Winner of 2020 Charity Law Student Essay Contest

  • July 15, 2020

Charitable Donation Tax Credits in Canada: Equitable Concerns and Options for Reform

Reid Buchanan, University of Manitoba (Robson Hall Law School)

INTRODUCTION

The current application of charitable donation tax credits (“CDTCs”) in Canada provide significant, expanding, and disproportionate control over public funds to high income individuals. This paper argues that this inequitable control as well as a lack of consistent evidence supporting the efficiency of CDTCs necessitates a change in tax policy. This paper then explores some options for reform, proposing that the value of tax credits should be reduced and cost savings re-distributed to small charities through direct grants.

The first section of this paper discusses our current system of taxation as related to charitable donations by individuals. This section provides a brief overview of the federal and provincial systems of taxation before setting out the rationale behind the system as set out by legislature, scholars, and the courts. Finally, this section briefly raises two key purported benefits of CDTCs: (1) promoting pluralism and (2) providing an incentive to give.

The second section of this paper addresses the idea of equity and the disproportionate advantages held by high income earnersIn particular, this section focuses on the reality of who gives and how that translates to control over public funds. On a stable ground of data from the Canada Revenue Agency (“CRA”), this section establishes that any benefits surrounding pluralism do not benefit Canadians in a way that is fair and equitable. Finally, this section addresses how trends in giving as well as recent legislative and policy changes have worsened the disproportionality of control.

Part three of this paper addresses questions surrounding the efficiency of our current system in incentivizing giving. This section looks at survey data, economic studies on price elasticity, and the effects of recent changes in tax policy to assess efficiency. This section concludes that while it seems likely that tax credits incentivize giving to a level somewhere near the cutoff for efficiency as defined by the Department of Finance, there is no clear consensus. As such, efficiency in the Canadian context should be studied in greater detail, but should not currently be a determinative factor dictating the ongoing use of CDTCs.

The fourth section of this paper discusses amendments which could be made to improve our current system. The option of eliminating CDTCs is raised but is ultimately passed over due to potential risks associated with such a drastic change. Ultimately, the option of decreasing credits, especially for high income Canadians, is touted as the best option for reform. The cost savings associated with decreasing the value of credits should be re-distributed to charities through direct grants, with a particular focus on benefitting small charities.

PART I - A Brief Overview of Our Current System

A. Federal Tax Credits:

Under section 118.1 of the federal Income Tax Act, individuals donating to registered charities or other qualified donees may claim a tax credit.1 The amount of the federal credit that individuals may claim is determined by both the value of their total donations and their income in the year that they are claiming.2 The first $200 worth of total donations will infer a tax credit of 15% and any donations above $200 will infer a tax credit of 29% or 33%.3 Generally, the total tax credit received cannot exceed 75% of the donor’s income in that tax year.4 Donations may take on numerous forms,5 and may be carried forward for up to five years to maximize the CDTC received.6

B. Provincial Tax Credits

All provinces and territories employ a similar policy to the federal government of providing tax credits for individual donationsAcross all provinces and territories, CDTCs are pro-rated by measuring donations up to and above $200.7 For the first $200 worth of donations, tax credits range from 4% in Nunavut all the way to 20% in Québec.8 Above $200, tax credits range from 11.16% in Ontario up to 24% in Québec.9 While some provinces may have some minor variations in the operation of their credit, this paper will not focus on those differences, and will instead discuss the policy benefits and concerns of using CDTCs.

C. Combined Federal and Provincial Credit Amounts

When adding federal and provincial credits, the percentage of donations which can be reimbursed to individual donors as tax credits range from 19% up to 57%.10 However, the statistics on donations to registered charities in Canada indicate that the majority of the value of donated funds is accounted for with a tax credit on the upper end of federal and provincial limits.11

Statistics Canada lists the median donation amount amongst Canadian tax filers in 2017 at $300.12 The average amount donated was significantly higher at $1790.13 This discrepancy between median and average donations is indicative of the fact that a disproportionate amount of the total donations for which a credit is given come from large donations.

While credits to be received can range from 19% to 57%, the majority of donations are credited at a rate between 40% and 57%This can be clearly evidenced in the most recent federal statistics regarding charitable giving published by the CRA.14 The total federal credit received by individual donors in 2016 was just greater than 29% of the total donations claimed.15 This underscores the reality in our CDTC system that a disproportionate amount of donated money comes in the form of large donations and from high income donors.16

D. Rationale Behind Our Current System:

Various policy reasons for recognizing charitable donations in the assessment of taxes are raised by scholars.17 David G. Duff, classifies the rationale cited by scholars into three main concepts: (1) Measuring Taxable Income; (2) Rewarding Generosity; and (3) Subsidizing Charitable Activities.18 Duff argues that the best rationale behind recognizing charitable donations in an assessment of taxes is as an indirect subsidy for charitable activities.19

It would seem that the Canadian Government would agree with this rationaleThe question of why we administer is clearly stated by the federal Department of Finance in its yearly report on tax expenditures.20 That report lists the federal CDTC as a social objective “designed to support the important work of the charitable sector in meeting the needs of Canadians.”21 This objective is made clear in previous publications as well.22 Finally, this objective was recently confirmed by the Federal Court of Appeal.23

