly how much they donated over the survey period. Chart 5
Charitable Donations Claimed as a Tax Credit, 1995 to 2012 Notes: Excludes donations made as part of tax shelter arrangements. Includes donations made in the year of death. Sources: T1 return data; Department of Finance calculations.
Table 3 provides a breakdown of charitable donations claimed on tax returns by type of donation. In 2012, cash donations and gifts of assets not eligible for the capital gains exemption accounted for $8.1 billion or 94% of total donations claimed as credit, while gifts of assets eligible for the capital gains exemption accounted for close to $500 million or 6% of the total.
Charitable Donations Claimed on Tax Returns, by Type of Donation, 2012
Cash and assets not eligible for the capital gains exemption
Assets eligible for the capital gains exemption
Notes: Totals may not add up due to rounding. Figures assume that the full amounts of gifts were claimed in the year they were made. Cash donations and gifts of assets not eligible for the capital gains exemption cannot be separated due to data limitations. This category also includes gifts of depreciable properties not included in the above categories.
Sources: T1 return data; Environment Canada; Department of Finance calculations.
3.3 Donations and Sources of Revenues by Type of Charity
Except for the preferential treatment granted to gifts of ecologically sensitive land and certified cultural property, charitable donations benefit from the same level of tax assistance regardless of the type of charity to which the donations are made.11 Chart 6 shows the distribution of tax-receipted donations by charity subsector, based on information reported by registered charities to the Canada Revenue Agency.12 In 2012, tax-receipted donations made to religious charities accounted for 37% of the total, while charities in the welfare and health subsectors accounted for 28.5% and 14.6% of total tax-receipted donations respectively. Although religious charities accounted for the largest share of total donations, their share has decreased significantly since 1995.
Distribution of Tax-Receipted Donations by Charity Subsector, 1995 and 2012 Note: Charities are organized into subsectors according to the conventional T3010 classification by charity type. Source: Registered Charity Information Return (T3010) data.
Chart 7 shows the composition of the total revenues of charity subsectors by source. Government contributions are the main source of funding for most subsectors, accounting for 68% of the total revenues of registered charities in 2012. However, the composition of total revenues differs significantly across subsectors. In particular, religious and welfare charities rely on tax-receipted donations for 47% and 15% of their revenues respectively. Charities in the health and education subsectors—groups that include hospitals and universities—receive significant government funding, and as such tax-receipted donations represent only 2% on average of their total revenues. Chart 7
Total Revenues of Charity Subsectors by Source, 2012 Note: Other revenues include non-tax-receipted gifts, transfers from other charities, rental and investment income, sale of assets, memberships and other. Source: Registered Charity Information Return (T3010) data.
4. Effectiveness of the Charitable Donation Tax Credit
Governments provide support to the charitable sector in recognition of its valuable contribution to society. In particular, tax incentives for charitable donations are intended to provide support to charities by encouraging individuals to fund the operations of these organizations through private donations. Therefore, tax incentives for charitable donations will be viewed as effective if they contribute positively to the financing of charities, after accounting for the cost of providing such tax incentives. This can be referred to as the “price effectiveness” of tax incentives for charitable donations.
Price effectiveness is a key aspect of the effectiveness of the Charitable Donation Tax Credit, and is the topic of the next three sections. Section 4.2 elaborates on the definition of price effectiveness and discusses a number of issues that need to be considered in determining whether the Charitable Donation Tax Credit is price effective, in particular the price elasticity of donations. Section 4.3 reviews issues that must be addressed in estimating the price elasticity of donations, while Section 4.4 reviews the associated empirical literature.
4.2 Definition of Price Effectiveness
Price effectiveness in relation to the Charitable Donation Tax Credit means the extent to which the credit is effective at increasing donations to the charitable sector by reducing the after-tax price of giving, considering the costs associated with the credit. This concept is similar to the concept of cost effectiveness in that it translates the need to maximize output (in this case, donations to charities) while minimizing cost. The expression “price effectiveness” is preferred, however, to emphasize that the credit operates by reducing the after-tax price of giving.
To be price-effective, the Charitable Donation Tax Credit should generate a net benefit to society, that is, the value to society of charitable activities that are funded by the additional donations generated by the credit should be greater than the cost to society of providing the credit. Furthermore, the Charitable Donation Tax Credit must be price-effective relative to the other options available to governments to achieve the same outcomes (i.e., direct government funding of charities, direct provision of charitable goods and services by governments).
The following reviews some issues that need to be considered in determining whether the Charitable Donation Tax Credit is price-effective as so defined.
The first step in assessing whether the Charitable Donation Tax Credit is price-effective involves determining the extent to which charitable activities are funded by the additional donations generated by the credit, and evaluating the resulting benefits to society. However, quantifying the benefits to society of additional charitable activities is a very complex undertaking; in practice, most analyses of the price effectiveness of tax incentives for charitable donations have focused on the narrower question of quantifying the amount of additional charitable donations that can be attributed to such tax incentives. This involves estimating the price elasticity of charitable donations, that is, the extent to which donations increase when the price of giving is reduced. Since a decrease in the price of giving should result in an increase in charitable donations, the price elasticity of giving is expected to be negative.
In general, it is considered that the price elasticity of giving should be at least as high as one (in absolute value) for tax incentives for charitable donations to be price-effective. That is, tax incentives should generate additional charitable donations that are at least as large as the tax revenues being forgone because of the tax incentives, since otherwise direct funding of the charitable sector by the government would result in more funding being provided to that sector at an equal or lower cost. Other factors, however, should also be considered in determining whether a tax incentive is price-effective (for example, the factors discussed in the rest of this section and the next section), and therefore a tax incentive could be found to be effective or not effective overall even though the price elasticity of giving would be lower or higher than one (in absolute value). As such, this particular condition could be seen as providing some useful guidance as to whether the Charitable Donation Tax Credit is effective or not, but should not be considered determinative on its own.
Impact of Direct Government Funding of the Charitable Sector on Private Donations
Another factor that needs to be accounted for in assessing the price effectiveness of a tax incentive for charitable donations is the possibility that direct government funding of charities crowds out private donations.13 Government crowd-out may arise in one of two manners.14 First, potential donors may see less need to donate to charities when the government increases its funding of the charitable sector. Second, charities that receive government funding may see less need to raise donations from private individuals, especially if fundraising activities are costly and only ancillary to their charitable activities.