E. The perceived benefits of CDTCs

There are two key perceived benefits to providing tax credits for charitable donations. These potential benefits form the basis of support for upholding our current system and must be assessed in determining whether our system may be justified.24 These perceived benefits will be outlined briefly below, before being addressed more substantively in parts II and III of this paper.

i. Incentives to Give

One of the key perceived benefits of CDTCs are that they incentivize giving.25 The basic concept behind this benefit is that individuals will give more to charity because they know they will be reimbursed for a percentage of their gift. If this is indeed the case, the charitable sector would receive greater funding from the application of CDTCs than they would from a system of direct grants.

ii. Pluralism

A second key benefit cited by proponents of indirect subsidies for charitable donations such as CDTCs is that individuals can choose where they donate and thus where they wish to direct public funds.26 This is a perceived benefit as this control provides public funding for exactly what individuals deem to be important.

PART II - An Inequitable System

In assessing the tax credit system, charity law doyen Neil Brooks described the CDTC as “one of the most shameful tax concessions in the Income Tax Act.”27 A big portion of the reasoning behind his statement is that the CDTC provides a clear and disproportionate advantage to Canadians with higher incomes and/or greater levels of wealthMore concerning than the harsh words of Brooks however are that since the publication of his paper in 2001, trends in giving and legislative changes have further widened the gap between high and low income Canadians.

A. Private Control Over Public Funds:

The reality of our system is that while the government indirectly subsidizes charities, donors directly control public fundsDonors may not always be aware of that control and the implications therein, but that control exists and is asserted either way. Control over public funds is obviously limited to funding registered charities, but there is nonetheless significant control held by donors.

This control is touted by proponents of CDTCs as pluralism, a key perceived benefit of the system in place. The issue with this purported benefit of CDTCs is that this pluralism is only accessed and public funding is disproportionately controlled by Canadians with high incomes.

B. Who Donates and How Much:

The most recent data released by the Canada Revenue Agency lists final data for the 2016 tax year.28 The data released by the CRA indicates donations filed on line 340 of tax returns depicting the allowable charitable donations and government gifts (index code 86).29 It also sets out the tax credit received (index code 88).30 These statistics on giving present a harsh reality with regards to disproportionate control of public funding through CDTCs.

Table 1: 2016 Statistics on Federal CDTCs31
Item Index Code* Total for All Filers Income<$34,999 Income>$100,000 Income>$250,000
# of Filers

3

28,074,780

12,946,620

2,444,360

271,080

% of Filers

N/A

100%

51.69%

8.71%

0.97%

# of Donors

86

5,589,980

1,021,220

1,230,420

179,710

$ Donated (thousands)

86

$9,789,520

$704,282

$5,216,027

$2,931,189

% of Donations

N/A

100%

7.19%

53.28%

29.94%

$ Credited (thousands)

88

$2,846,445

$186,389

$1,574,050

$955,232

% of Credit Received

N/A

100%

6.51%

55.30%

33.56%

* index codes are included for your convenience and are sourced from column 2 of the "Final Table 2" document originally cited at footnote 14. Note that percentages are based on calculations by this author and thus have no associated index code

As Table 1 above shows, there is a gross disproportionality between the control over public funds exerted by individuals based on income. This is the case even though, in general, low income Canadians contribute a greater proportion of their income to charity than do high income Canadians.32 The Bottom 51.69% of individuals filing taxes in Canada (those with income under $35,000) account for only 7.2% of the total donations (by $) and only 6.5% of the total dollars credited to individuals under the CDTC. The top 8.7% of earners (those with income over $100,000) contribute 53.28% of the donations and receive 55.3% of the dollars credited. Most strikingly of all, the top 0.97% of earners (those with income over $250,000) contribute 29.97% of the total donations and receive 33.56% of the dollars credited. So, in essence, just less than the top 1% of earners control more than a third of public funding from the federal CDTC and have more than five times the amount of control over funding as compared to Canadians in the bottom half of earners. Also, keep in mind that these figures only describe federal creditsIn particular, the total amount of money controlled by individuals at different levels of income would be increased proportionally if provincial credits were also applied.

All of this is not to say that high income earners are bad individuals for donating money and supporting the charitable sector. High income individuals who donate to charity are clearly doing a great service. However, the ability of a focused group of individuals not democratically elected, and not required to be transparent and accountable, to dictate where such vast sums of public money is spent is inherently inequitable. This is increasingly concerning when seen in light of the fact that lower income Canadians give a greater proportion of their income to charity.33

High income earners on average make donations to different charities than do low income individuals.34 With a clearly varied public opinion on the best distribution of public funds amongst charities, there seems to be little justification for allowing a limited group of individuals have such disproportionate control over large sums of public money.

Pluralism is not an adequate justification for a system in which the benefits of that pluralism are so disproportionately administered. Thus, the only possible justification for such a system lie in the second key perceived benefit of CDTCs.

C. Recent Trends in Giving:

Since 2000, the percentage of tax-filers claiming donations has steadily decreased while the amount of money claimed as charitable donations has increased.35 This trend means that a decreasing percentage of Canadians are having increasing control over the public funds through CDTCs.

In addition, the federal tax credit was increased from 29% to 33% for those being taxed at the highest marginal tax rate.36 This change further increases the credit available to those with high incomes and widens the control gap between high and low income individuals.

D. Canada Without Poverty:

An additional concern could arise following the Ontario Court of Superior Justice decision in Canada Without Poverty v AG Canada,37 as well as the fallout surrounding that case.38

Charities are now allowed to carry on unlimited “public policy dialogue and development activities” (PPDDAs) in furtherance of a stated charitable purpose.39 Charities are still disallowed from directly or indirectly supporting political parties or candidates, but they can advocate for general changes to public policy (provided that that policy is in furtherance of a charitable purpose).40 This shift in the governance of charities has some ability to further enhance the disproportionate control over public policy as well as public funds.

Public policy dialogue for charitable purposes such as relieving poverty are not controversial, but what if charities were to use funds to advocate for public policy changes on more controversial issues such as abortion or gay-marriage? This possibility is admittedly extreme, but if individuals wished to increase public policy dialogue on one side of a controversial issue using public funds, it would seem that they could do so. Given the disproportional control over public funds, this ability to also control some element of public policy dialogue would also be disproportionately held by high income individuals.

PART III - Efficiency of Our System

In assessing the efficiency of our system, one basic question must be answered: To what extent do charitable tax credits incentivize charitable giving by individuals?

An efficient system will be defined in this paper in a similar manner to the definition of “price effectiveness” used by the Department of Finance. The Department of Finance states:

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 creditFurthermore, the Charitable Donation Tax Credit must be price-effective relative to the other options available to governments to achieve the same outcomes.41

The main alternative to which the efficiency of CDTCs will be compared in this paper is a system utilizing direct grants as a replacement for the current CDTCs.

In assessing the efficiency of our system as it currently stands, it is assumed that governments would fund the charitable sector equally whether doing so through the indirect process of providing charitable donation tax credits or through providing funding to the sector directlyIn practice, this assumes that the 3.19 billion dollars estimated to be expended on the federal CTDC in 2020,42 as well as the tax expenditures as a result of the CDTCs in every province and territory, would be spent on funding charities directly.

A. Surveys on Giving:

Numerous surveys have taken place asking donors why they give to charities.43 Predictably, different surveys produce different results, but a few general findings regarding tax recognition as an incentive for giving persist.

Firstly, tax incentives do motivate giving for some donors. The exact percentage of donors motivated and the extent to which tax incentives affects their decision to donate is not entirely clear. Secondly, survey results indicate that tax incentives seem to motivate people with greater income to donate more so than they do people with lesser income.44 While this may be a factor of greater knowledge of tax incentives and tax planning generally, the finding persists nonetheless. Finally, tax incentives are consistently found to motivate a lower percentage of donors than many other motivators such as a desire to help and simply being asked to donate. Burrows states:

Altruism, beliefs in the charity’s mission, and the circumstances of the solicitation have a greater effect than tax incentives on securing gifts. When a friend asks you to support her weekend walk for breast cancer, you do not calculate the tax benefits of your decision. This is typical philanthropic behaviour, and it extends to most routine forms of giving.45

These findings are clearly useful in informing charities, but with regards to supporting a finding on the efficiency of tax credits as an incentive for giving, survey findings likely need the support of more advanced studies. After all, individuals may be motivated to downplay the importance of receiving a “reward” when assessing their motivations for charitable giving. Also, it is worthwhile to note that even if deemed less motivating than other factors, tax incentives could still be seen as efficient.

B. The Price Elasticity of Giving:

The reality of tax credits are that they reduce the cost of giving for individuals. There is some delay in receiving the credit, but the cost of giving is nonetheless reduced. In assessing tax credits as an incentive for giving, we are, in essence, assessing how much that reduction in the cost of giving affects individuals willingness to give.

This assessment is undertaken by economists when they assess the “price elasticity” of giving.46 The price elasticity of demand is calculated by dividing a change in demand of a certain product by the change in the price of that product. A price elasticity with a magnitude greater than 1 is deemed to be elastic while an elasticity with a magnitude less than 1 is deemed to be inelastic.47 In basic terms, an inelastic product is one which will not respond to changes in price in a way sufficient to justify those changes, while an elastic product will justify a change in price. In the context of charitable giving, that “product” is a gift to a charity.

Numerous economists have studied the price elasticity of giving with mixed results.48 Neil Brooks even goes so far as to say that the results of these studies are “hopelessly irreconcilable.”49 While that assessment may be overly harsh, there is a clear lack of consensus as to the exact price elasticity of giving.50

i. Challenges in Assessing Price Elasticity

One of the key challenges in assessing the price elasticity of giving is that different eras used different methodologies in their assessments and thus found different resultsNormal price elasticities of giving found by economists have increased and decreased in different time periods.51 This in part reflects the methods frequently used to assess elasticity over time as certain assessments generally provide higher elasticities than others.52 Notably, early studies frequently used cross-sectional analysis rather than panel analysis. This resulted in what may be seen as artificially high findings of elasticity based on the analysis of short term rather than long term effects.53

Another difficulty in assessing the price elasticities found by economists is that the vast majority of studies assess temporary changes as opposed to permanent changes in the cost of giving.54 This presents a difficulty as temporary changes are found to have higher average elasticity findings than permanent changes.