Empirical evidence of the existence of a net crowding out effect of government funding on private donations is still relatively limited. Results for Canada obtained by Andreoni and Payne (2013a) suggest an almost dollar-for-dollar government crowd-out, which is largely attributable to reduced fundraising by charities. Similar results are obtained by Andreoni and Payne (2011) using data on U.S. charities. Andreoni and Payne (2013a) further observe that government funding crowds out funding from foundations and other charities, which is consistent with the fact that these groups of donors are generally well-informed about the financial needs of recipient charities, and may respond to government funding by reallocating funds to other charities. Andreoni and Payne (2013b) also find that the level of crowding out varies across charity sectors, being large for social welfare charities but non-existent for health, overseas and relief organizations.
Government funding of the charitable sector could potentially also have the opposite effect, that is, it may crowd in donations, for instance by signalling to potential donors that the charities that receive government funding would make good use of their donations. Indeed, the results obtained by Andreoni and Payne (2013a) indicate that tax-receipted gifts are crowded in by government funding, but that this effect is more than offset by the crowd-out that is due to reduced fundraising activities, such that the net impact of government funding is to crowd out individual donations.
The crowding out of private donations by direct government funding must be accounted for in assessing the price effectiveness of charitable tax incentives. Government crowd-out increases the price effectiveness of charitable tax incentives relative to direct government funding (and vice-versa in the case of government crowd-in), as it increases the cost for the government of achieving a given level of funding, a point which is further discussed below. Government crowd-out must also be taken into account when estimating the price elasticity of charitable donations, otherwise the price elasticity could be incorrectly estimated.
Targeting of Tax Incentives
What is being donated may vary (cash or assets), the manner to donate may vary (e.g., donations at fundraising events or through automatic monthly withholding from paycheques) and the recipients of gifts may undertake charitable activities in a broad range of sectors. These factors may influence the price elasticity of donations, which would mean that a tax incentive could be more or less price-effective for each type of donation that qualifies for the incentive (e.g., donations through automatic monthly withholding may adjust more slowly to a change in the tax credit as donors may not readily update their withholding arrangements). Determining whether a tax incentive is targeted at the most price-elastic forms of donations would require estimates of the price elasticity for different forms of donations, including those that do not qualify for the tax incentive (such as donations for which no tax receipts are issued). Such information is difficult to obtain in practice due to data limitations and the fact that the prices of donations that are not eligible for a tax incentive would generally not vary across individuals. Some of the studies that have estimated the price elasticity of donations for different categories of donors or donees are reviewed in Section 4.4.
The non-refundable feature of the Charitable Donation Tax Credit gives rise to a similar issue, in that by design the incentive effect of the credit is limited to those individuals that pay sufficient federal taxes to be in a position to benefit from the credit. The share of individuals who have no federal tax payable (before application of the Charitable Donation Tax Credit) and for whom the credit does not reduce the price of giving has been increasing in recent years (see Chart 4). Whether this reduces the overall price effectiveness of the credit would depend on whether individuals who can and cannot benefit from the credit are equally sensitive to the price of giving. For instance, if individuals who have no federal tax payable (who, in general, would tend to be lower-income individuals) are less sensitive to price than individuals that can fully benefit from the credit, the non-refundable feature of the credit would improve the price effectiveness by ensuring that the credit is targeted at individuals who are more likely to be responsive to the tax incentive. The issue of whether the price elasticity of giving varies for individuals in different income groups is considered in Section 4.4.
While targeting the most price-elastic forms of donations is desirable from a price effectiveness perspective, it is also important that the additional donations generated by the tax credit be targeted at the most pressing social needs in order for social welfare to be maximized. The Charitable Donation Tax Credit and other tax incentives for charitable donations operate much differently in that respect than direct government funding, in that the allocation of tax-assisted funding across charities and charitable needs is determined by donors rather than governments, and is therefore the outcome of the aggregation of the decisions made by individual donors. The allocation of tax-assisted funding across charity sectors seems to differ from the allocation of direct government funding (see Chart 7). This may suggest that government priorities differ from individual preferences, although it can also be the case that governments take into account the distribution of tax-assisted donations in determining which charity sectors should receive direct funding. In any event, it cannot be assumed that direct government funding to charities is necessarily more efficiently targeted than tax-assisted funding. Cost of Providing Tax Incentives for Charitable Donations
In assessing the price effectiveness of a tax incentive for charitable donations, one must consider not only the amount of additional donations that result from the tax incentive, but also the cost that is incurred in providing the incentive. This is necessary to assess whether the tax incentive generates a net benefit to society—that is, whether the economic benefits resulting from the additional funding provided to charities exceed the economic costs of providing the tax incentive—and whether the tax incentive is more or less costly than alternative options.
Cost of Tax-Assisted Funding Relative to Direct Government Funding
A. Tax-assisted
B. Direct government
C. Difference (A - B)
Amount directly allocated to charitable activities
Administrative costs ∝•ΔD
∝*•ΔD
(∝-∝*)•ΔD
Economic cost of tax distortions—share attributed to increased funding
θ1•ϒ•ΔD
ϒ•ΔD
-(1-θ1)•ϒ•ΔD
Economic cost of tax distortions—share attributed to windfall gains
(θ1-θ0)•ϒ•D0
Economic cost of tax distortions—additional cost due to government crowd-out
υ•ϒ•ΔD
-υ•ϒ•ΔD
Fundraising costs ρ•ΔD
ρ•ΔD
Table 4 compares the economic cost of securing an amount ΔD = D1 - D0 of additional funding to the charitable sector by encouraging private donations with a tax credit (column A) to using tax revenues to provide the same amount of funding to the charitable sector (column B). This cost can be decomposed as follows:
The direct money cost ΔD of providing the additional funding: This cost is the same under the two options, although it is assumed by donors in the case of tax-assisted funding, and by the government (and indirectly taxpayers) in the case of direct government funding.
Administrative costs: These costs include, for instance, the costs to individuals of claiming the tax credit, the costs to charities of issuing tax receipts and the costs to the government of administering the tax credit in the case of tax-assisted funding, or, in the case of direct government funding, the costs to charities of requesting the funding and the costs to the government of determining the allocation of funding across charities. It is assumed in Table 4 that these costs are proportional to the amount of additional funding being provided, by factors of ∝ and ∝* respectively.
Economic costs attributable to tax distortions: Raising tax revenues imposes costs on the economy in that taxes distort decisions made by taxpayers (for instance, individuals may reduce the number of hours they work when labour income is taxed). Such economic costs are incurred in funding the charitable sector in the following circumstances:
When a tax credit is provided to encourage charitable donations, the government must raise taxes to make up for the tax revenus loss that results from the provision of the credit. The associated economic cost is equal to θ1•ϒ•ΔD where θ1 is the level of the tax credit that must be provided to generate ΔD in additional donations and ϒ is the economic cost of raising one dollar of tax revenue.
In addition, to the extent that the tax credit is provided in respect of all donations, existing donations would qualify for the credit to the same extent as new donations, which would imply that a portion of the additional tax assistance that the government needs to provide in order to generate ΔD in additional donations will accrue to existing donors as windfall gains. The government will need to make up for this additional revenue loss by further raising taxes, which would result in an additional economic cost of (θ1-θ0)•ϒ•D0 where D0 is the amount of donations at the initial level of the tax credit (θ0) and (θ1-θ0) is the increase in the value of the tax credit that is required to generate ΔD in additional donations.
In the case of direct government funding, taxes must be raised in the amount of ΔD to finance the additional funding being provided, at an economic cost of ϒ•ΔD.
In addition, as discussed earlier in this section, the cost of direct government funding could be higher if government funding of the charitable sector crowds out private donations. That is, the government might need to provide an additional amount of funding to make up for a reduction in private donations, at a cost in terms of economic distortions of υ•ϒ•ΔD where υ is the magnitude of government crowd-out (for instance, υ = 1 if government crowds out private donations on a dollar-for-dollar basis).15
Fundraising costs: These represent the cost that charities must incur in order to attract the ΔD in additional donations. It is also assumed that there is a fixed fundraising cost of ρ per dollar of donations raised.
As indicated in the third column of Table 4, tax-assisted funding has two potential cost advantages over direct government funding: the lower (by a factor of 1-θ1) economic costs that arise from the fact that taxes must be raised to cover the value of the tax assistance provided to individual donors rather than the full amount of additional funding provided, and the cost savings because the crowd-out associated with direct government funding is avoided. In turn, tax-assisted funding also has two potential cost disadvantages: fundraising costs, and the economic costs that result from the need to make up for forgone tax revenues attributable to pre-existing donations.
There are inherent difficulties—from both theoretical and data limitation perspectives—in determining the different parameters that are required to assess the total economic cost of generating additional charitable donations by way of a tax credit, and to determine whether this cost is smaller or greater than the cost for the government of directly providing the same amount of funding to the charitable sector. Existing studies for Canada suggest that the economic cost of raising one dollar of tax revenue (ϒ) is in the range of 25 cents to 30 cents per dollar, while available information on fundraising costs would suggest that the cost to charities of raising one dollar of donations (ρ) may be about 15 cents.16 On the other hand, accounting for the forgone tax revenues attributable to pre-existing donations would require some knowledge of the impact of the tax credit on charitable donations, since the magnitude of windfall gains accruing to existing donors depends on the extent to which donations are higher because of the tax credit. As discussed in Section 4.4, limited evidence is available as to the price elasticity of charitable donations in Canada. The same is true regarding the scale of government crowd-out in Canada, with only a few studies having considered this issue (see the discussion earlier in this section). More definite estimates of the price elasticity of charitable donations and of government crowd-out in Canada would be needed in order to get a better indication of the price effectiveness of the Charitable Donation Tax Credit, both on its own and relative to direct government funding.
4.3 Estimating the Price Elasticity of Charitable Donations
Determining the price elasticity of giving is a key step in assessing the price effectiveness of the Charitable Donation Tax Credit, and measuring the extent to which tax credits and other tax incentives encourage individuals to donate more is an issue that has been studied extensively in the economic literature.
As is the case for many empirical analyses, the key challenge in estimating the price elasticity of charitable donations is to untangle the effect of price from the influence of other factors on charitable donations. This section discusses the nature of this challenge in more detail and reviews some of the factors other than price that may influence charitable donations. Section 4.4 reviews estimates of the price elasticity of giving that have emerged over the last 40 years and considers the evidence that is available on the question of the price elasticity of charitable donations in Canada.
Factors Influencing Charitable Donations
From an analytical perspective, charitable donations can be viewed as a normal economic good, the amount of which is determined by its relative price, the constraints that limit an individual’s ability to donate, and the individual’s preferences. The price for an individual of donating one dollar is the direct financial cost of parting with one dollar, minus any tax assistance that the donor may obtain, net of any compliance costs that must be incurred to obtain the tax assistance.17 Other financial and non-financial costs may also be incurred by a donor (e.g., transaction costs, banking charges) that would increase the price of donations. These other costs are generally unobservable, and most often ignored in empirical studies.
Individuals are constrained in the amounts they can donate by their available resources—both their income and wealth, and their financial (cash, investments) and non-financial (real assets) resources. Resource constraints not only limit the amounts that individuals can donate, but also the types of donations that can be made (i.e., gifts of cash versus assets). This may indirectly affect the price a donor faces, for instance when gifts of certain assets benefit from more generous tax preferences, as is the case in Canada for publicly listed securities, ecologically sensitive land and cultural property.
Preferences are what motivate an individual to give. There is an ample literature on why people donate to charities, which highlights two primary factors. Donors may be motivated by altruism, that is, by a desire to have a positive impact on others and their community. In this case the reason to donate is to make other people feel better. In contrast, individuals may also donate because they feel better if they donate, irrespective of what is achieved through their donations. This “warm-glow” effect (sometimes referred to as “impure altruism”) arises whenever the positive feeling associated with the act of giving provides by itself utility larger than the monetary cost of the donation.18 Such a warm-glow effect may be attributable to social pressures, sympathy for a cause, guilt, or the donor’s desire to get social recognition. Fundraising activities by charities, by increasing pressures to donate, can contribute to this warm-glow effect, and can thus indirectly motivate individuals to donate.
Measuring the effect of price on donations requires that the effect of donors’ motivations and ability to donate be properly controlled for, which in turn requires that each of these three variables—price, motivations and ability to donate—be properly measured.
This raises many difficulties, in particular regarding motivations, which are difficult to observe. Donors may be asked about their motivations in surveys; for instance, Chart 8 indicates the motivations reported by Canadian donors that were surveyed through Statistics Canada’s Canada Survey of Giving, Volunteering and Participating. Most respondents reported some altruistic motivations, with 90% of donors saying their donations were motivated by compassion towards people in need, 86% by a personal belief in a cause, and 80% by a desire to make a contribution to the community.