There have also been relatively few studies on the price elasticity of giving conducted with respect to Canadians.55 Resultingly, the sample size we have to draw from in assessing Canadians is fairly limited and “Do not offer a sufficient base to draw firm conclusions on the price elasticity of Charitable Donations in Canada.”56 The majority of studies have been conducted in the United States, and while these studies may have some value in the assessment of price elasticity, the Canadian Department of Finance states the following:

“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.”57

As such, assessments based on international studies can suggest conclusions with regards to price elasticity in Canada, but should not be relied on as determinative in assessing the efficiency of our current system.

ii. Findings of Canadian Studies

Similar to international studies, Canadian studies have found varied price elasticities. Early studies (defined as studies using data prior to 1996) generally found the price elasticity of giving to be inelastic.58 These findings may be useful to some extent but were generally calculated using less advanced methods than current studies and were implemented at a time when accurate and expansive data was not easily obtainable.59

More recently, studies on Canadians have focused less on calculating an overall elasticity and more so on other topics.60 These studies have found that the elasticity of giving is much lower for donations to religious charities while finding that donations to charities for non-religious purposes were more elastic.61 Importantly, of the studies on Canadians completed since changing tax deductions to tax credits for individual donations, there is disagreement as to whether the price of giving had a statistically significant impact on total donations.62

Given the disagreement as to the statistical significance of the price elasticities, the small sample size of recent studies on Canadians, and some debate as to the legitimacy of early studies, there seems to be little which can be conclusively stated from the Canadian studies.

iii. Findings of International Studies

International studies on the price elasticity of giving have mainly taken place in the United States. The most all-encompassing analysis of these studies occurred in 2005 when Peloza & Steel conducted a meta-analysis of all previous studies.63 Despite its usefulness in gathering all prior studies into one resource, this meta-analysis seems to have raised more questions than answers.

The findings of this meta-analysis are that the average elasticity found by studies was -1.44.64 While this would seem to indicate that the price elasticity of giving is in fact elastic and could be seen as a valid incentive for giving, that elasticity falls to -1.11 when extreme outliers are removed.65 The results also indicated difference in elasticities found based on methodologies. Alternate methodologies often seemed to cause a distinction between finding mean elasticities above and below the threshold for deeming giving to be elastic.66 This finding further complicates the data as methodology varied greatly across studies and there seems to be little if any agreement regarding the best methodology to use.

Debate over best methodology is in large part best left to economists. From a layman’s point of view however, it would seem that methodology based on long term tax-filer data of permanent changes would be most useful. That may be deemed to be self-serving as all of those methodologies produce less elastic and more often than not inelastic results. However, the reality of tax policy changes is that they are generally deemed to be permanent changes. Given the permanent nature of changes it would seem that long-term results should be more instructive to determining policy changesFinally, tax-filer data would seem to be inherently more accurate in determining results based off of that data than would survey data.

Regardless of methodology used, the results of studies conducted in the United States generally find elasticities close to or slightly above the cut-off for efficiency as set out in this paper.

A few studies have also been conducted in other countries,67 but given the small sample size as well as potential difficulties in applying their findings to Canadians and the Canadian tax system they do not factor into this analysis.

iv. Conclusion on Price Elasticity

There has clearly been some progress in assessing the elasticity of giving since Brooks referred to these studies as “hopelessly irreconcilable.”68 Despite the progress made, establishing a strong conclusion on the elasticity of giving in Canada seems to be undermined by issues relating to sample size of Canadian studies, the application of American studies to a Canadian population, and questions inherent in the methodologies used by various studies.

While the results are plagued by the issues described above, it seems likely that the price elasticity of giving is somewhere close to the cut-off delineating it as elastic or inelastic. Further efforts to conclude the best methodology in assessing price elasticity as well as a greater wealth of Canadian studies would be very useful in informing any future analysis.

C. Past Changes in CDTC Policy and Their Effects:

In addition to the data gathered from surveys assessing motivations for giving and more advanced studies on price elasticity, past effects of changes to tax policy should also inform an assessment of the efficiency of our current system. These effects can, and inevitably are, altered by other factors, but these results provide some insight on how well the economic studies may translate to real events. These “case-studies” also serve some purpose in informing a discussion of ways to improve our system regardless of the elimination or continued use of CDTCs.

i. First-Time Donor’s Super Credit

The First-Time Donor’s Super Credit was a tax incentive put in place by the federal government in 2013 to incentivize “first-time donor’s” to donate to charity.69 This “super credit” allowed first-time donor’s to receive an additional 25% of their donation back as a credit up to a total donation of $1000.70 This was a temporary measure that was only in place from 2013-2017 and could only be claimed once in that time.71 It is the most recent example of a focused effort of the federal government to incentivize giving through tax policy.

The reason behind creating the first-time donor’s super credit was to “encourage all young Canadians to donate to charity.”72 The federal budget in 2013 asserted that:

This new credit will significantly enhance the attractiveness of donating to a charity for young Canadians who are in a position to make donations for the first time and—by helping to rejuvenate and expand the charitable sector’s donor base—will have an immediate impact in supporting the sector.73

Despite these lofty assertions, the effect of the first-time donor’s super credit appears to have been negligible. From 2000 to 2017 the overall number of donors stayed relatively stagnant at roughly 5.5 million individuals.74 In fact, there was a consistent albeit minor reduction in the number of total donors during the time of the first-time donor’s super credit.75 In addition, the percentage of donors aged 0-24 years old stayed stagnant at 3% before and during the super credit.76 The percentage of donor’s aged 25-34 also fell during the time of the credit, as had been the trend since 2000.77 These changes were inconsistent with the predicted effects of the super credit and all occurred despite the percentage of Canadians within those age ranges remaining relatively stable throughout that time period.78

There is the possibility that the results above may have also been influenced by factors outside the control of government. These factors could include economic or other changes to the population of “young Canadians”. There is also the possibility that this credit was effective, and but-for its existence, there would have been an even more significant drop in the number of young donors. Both of these possibilities seem unlikely, but they should be acknowledged.

More reasonable explanations could be that: (1) young Canadians were not aware of this super-credit; (2) young Canadians weren’t incentivized by the super-credit; or (3) a combination of lack of awareness and lack of incentivization occurred. For the sake of assessing the efficiency of CDTCs, the 2nd possibility is clearly the most concerning,79 but regardless, it is obvious that some change needs to be made to make credits like this more effective.

ii. Increased provincial tax credits in Alberta

In 2007, Alberta raised their provincial tax credit from 10% to 21%This change provided credits greater even than the highest provincial tax rate at that timeIt has been described as “… the most dramatic experiment in Canadian history to encourage additional giving…”80 This 11% increase in the upper end of provincial credits was reflected in a less than 7% increase in charitable donations between 2006 and 2007, 81 a time in which the Alberta economy was still growing. This increase was more drastic than increases in giving for most other provinces, but slightly less than the increase in B.C., where no changes in tax policy occurred.82

Over the long-term, the high end of the provincial tax credit in Alberta has remained at 21%, still higher than their highest marginal tax rate which has now increased to 15%.83 These long term changes has seen fairly significant increases in charitable donations. From 2007 to 2017, charitable donations in Alberta have risen by just under 12%.84 Charitable giving in Canada during that same time period has increased by just under 10%.85

This example shows some increase in charitable donations which may be attributed to increased charitable donation tax credits. However, this minor increase in charitable donations compared to increases across Canada seems to fail to justify the significant change in tax expenditures. This example is obviously prone to other factors such as economic and population changes, but the fact remains that for some reason or other, the tax policy changes made do not seem to have been efficient.

D. Conclusion Regarding Efficiency

There are difficulties and limitations inherent in all of the assessments of efficiency applied. Regardless of whether survey data, price elasticity, or an analysis of past effects of changes in tax policy are used, no firm conclusions can be drawnIt can likely be assumed that our current system borders somewhere fairly close to the line at which efficiency and inefficiency is delineated.

The true conclusion to be drawn however is that more advanced research needs to be completed. The necessity of completing this research is further enhanced by the need for change as a result of the inequity inherent in our system discussed in Part II.

PART IV - Options Moving Forward:

The lack of any formal consensus on the efficiency of our system leaves legislators in an admittedly tough position. Without having any concrete knowledge as to the efficiency of our system, policy changes hinge on the importance of equitable control of public resources. Given the extent to which that inequitable control undermines and overwhelms any perceived benefits of pluralism, some changes are necessary. Whether those changes should include a complete overhaul of the system or some minor amendments is discussed below.

A. Eliminating the CDTC:

One option moving forward would be to simply eliminate the tax recognizance of charitable donations and move to a system of direct grants. The principal benefit of this change is that it would remove the power imbalance regarding control of public funds. Regarding efficiency, it is not clear whether this change would be to the benefit or detriment to the bottom line of the charitable sector.

When considering this option however, a few additional factors should be considered.

i. Costs of changing system

Firstly, it should be noted that there could be cost implications to both charities and to government. The long-term costs to government of such a major alteration in tax policy are in large part beyond the scope of this paper, but should be factored into any discussion of efficiency. In the short term, it seems likely that there would be some significant expense associated with the discussion and implementation of any such changes.

For charities, the cost and difficulties associated with filing taxes and complying with some of the direction from the CRA could in large part be reduced. Additional cost and effort required for filling out grant applications could reduce this benefit somewhat, but overall it seems likely that the operation cost of charities would be reduced by this change in both the long and short term.

ii. The Crowding Out Effect

One possible effect of eliminating CDTCs would be that donations to charities could be altered by a “crowding out” effect.86 The theory behind this effect is that if donors know that charities are increasing funding to the charitable sector, they would be less likely to donateIn addition, charities could see less need to raise donations, instead relying more heavily or even exclusively on government grants.87

Just as with price elasticity however, there is no consensus as to whether crowding out would actually occur.88 Research has been fairly varied in that regard and in some cases has also found that direct funding of the charitable could “crowd in” some funding to help offset a portion of the crowding out effect.89 The crowding in of funding would occur on the theory that some individuals, in seeing that government saw a charity as worthy of funding, would feel more secure in the merits of donating.90