Reasons for Making Financial Donations, 2010
Note: Donors aged 15 and over. Source: Statistics Canada, Canada Survey of Giving, Volunteering and Participating, 2010.
However, self-reported motivations may not necessarily be good indicators of true motivations, in particular when motivations are being confounded with considerations with respect to price or ability to donate. As shown in Chart 8, just 23% of donors cited the income tax credit as a motive for giving, well below a range of other factors, which could be seen as suggesting that the tax credit has little impact on donations. However, tax incentives for donations do not work by motivating people to donate, but rather by reducing the after-tax price of donations so that people who are motivated to donate will donate more. Responses to survey questions that are more directly targeted on the impact of the credit on the after-tax price of donating are suggestive of a larger impact of the tax credit. For instance, Chart 9 shows that the share of respondents who said they intended to claim the tax credit or would give more if the tax credit was increased is greater than the share of respondents who indicated they were motivated to give by the tax credit. That said, it can also be seen in Chart 9 that responses to these questions vary by income class, with higher-income respondents being more likely to provide answers that suggest that the tax credit has some influence on their donations. This may indicate that higher-income individuals are more sensitive to price considerations, but could also suggest that donations are determined by some other underlying factors that vary with income (e.g., low-income individuals may not be able to donate more due to budget constraints, and thus would be less likely to answer that they would contribute more if the tax credit were enhanced).
Survey Responses Concerning the Impact of the Charitable Donation Tax Credit, by Total Household Income of Respondents, 2010
Note: Total income, before taxes and deductions, of all household members from all sources in the past 12 months.
Sources: Statistics Canada, Canada Survey of Giving, Volunteering and Participating, 2010; Department of Finance calculations.
Socio-Economic Characteristics of Donors
In practice, most empirical studies of the determinants of charitable donations make use of observable socio-economic variables, such as income, age or gender, as indicators of donors’ motives and ability to give. Questions arise, however, as to how good a role these variables can play as indicators of these factors, and how to interpret the relationships between these variables and the donations being observed. These are important questions, as the conclusions drawn concerning the impact of price considerations on donations may not be valid if the variables used to control for donors’ motives and ability to give are poor proxies for these factors, and the results obtained may be difficult to interpret if the relationships between these variables and donations are not well understood.
This section reviews the key socio-economic characteristics that are closely correlated with charitable giving and which are generally explicitly controlled for in econometric studies of the price elasticity of giving. Canadian statistics are presented for each of these characteristics in order to inform the interpretation of existing price elasticity studies that are reviewed in the next section.19
Income is a strong predictor of charitable giving, and studies have generally found that the income elasticity of donations is positive, indicating that the average value of giving increases with income. An individual’s ability to donate would be expected to increase with the individual’s income, because donations can be financed out of current income or out of accumulated wealth, for which income can be a proxy. Income may be associated with giving for other reasons as well. Higher-income individuals may feel they have a moral obligation to “give back” to their communities, or may be approached more often for donations, thereby increasing the social pressure and opportunities to donate.20 Higher-income individuals may also be more inclined to make donations that qualify for the tax credit for social or institutional reasons.
A strong correlation between donations and income is observed in Canada, both in survey and tax return data. As shown in Table 5, the share of individuals that claim the Charitable Donation Tax Credit increases with income, as does the share of all claimants that donate more than $200 and the average value of reported donations.
Share of Individuals Claiming the Charitable Donation Tax Credit and Average Donation, by Income Quantile, 2012
P0-P25
($0-$37,121)
P26-P50
($37,122-$56,149)
P51-P75
($56,150-$84,380)
P76-P95
($84,381-$157,627)
P96-P100
($157,628 and above)
Claimants as a share of tax filers with
net federal tax (%)
Distribution of claimants by size of donations (%)
Donations of $50 and less
Donations of $51-$200
Average value of donations ($)
Claimants donating $200 or less
Claimants donating more than $2001
1 The average value of donations above $200 excludes donations of publicly listed securities.
A strong positive correlation also exists between age and charitable donations. In Canada, the share of individuals that claim charitable donations increases with age at all income levels (Chart 10). Average reported donations also increase with age, with claimants aged 65 and over making significantly larger donations than their younger counterparts, especially for claimants in the top 5% income quantile. Similar patterns are observed in other countries, and studies have generally found that charitable donations increase with age, controlling for other determinants of donations.
Share of Individuals Claiming the Charitable Donation Tax Credit and Average Donation, by Age and Income Quantile, 2012
Claimants as a Share of Tax Filers With Net Federal Tax
Average Value of Donations Among Claimants
Note: The income ranges for each quantile correspond to those presented in Table 5.
A variety of potential explanations for the relationship between age and charitable giving are offered in the literature. Most importantly, age may reflect life-cycle dynamics whereby the disposable income of individuals increases through time as children leave home, mortgages are being paid off, work-related expenses are reduced, etc., and wealth is being accumulated out of which larger donations can be made. Some authors have also suggested that the larger donations of older donors may in part be attributable to the higher participation of these individuals in church activities (see below about religious motivations for giving).21
Results from studies that have considered the impact of gender on giving are somewhat mixed, although some recent studies have suggested that women may be more likely to donate than men after controlling for other factors.22 Empirical studies have also generally found that individuals in a couple relationship make larger donations than single, separated and divorced individuals, even after controlling for income and age.
Share of Individuals Claiming the Charitable Donation Tax Credit and Average Donation, by Gender and Income Quantile, 2012 Claimants as a Share of Tax Filers With Net Federal Tax
Notes: In this chart, spouses or common-law partners are counted as having claimed the tax credit as long as at least one of the two spouses or partners has claimed the credit. The income ranges for each quantile correspond to those presented in Table 5.
Chart 11 illustrates these dynamics amongst Canadian donors. Unattached women are more likely to claim the tax credit for donations compared to their male counterparts, and donate slightly more on average. For individuals with a spouse or partner, donation rates and average donations are higher than for unattached individuals, and do not vary significantly depending on whether the couple’s main earner is a man or a woman, apart from average donations by the top 5% of tax filers which are significantly larger when the couple’s main earner is a man. The exact nature of the relationship between marital status and giving is unclear. One possible explanation would be that individuals with spouses or partners have expanded social networks, and as such would be exposed to more opportunities to donate than single individuals.23 Gender and marital status could also be interacting, in that gender differences in giving may be related to how decisions about giving are made within couples, for instance if partners are discussing the amount of donations they want to make.24
Region Giving behaviours vary across Canadian provinces and territories. The share of individuals claiming the tax credit is relatively high in Prince Edward Island, Ontario, Manitoba and Saskatchewan, while the average value of donations reported by residents of Quebec is considerably lower than for residents of other provinces and territories (Chart 12).