Part of the discussion on the crowding out effect that seems to be missing however is that moving to a direct grant system would not change the amount of money that governments would spend on charities. Assuming that a shift in policy would result in the tax expenditure from the CDTCs to be spent in the form of direct grants, the change would be in the delivery of funds and not the amount of funds delivered by governmentsIf this could be conveyed to both donors and charities, then there could be a reduction of the crowding out effect, if that effect is deemed to be likely to occur in the first place.

iii. Direct Grants and Small vs Large Charities

An additional concern surely to be raised by small charities is that the majority of government funding currently in place is distributed to large charities.91 Small charities make up the bulk of the charitable sector,92 but are often left without the benefit of direct grants.93 As such, these charities rely, in large part, on donations to support their charitable activities.94

For these reasons, it would be essential in eliminating or even in reducing CDTCs that the majority of tax expenditures recovered from that change be applied to providing direct grants for small charities. This would protect those charities from some of the potential harms of such a change and could also address potential flaws in our current government grant system.

iv. Tax Avoidance

An additional concern in replacing our system with a direct grant system is that individuals motivated more so by the tax incentives in place than by altruistic or other reasons could stop donating and instead use other forms to reduce their taxes owed. This would thus lower the donations to charities while also failing to regain those losses through taxation. This would likely occur almost exclusively for large donors who are more closely attuned to the tax implications of giving. However, given that large donations make up a significant portion of total donations, this tax avoidance as a result of these changes could have significant effects.

The possibility of donors using other legal means to reduce their taxes payable could be even more likely to occur if the crowding out effect is deemed likely to occurIf possible donors saw other ways to save themselves money, and could justify not donating on the grounds that direct funding would support charities, they may be more likely to so. These concerns need to be tempered with the reality that most donors do not donate with the primary goal of reducing taxes, but should be acknowledged nonetheless.

v. Conclusion on Eliminating CDTCs

Eliminating CDTCs would most directly address the disproportionality of control in the current system. Despite that, there are significant risks in making such a drastic change. These risks include increasing short term costs of governments, perpetuating some level of harm to small charities, and decreased efficiency due to possible crowding out effects and increased tax avoidance. Given these potential risks, more research should be done to confirm the likelihood of their occurrence. Until such time as the full risks of eliminating CDTCs becomes more clear, and more concrete conclusions on the efficiency of our current system is gathered, we should consider addressing concerns surrounding inequity through less drastic means.

B. Reducing CDTCs:

A second option to consider in improving our system would be to simply reduce the amount of credit received by donors and use the increased available funds to support direct grants. This could be done through reducing or eliminating the credit received for donations above $200 and/or by reducing the limits on credits with regards to the percentage of total income eligible to be credited. Dependent on the magnitude of changes made to the percentage credited, reductions in the limits of total credit received as a percentage of income may be unnecessary.95

An example of this would be to make all donations creditable at the current rate for donations under $200. If this were to occur, credit rates across the country (combined federal and provincial/territorial) would range from 19% in Nunavut to 35% in Quebec, with almost all rates at or below 25%.96

This option would seem to present somewhat of a middle ground between proponents of our current system and those vehemently opposed to the inequity present in the disproportionate control over public funds.

i. Possible Concerns with this Approach

The key potential drawback of this approach is that it may not sufficiently address concerns regarding private control of public funds. This is a valid concern in simply reducing the expenditures associated with CDTCs, but if such expenditures were reduced mainly through reducing the high end of the tax credit, this concern could be mitigated.

In addition, some of the same possibilities which present concern regarding eliminating CDTCs are also present if CDTCs are merely reduced. While it is clear that the cost of changing the system, possible crowding out effects, tax avoidance concerns, and concerns regarding effects on small charities would be present here as well, these concerns are clearly less pressing with reduction of CDTCs rather than elimination of CDTCs.

ii. Benefits of Reducing CDTCs

This option has a few key benefits. First and foremost would be that a reduction of the credit for donations above $200 would reduce the disproportionality of control of public funds between high and low income individuals. There would still be some level of disproportionality present, but it could be reduced to a more permissible level given the perceived benefits of pluralism. Furthermore, the risks associated with a full elimination of CDTCs would be in some ways mitigated by reducing but not eliminating CDTCs. There would still need to be a focus on providing better support to small charities through the increased direct funding, but other risks such as increased short term costs, crowding out, and tax avoidance would be less than in the elimination of CDTCs.

In addition, this change would better address the reality that the efficiency of CDTCs is unclear. In the off chance that our current system is actually highly efficient in incentivizing donations, such a change would address equitable concerns without completely destroying some level of economic efficiency.

Finally, this method could have the subsidiary benefit of providing additional insight into a discussion regarding the efficiency of tax recognition of charitable donations. Results would obviously be affected by other factors, but this could be an additional data point in answering questions of efficiency. The exact level of any reduction could thus be tinkered with and improved upon as more data becomes available. While this benefit alone is far from sufficient from justifying or even informing such a large-scale change on its own, this could be seen as a tertiary benefit to such a change.

iii. Conclusion on Reducing CDTCs

A reduction in the value of CDTCs, especially for high income Canadians provides the most stable middle ground to improve our current system. By reducing the tax expenditures of CDTCs and increasing direct grants, especially to small charities, governments could improve on the equity of our current system while mitigating risk associated with a more extreme reform.