Share of Tax Filers With Net Federal Tax Claiming the Charitable Donation Tax Credit and Average Donation Among Claimants, by Province and Territory, 2012
Note: Based on T1 tax returns for all tax filers aged 20 and over, excluding those who died in 2012.
Regional differences may reflect differences in income. As shown in Chart 13, donation rates increase with income in all provinces, which implies that aggregate donation rates would be expected to be higher in richer provinces. Regional differences may also reflect other factors, such as differences in the sizes of age groups, in the composition of the charitable sector in each province, or in the levels of government social spending.
Share of Tax Filers Claiming the Charitable Donation Tax Credit, by Province and Income Quantile, 2012
Other characteristics may be of interest when analyzing the determinants of charitable giving.
Most empirical studies find a positive relationship between charitable giving and education after controlling for the fact that more educated people generally earn more. Possible explanations for this relationship include higher educated individuals being more exposed to information about charitable causes or more often solicited, or having a higher degree of social trust, a greater sense of social responsibility or more confidence in charities.25
Another important social determinant of charitable giving is religion. Empirical studies that control for religious involvement find a positive relationship between religion and charitable giving. As shown in Chart 6, religious organizations in Canada receive the largest share of charitable donations. While only 32% of donors in 2010 reported a sense of religious obligation as a motive for giving, respondents that attended religious services weekly were more likely to make charitable donations and donated more on average compared to those who did not attend services weekly.26 The positive relationship between religion and charitable giving may reflect social values, but could also be explained by the fact that people attending religious services may have more opportunities for giving.27
4.4 Review of Estimates of the Price Elasticity of Giving
As noted above, assessing the price effectiveness of tax incentives for charitable donations requires some knowledge of the impact of the tax incentives on the amount of donations made, which in turn involves estimating the price elasticity of charitable donations, that is, the extent to which donations increase when the price of giving is reduced.
Many empirical studies over the last 40 years have attempted to estimate the responsiveness of charitable donations to tax incentives. The majority of these studies have focused on charitable giving in the United States, with only a few studies looking at the impact of tax incentives on charitable donations based on data from Canada or other countries (Germany and France in particular). This section presents a review of the international literature, followed by a review of the Canadian studies. Results from the international literature may not be directly applicable to Canada as the design of tax incentives may vary across countries and individuals may respond differently to these incentives due to societal, institutional or other differences. Nevertheless, a study of these results can be informative by helping to understand how individuals respond to tax incentives.
There is a general consensus in the literature that tax incentives for charitable donations have a positive impact on charitable giving, although the magnitude of that impact is debated given the many challenges associated with estimating the price elasticity of giving. As noted in Section 4.3, a fundamental difficulty is distinguishing the causal effect of price on charitable giving from the effects of income and other factors. In recognition of this difficulty, this literature has progressed by making use of increasingly sophisticated econometric methods, notably to try to account for determinants of giving that are unobservable. Early estimates of the price elasticity of giving were obtained using cross-sectional data (i.e., observations for many individuals for a single year) and statistical methods that exploited the fact that not all individuals in a given year face the same after-tax price of giving. The consensus among these early studies was that the price elasticity of giving was greater than one in absolute value, indicating that tax incentives for charitable donations could be price-effective.28
Later studies began to exploit panel data (i.e., observations for many individuals over a multiple-year period), which offers two major advantages. First, the ability to follow the same group of individuals over time makes it possible to distinguish between long-run responses to persistent changes in price and income from short-run responses that are driven by donation-smoothing or learning behaviours.29 Second, panel data allows for econometric methods that help reduce statistical biases caused by the omission of unobservable factors. This aspect is particularly important since, as noted, the underlying motives for giving are often unobservable. Overall, results from panel data studies tend to yield price elasticity estimates that are lower than the results obtained by studies using cross-sectional data. In many cases, these estimates were less than one in absolute value, suggesting that tax incentives for charitable donations are less likely to be price-effective.
Different price elasticity estimates have also been obtained depending on whether the data being used were collected by surveys or from tax returns. Survey data provide a rich set of socioeconomic characteristics, but are also less precise in general than tax return data. Furthermore, high-income households and individuals tend to be under-represented in survey data, which can be problematic given their greater propensity to donate. In turn, tax return data generally lack the rich socioeconomic information available in survey data.
Chart 14 summarizes the range of estimates that were obtained in international studies published before 2005 (the majority of which were based on U.S. data), as reported in an extensive review of price elasticity estimates that was published by Peloza and Steel (2005). Estimates from more recent studies, including some non-U.S. studies, are also shown in the middle panel of Chart 14, while estimates from available Canadian studies are shown in the right panel.
Summary of Estimates of Price Elasticity of Charitable Donations
Notes: Estimates in the left panel are summarized by box and whisker plots. The lower end of each box marks the upper threshold for the lowest quartile of estimates and the top end of each box marks the lower threshold for the top quartile of estimates. The median estimate is marked by the horizontal markers inside the box. The whiskers are the two lines outside the box that extend to the highest and lowest estimates. Estimates in the middle and right hand panels are summarized by the range between the lowest and highest estimates. Single estimates are indicated by single markers. Estimates from studies that dealt specifically with bequests are not shown.