CONCLUSION

Our current system of providing tax recognition for individual charitable donations in the form of tax credits provides disproportionately high levels of control over public funds to individuals with high incomes. In addition, there is no consensus indicating that this system is efficient nor how efficient or inefficient it may be. We should thus continue to research the efficiency of CDTCs. Finally, charitable donation tax credits in Canada should be amended to provide less credit to high income donors. Tax expenditure savings from this change should be redistributed to charities in the form of direct grants focused on benefitting small charities.

BIBLIOGRAPHY

LEGISLATION

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Boris I Bittker, “The Propriety and Vitality of a Federal Income Tax Deduction for Private Philanthropy” in Tax Impacts on Philanthropy (Princeton: Tax Institute of America, 1972) 145 at 166.

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David G Duff, “Tax Treatment of Charitable Contributions in Canada: Theory, Practice, and Reform” (2004) 42:1 Osgoode Hall LJ 47 at 50.

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Gabrielle Fack and Camille Landais, “Are Tax Incentives for Charitable Giving Efficient? Evidence From France” (2010) 2:2 American Economic J: Economic Policy 117.

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RD Hood et al, “Economic Determinants of Individual Charitable Donations in Canada” (1977) 10:4 Can J Economics 653.

Belayet Hossain and Laura Lamb, “Does the Effectiveness of Tax Incentives on the Decision to Give Charitable Donations Vary Across Donation Sectors in Canada?” (2012) 19:13-15 Applied Economics Letters 1487.

David Joulfaian & Mark Rider, “Errors-In Variables and Estimated Income and Price Elasticities of Charitable Giving” (2004) 57:1 National Tax J 25.

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Larson, Jan, “Sweet Charity” (1995) 2:3 American Demographics 68.

Paul R McDaniel, "Federal Matching Grants for Charitable Deductions: A Substitute for the Income Tax Deduction" (1972) 27 Tax L Rev 377.

Gwyneth McGregor, "Charitable Contributions" (1961) 9 Can. Tax J 441.

John K McNulty, “Public Policy and Private Charity: A Tax Policy Perspective” (1984) 3:2 Va Tax Rev 229.

Adam Parachin, “Split Receipting and Inter-Charity Gifts” (2008) 27:2 Est Tr & Pensions J, 197 at 198.

John Peloza & Piers Steel, “The Price Elasticities of Charitable Contributions: A Meta-Analysis” (2005) 24:2 J Public Policy & Marketing 260.

John Robinson, “Estimates of the Price Elasticity of Charitable Giving: A Reappraisal Using 1985 Itemizer and Nonitemizer Charitable Deduction Data” (1990) 12:2 J American Taxation Ass 39.

See e.g. Royal Commission on Taxation, Report of the Royal Commission on Taxation, vol 3, (Ottawa: Queen’s Printer, 1966) at 222.

Statistics Canada, Charitable Giving by Individuals, by Martin Turcotte, Catalogue No 89-652-X2015008 (Ottawa: Statistics Canada, 16 December 2015).

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Faye L Woodman, “The Tax Treatment of Charities and Charitable Donations Since the Carter Commission: Past Reforms and Present Problems” (Fall 1988) 26:3 Osgoode Hall LJ 537.

Jiang-Ming Johnny Wu & Robert Ricketts, “The Price Elasticity of Charitable Giving: Additional Evidence from the Panel Data via the EM Algorithm” (1999) 11 American Statistical Society 831.