Estimates for the pre-2005 period are organized according to the source and type of data used (i.e., survey data versus tax return data, cross-sectional data versus panel data). As can be observed, estimates differ noticeably according to the source and type of data used. Estimates based on cross-section samples of survey data have an interquartile range from -0.6 to -2.4 and a median estimate of -1.6, while those based on survey-based panel data range from -1.0 to -2.2 with a median of -1.25. Overall, among survey data estimates, those based on panel data are lower than those based on cross-sectional data.30 Estimates from studies that made use of tax return data rather than survey data are also generally lower, with elasticity estimates based on cross-sections of tax return data ranging from -0.8 to -2.1 with a median estimate of -1.3, compared to a median estimate of only -0.6 and an interquartile range from -0.3 to -1.4 for estimates obtained from tax return panel data.31 Peloza and Steel (2005) provide statistical evidence that confirms that the price elasticity of giving reported in studies based on tax return data is lower than in studies based on survey data. However, these authors were not able to conclude that the difference between estimates based on panel data and cross-section data was statistically significant.32
The majority of older studies reviewed in Peloza and Steel (2005) generally attempted to estimate the responsiveness of donations to the after-tax price of giving for the population as a whole. It may be the case, however, that different groups of donors respond differently to tax incentives, for instance that higher-income donors are more sensitive to tax incentives than lower-income donors, or that individuals who make relatively large donations or who donate to certain types of charities pay more or less attention to the after-tax price of giving than other donors. Knowledge of how the price elasticity of giving may differ across groups of donors is important in assessing the price effectiveness of charitable tax incentives, both overall and for distinct groups of donors. More recent studies have focused on how the responsiveness of donations to the after-tax price of giving may vary across different groups of donors. Results seem to be mixed as to whether higher-income individuals respond more strongly to charitable tax incentives than other donors.33 Using sophisticated econometric techniques, Bakija and Heim (2011) find little evidence that higher-income individuals are more sensitive to the price of giving compared to lower-income individuals.34 Their study makes use of a panel data sample of high-income U.S. tax filers spanning from 1979 to 2006, and exploits the variation in the after-tax price of giving over time and across U.S. states to estimate the price elasticity of giving.35 In contrast, using a similar methodology with German data, Adena (2014) finds evidence of heterogeneity across income classes, with estimates of -0.2 for individuals at the lower end of their income spectrum, -1.6 for those in the middle, and -1.4 for those at the top of the income spectrum. Both of these studies, particularly that of Bakija and Heim (2011), rely on samples of data in which high-income individuals are over-represented; as such their ability to detect differences in the price elasticity of giving across income groups may be limited.
Recent studies comparing the price elasticity of giving for donors making large or small donations generally suggest that donors may indeed respond differently depending on their level of giving. Based on a sample of German tax filers ranging over 1998 to 2004, Bönke et al. (2013) find that individuals who donate relatively little to charity and those who make very large donations are more responsive to changes in the after-tax price of giving compared to other donors. More specifically, they find a price elasticity of -1.4 for small donations and -1.1 for very large donations, while the elasticity for the majority of donors can be as low as -0.5. Fack and Landais (2010), using tax return data for middle-income French households, find that the price elasticity of giving tends to be higher for more generous donors (-0.6) compared to smaller donors (-0.2). Finally, using U.S. survey data, Brooks (2007) obtains an overall price elasticity of giving of -2.7, but finds substantial variation in the price elasticity of giving depending on which charity sectors individuals choose to donate to. Donations to religious charities are found not to be affected by the price of giving, while the price elasticity of giving to charities in other sectors ranges from -0.6 for donations to those in the health sector to -1.3 for donations to charities that relieve poverty.
Estimates of the Price Elasticity of Giving in Canada
As noted, only a few studies have considered the price elasticity of giving using Canadian data. Early estimates for Canada date back to years before 1988 when charitable donations made by individuals were deductible in computing taxable income rather than eligible for a non-refundable tax credit. Using aggregate data on donations and income for the years 1968 to 1973, Hood et al. (1977) estimated the price elasticity of giving in Canada to be -0.86. Subsequently, Glenday et al. (1986) obtained an estimate of only -0.2 based on a small cross-section sample of tax return data for the years 1978 to 1980. Finally, using data from Statistics Canada’s Survey of Family Expenditures, Kitchen and Dalton (1990) estimated an elasticity of -0.93 for 1982 and Kitchen (1992) obtained an estimate of -2.03 based on data for 1986. Their studies also examined elasticity differences across regions and income groups, though their results appear to suffer from identification problems (which could explain the large gap between these two estimates).36
Caution should be taken in interpreting the results from these early studies, as they were based on simpler methodologies and had to deal with more severe data limitations. Also, the tax incentive in place in the period covered by these studies—a deduction for charitable donations made by individuals—operated differently than the existing tax credit, and as such the results from these early studies may not be directly applicable to the system that is currently in place.
A number of more recent studies have considered the impact of the Charitable Donation Tax Credit using data from Statistics Canada’s Canada Survey of Giving, Volunteering and Participating. Some of these studies have also considered whether the price elasticity of giving differs across types of giving. A first study for 1997 by Apinunmahakul and Devlin (2004) found that donations to non-religious charities were highly responsive to price (price elasticity of -1.4) while donations to religion-based charities were not.37 They found that price had no statistically significant impact on total donations. In a more recent study, Hossain and Lamb (2012) found an overall elasticity estimate of -1.68 that is statistically significant. They also found that price elasticity varies by type of donation, with estimates ranging from -0.81 for donations to religious charities to -2.2 for donations to international charities. Additional studies would be needed before firm conclusions could be drawn on the price effectiveness of the federal Charitable Donation Tax Credit in Canada. The results obtained by Hossain and Lamb (2012) are suggestive that the Charitable Donation Tax Credit could be price-effective. This study, however, made use of cross-sectional survey data, and the analysis of U.S. studies presented above seems to indicate that studies based on this type of data obtain price elasticity estimates that tend to be biased upward compared to studies that use panel data and tax return data.
The charitable sector is an important contributor to Canadian society, playing a vital role in providing valuable goods and services to Canadians in areas such as health care, education, poverty relief and the protection of the environment. In recognition of this important role, Canadians support charities directly by donating cash and goods and by volunteering their time, while governments in Canada provide assistance in a number of ways, notably by offering a tax credit in respect of donations made by individuals. In 2012, Canadians claimed the federal Charitable Donation Tax Credit in respect of donations worth $8.6 billion.
This report has presented an assessment of the effectiveness of the federal Charitable Donation Tax Credit. The effectiveness of the tax credit and of other tax incentives for charitable donations must be assessed vis-à-vis the contribution that such incentives can make to the attainment of the objectives being pursued by governments in supporting the charitable sector. First and foremost, tax incentives for charitable donations will be viewed as effective if they contribute positively to the financing of charities, after accounting for the costs of providing such tax incentives.
Empirical studies of the determinants of charitable donations, including the few recent studies that have studied this question using sophisticated data and econometric techniques, support the general conclusion that tax incentives have a positive impact on charitable giving. Studies for Canada are fewer and do not offer a sufficient basis to draw firm conclusions on the price elasticity of charitable donations in Canada. Results from international studies suggest that tax incentives such as the Charitable Donation Tax Credit are likely effective in encouraging individuals to donate more, but the precise magnitude of that impact remains to be determined. Furthermore, empirical research on the impact of tax incentives across groups of donors or donations made to different charity sectors is still limited.
There are inherent difficulties in assessing the cost of the Charitable Donation Tax Credit, in part because the cost per dollar of generating additional donations with a tax credit is a function of the price elasticity of charitable donations in Canada. In addition, whether this cost is lower or higher than the cost that governments incur in funding the charitable sector directly or in providing the goods and services that charities would otherwise provide depends not only on the price elasticity of charitable donations, but also on the extent to which governmental support crowds out private donations to the charitable sector. More definitive estimates of these parameters for Canada would be needed in order to better determine the relative price effectiveness of the credit.
Recent Changes to Tax Incentives for Charitable Donations Made by Individuals
Reduction to $200 (from $250) of the threshold over which charitable donations are creditable at the higher rate (29%).
Elimination of the net income limit for donations of ecologically sensitive land eligible for the tax credit. 1996
Increase in the amount of charitable donations eligible for the tax credit from 20% to 50% of net income, and to 100% of net income in the year of death and the preceding year.
Reduction by one half of the normal inclusion rate applicable to capital gains arising from donations of publicly listed securities made before 2002.
Increase in the amount of charitable donations eligible for the tax credit from 50% to 75% of net income.
Reduction in the taxable employment benefits realized when shares acquired through stock option plans are donated, to parallel the treatment of donations of publicly listed securities.
Extension of the tax credit to donations of Registered Retirement Savings Plan, Registered Retirement Income Fund and insurance proceeds that are made as a consequence of direct beneficiary designations.
Reduction by one half of the normal inclusion rate applicable to capital gains arising in respect of gifts of ecologically sensitive land and related easements, covenants and servitudes.
Permanent extension of the reduced inclusion rate applicable to capital gains arising from donations of publicly listed securities.
Reduction to 0% of the inclusion rate applicable to capital gains arising from donations of publicly listed securities and ecologically sensitive land.
Extension of the capital gains tax exemption to capital gains arising on donations of publicly listed securities and ecologically sensitive land to private foundations.
Extension of the capital gains tax exemption to capital gains arising on donations of unlisted exchangeable securities if exchanged for publicly listed securities and donated to a charity within 30 days of the exchange.
Introduction of the temporary First-Time Donor’s Super Credit on cash donations of up to $1,000 made before 2018.
Extension of the carry-forward period for donations of ecologically sensitive land from five to ten years.
Change to allow the trustee of an individual’s estate increased flexibility to apply the Charitable Donation Tax Credit against the income tax liabilities of the individual or the estate.
List of Qualified Donees Under the Income Tax Act
As defined sin subsection 149.1(1) of the Income Tax Act, a “qualified donee” means a person that is
(a) registered by the Minister of National Revenue and that is
(i) a housing corporation resident in Canada and exempt from income tax that has applied for registration,
(v) a foreign organization that has applied to the Minister of National Revenue for registration,
(d) Her Majesty in right of Canada or a province, the United Nations or an agency of the United Nations.
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Dahlby, Bev and Ergete Ferede (2011). “What Does It Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds”, C.D. Howe Institute Commentary #324.
Department of Finance Canada (1987). “Tax Reform 1987: The White Paper”, June 18, 1987.
Fack, Gabrielle and Camille Landais (2010). “Are Tax Incentives for Charitable Giving Efficient? Evidence From France”, American Economic Journal: Economic Policy, vol. 2 (2), pp. 117-141.
Glenday, Graham, Anil K. Gupta and Henry Pawlak (1986). “Tax Incentives for Personal Charitable Contributions”, The Review of Economics and Statistics, vol. 68 (4), pp. 688-693.
Hall, Michael H. (1996). “Charitable Fundraising in Canada: Results From a National Survey of Fundraising Practices of Canadian Charities”, Canadian Centre for Philanthropy.
Hood, R.D., S.A. Martin and Lars S. Osberg (1977). “Economic Determinants of Individual Charitable Donations in Canada”, Canadian Journal of Economics, vol. 10 (4), pp. 653-669.
Hossain, Belayet and Laura Lamb (2012). “Does the Effectiveness of Tax Incentives on the Decision to Give Charitable Donations Vary Across Donation Sectors in Canada?”, Applied Economics Letters, vol. 19 (13-15), pp. 1487-1491.
House of Commons (2013). Tax Incentives for Charitable Giving in Canada, Report of the Standing Committee on Finance, 41st Parliament, 1st Session. Kitchen, Harry and Richard Dalton (1990). “Determinants of Charitable Donations by Families in Canada: A Regional Analysis”, Applied Economics, vol. 22 (3), pp. 285-299.
Kitchen, Harry (1992). “Determinants of Charitable Donations in Canada: A Comparison Over Time”, Applied Economics, vol. 24 (7), pp. 709-713. Lester, John (2012). “Benefit-Cost Analysis of R&D Support Programs”, Canadian Tax Journal, vol. 60 (4), pp. 793-836.
Mesch, Debra J., Melissa S. Brown, Zachary I. Moore and Amir Daniel Hayat (2011). “Gender Differences in Charitable Giving”, International Journal of Nonprofit and Voluntary Sector Marketing, vol. 16 (4), pp. 342-355.
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1 See recommendation 7 of the February 2013 report of the Standing Committee on Finance entitled Tax Incentives for Charitable Giving in Canada. See also the Government’s response to this report, dated June 11, 2013. 2 The Income War Tax Act, 1917, 7-8 Geo 5, c. 28, s. 3. This measure was subsequently repealed and reintroduced in the 1930s. 3 See Department of Finance Canada (1987). See Annex 1 for a list of recent changes to the Charitable Donation Tax Credit and other tax preferences targeted at charitable donations made by individuals.
4 See Annex 2 for the full list of qualified donees.
5 The credit is based on the fair market value of the asset being donated, while only a fraction of the capital gain realized upon the donation not exceeding 50% is included in the donor’s income. This means that for most donors the Charitable Donation Tax Credit should fully offset the tax payable on the income or gain that is funding the donation, including for donations of assets that are not eligible for the capital gains exemption. 6 From this point forward, references to “provinces” also include the territories.
7 The capital gains inclusion rate was reduced to zero for donations of publicly listed securities, stock options, and ecologically sensitive land to a registered charity or other qualified donee (other than a private foundation) made after May 1, 2006 (the inclusion rate for donations of these properties made before May 2, 2006 was reduced to 25%). The capital gains inclusion rate for donations of these capital properties (other than donations of ecologically sensitive land) was extended to donations made to private foundations as of March 19, 2007. 8 This proportion is similar to the proportions estimated by Statistics Canada for 2004 and 2007. Results from the 1997 and 2000 surveys are not comparable to results from later surveys due to changes in survey methodology. 9 Discrepancies are also observed for 2004 and 2007 (18.9% and 7.4% respectively). 10 Looking at the real change in donations over the 2004 to 2010 period, survey results report an increase of 7.3%, which is similar to the increase of 7.8% observed from tax data. 11 To be eligible for a capital gains exemption, gifts of ecologically sensitive land must be made to a registered charity designated by the Minister of the Environment, while gifts of cultural property must be made to a registered charity designated by the Minister of Canadian Heritage and Official Languages. 12 Data shown in Charts 6 and 7 are from the Registered Charity Information Return (T3010). They differ from donations reported by taxpayers on the T1 return as they include donations made by corporations and trusts but exclude donations to qualified donees that are not registered charities.
13 Direct provision by governments of the goods and services that the charitable sector would otherwise provide could also result in the crowding out of private donations. This section only discusses the crowd-out attributable to direct government funding in order to simplify the discussion. 14 See Andreoni (2006) and Saez (2004) for a more complete discussion of these questions.
15 This cost would be somewhat lower, to the extent that private donations are reduced, because of the reduction in the total amount of tax assistance provided in respect of private donations. 16 Lester (2012), using estimates from Dahlby and Ferede (2011), calculates a welfare loss due to taxation of 26 cents per additional dollar raised in 2010. Results obtained by Baylor and Beauséjour (2004) using a dynamic general equilibrium model would imply a cost of about 30 cents per dollar raised based on the 2010 tax mix. As for fundraising costs, Hall (1996) finds that fundraising costs in Canada averaged 26 cents per dollar raised by charities, with a median of 12 cents. According to more recent figures from Charity Intelligence Canada (www.charityintelligence.ca/canadas-top-10-largest-charities), fundraising costs for Canada’s 10 largest charities averaged 21 cents per dollar of donations between 2012 and 2014. Data from the Registered Charity Information Return (T3010) suggests costs closer to 15 cents per dollar of donations.
17 Non-tax assistance for charitable donations may also be available, for instance when a government matches the donation made by the individual. A program that matches private donations on a dollar-for-dollar basis would effectively reduce the after-tax price of donations by one half in that an individual would achieve two dollars of donation for the (private) price of one. 18 See Andreoni (1989) for further details.
19 Unless otherwise noted, the statistics presented in this section are derived from tax return information for a sample of 10% of all tax filers aged 20 or more that provides information for both a tax filer and his or her spouse or common-law partner (if there is one). Donations made in the year of death are not shown in order to focus on charitable giving decisions made actively as opposed to bequests. Adjustments are also made to exclude outlying values. Since spouses and partners can pool their donations and may choose how much to donate based on their combined resources, the income of each spouse or partner in a couple is calculated as the couple’s combined income, divided by the square root of two to account for economies of scale available to couples. Individuals are classified by income quantile on the basis of their income as so adjusted. Income corresponds to gross adjusted pre-tax income, which is defined as total income for federal tax purposes (line 150 of the federal income tax return) plus or minus some adjustments, including the addition of the non-taxable portion of capital gains, and the removal of the gross-up of dividends from taxable Canadian corporations and the amount of pension income transferred from a spouse or common-law partner. The sample is restricted to filers with federal tax payable (or in the case of married or common-law filers, to those with combined federal tax payable). 20 See Bryant et al. (2003).
21 See Bekkers and Wiepking (2012). According to results from Statistics Canada’s Canada Survey of Giving, Volunteering and Participating reported in Turcotte (2012), roughly 30% of respondents aged 65 and over reported being religiously active compared to only 13% of those aged 35 to 44. 22 See Mesch et al. (2011) and Bekkers and Wiepking (2012) for a review of studies that consider the impact of gender.
23 See Bekkers and Wiepking (2012). 24 See, for example, Andreoni et al. (2003), Yörük (2010), and Andreoni and Payne (2013b).
25 See Bekkers and Wiepking (2011) for a summary. 26 Statistics Canada, 2010 Canada Survey of Giving, Volunteering and Participating. In 2010, 93% of respondents who attended church on a weekly basis made charitable donations and donated an average of $1,004. In contrast, 83% of respondents who did not attend church weekly made charitable donations, donating $300 on average. 27 See Bekkers and Wiepking (2011). Members of certain religious organizations are also required to make donations to their organizations.
28 See Clotfelter (1985).
29 See Barrett (1991) and Bakija and Heim (2011). 30 The average elasticity estimate within the upper and lower quartile of cross-section-based survey estimates is -1.6 compared to -1.3 for survey panel data estimates.
31 The average elasticity estimate within the upper and lower quartile of tax return cross-section based estimates is -1.4 compared to -0.8 for tax return panel data estimates.
32 Estimates presented in Peloza and Steel (2005) may also vary depending on the methods used to address the econometric challenges associated with the large percentage of individuals who donate nothing at all. See for example Bradley et al. (2005).
33 The impact of income on the price elasticity of giving was also addressed in earlier studies but again with mixed results; see Peloza and Steel (2005) for a summary. Based on the range of income compositions used in the samples employed in the studies reviewed by Peloza and Steel (2005), the authors were not able to find statistical evidence that the price elasticity of giving differs by income.
34 In an earlier study, Bakija and Heim (2008) did conclude that the price elasticity of giving was higher when the sample was restricted to those with very high incomes (their lowest income category was for incomes of less than $200,000). 35 Bakija and Heim (2011)’s preferred estimates fall between -1.13 and -1.5, depending on the specification employed. Their results also suggest that donors react slowly to changes in the price of giving, likely because it takes time for individuals to learn about changes in the after-tax price of giving.
36 The estimates for Kitchen and Dalton (1990) and Kitchen (1992) shown in Chart 14 reflect their estimates for Canada overall. 37 Kitchen and Dalton (1990) and Kitchen (1992) also observed that donations to religious causes seemed to be relatively price-inelastic, but as noted their studies may have suffered from identification problems.