Endnotes

1 Income Tax Act, RSC 1985, c 1 (5th Supp), s 118.1 [ITA]. For a list of other “qualified donees”, see Canada Revenue Agency, Qualified donees, Reference No CG-010 (issued on 15 August 2011, last modified 11 January 2017), online: <www.canada.ca/en/revenue-agency> [perma.cc/3NVD-GMZN].
2 See ITA, supra note 1, s 118.1(3).
3 Ibid. See also Canada Revenue Agency, “Amended legislation for the charitable donation tax credit” (24 January 2017) [CRA Amendments for High Income], online: <www.canada.ca/en/revenue-agency> [perma.cc/9HZS-RAGY]. Note that the 33% federal credit is reserved only for individuals being taxed at the top marginal tax rate.
4 The exception to the 75% limit occurs for donations occurring in the year of a donor’s death; See Canada Revenue Agency, Gifts and Income Tax 2018- Gifts in the Year of Death, Pamphlet No P113 (last modified 19 February 2019), online: <www.canada.ca/en/revenue-agency> [perma.cc/AWX9-644Q]. See also ITA, supra note 1, s 118.1.
5 Some forms of permitted donations include monetary gifts, cultural gifts, and ecological gifts. See ITA, supra note 1, s 118.1.
6 See Canada Revenue Agency, “Line 349- Donations and Gifts- Tax Tip” (last modified 12 February 2019), online: <www.canada.ca/en/revenue-agency/> [perma.cc/GM2Y-64V5]; Also, note that gifts of ecologically sensitive land made after February 10, 2014 may be carried forward for up to 10 years.
7 See Canada Revenue Agency, “Charitable donation tax credit rates” (last modified 24 January 2017) [CDTC Rates], online: <www.canada.ca/en/revenue-agency/> [perma.cc/HRB5-YEE9].
8Ibid.
9 Ibid.
10 Ibid. The minimum credit is based off of a total donation under $200 claimed in Nunavut while the maximum credit is based off of the credit rate for amounts donated greater than $200 by an individual in the top federal tax bracket making a donation in Quebec.
11 Further discussion of this topic will occur in Part II-B “Who Donates and How Much” below.
12 See Statistics Canada, Summary of Charitable Donors, Table No 11-10-0130-01 (last modified 4 December 2019), online: <www150.statcan.gc.ca> [perma.cc/ASS5-Y2GX].
13 Ibid. Note that average donation amount is not listed on that table but may be calculated by dividing total claimed donations ($9,576,975,000) by total donors (5,348,220).
14 See Canada Revenue Agency, “Income Statistics 2018 (2016 tax year)- Final Table 2 for all Canada” [CRA 2016 Stats], online (pdf): <www.canada.ca/content> [perma.cc/ M4DY-844T].
15 Ibid. Note that Total Credited Donations Claimed were $2,846,445,000 (Item Code 88- Grand Total ($)) while Total Donations Claimed were 9,789,520,000 (Item Code 86- Grand Total ($)).
16 Further discussion of this topic will occur in Part II-B “Who Donates and How Much” below.
17 See e.g. Tim Edgar, “The Concept of Taxable Consumption and the Deductibility of Expenses Under an Ideal Personal Income Tax Base” in Richard Krever, ed, Tax Conversations: A Guide to the Key Issues in the Tax Reform Debate (London: Kluwer Law International, 1997) 293; William D. Andrews, “Personal Deductions in an Ideal Income Tax” (1972) 86 Harv L Rev 309; Boris I Bittker, “The Propriety and Vitality of a Federal Income Tax Deduction for Private Philanthropy” in Tax Impacts on Philanthropy (Princeton: Tax Institute of America, 1972) 145 at 166.
18 See David G Duff, “Tax Treatment of Charitable Contributions in Canada: Theory, Practice, and Reform” (2004) 42:1 Osgoode Hall LJ 47 at 50. These rationale are used by other scholars as well; See e.g. Adam Parachin, “Split Receipting and Inter-Charity Gifts” (2008) 27:2 Est Tr & Pensions J, 197 at 198.
19 Duff, supra note 18.
20 See Canada, Department of Finance, Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations, 2019, Catalogue No F1-47E-PDF (Ottawa: Department of Finance, 2019) at 73 [DF Tax Exp 2019].
21 Ibid.
22 See e.g. Royal Commission on Taxation, Report of the Royal Commission on Taxation, vol 3, (Ottawa: Queen’s Printer, 1966) at 222.
23 See Church of Atheism of Central Canada v Minister of National Revenue, 2019 FCA 296 at para 26.
24 Note that the benefits listed in this paper entail benefits which form the bedrock of arguments in favour of CDTCs. Other perceived benefits such as Altruism, Independence, and Innovation are raised and in large part conclusively addressed by other scholars. See e.g. Neil Brooks, “The Tax Credit and Charitable Contributions: Giving Credit where None is Due” in Phillips, Chapman & Stevens, eds, Between State and Market: Essays on Charities Law and Policy in Canada (Montreal: McGill-Queen’s University Press, 2001) 457 at 464 ; Faye L Woodman, “The Tax Treatment of Charities and Charitable Donations Since the Carter Commission: Past Reforms and Present Problems” (Fall 1988) 26:3 Osgoode Hall LJ 537 at 538; John K McNulty, “Public Policy and Private Charity: A Tax Policy Perspective” (1984) 3:2 Va Tax Rev 229 at 231. This author asserts that these alternative benefits were addressed sufficiently by Brooks, are encompassed by similar principles as those discussed in this paper, and are less relevant in considering alternatives of direct grants as opposed to full government control.
25 See Brooks, supra note 24 at 461; Duff, supra note 18 at 58.
26 See Brooks, supra note 24 at 459; Duff, supra note 18 at 62.
27 Supra note 24 at 458.
28 See CRA Stats 2016, supra note 14.
29 Ibid.
30 Ibid.
31 Ibid. Note that all statistics apart from those regarding percentage of donations and percentage of credit received are pulled directly from the cited source. Percentages are calculated by this author with final percentages rounded to two decimal points.
32 See CRA Stats 2016, supra note 14.
33 See Statistics Canada, Charitable Giving by Individuals, by Martin Turcotte, Catalogue No 89-652-X2015008 (Ottawa: Statistics Canada, 16 December 2015) at 9.
34 Ibid at 11.
35 See Statistics Canada, Tax filers with charitable donations by income, Table No 11-10-0003-01 (last modified 4 December 2019), online: <www150.statcan.gc.ca> [>perma.cc/GM4S-J32G].
36 See CRA Amendments for High Income, supra note 2.
37 2018 ONSC 4147.
38 See Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, 1st sess, 42nd parl, 2018, cl 17 (as assented to 13 December 2018); See also Canada Revenue Agency, “Public policy dialogue and development activities by charities” draft guidance document CG -027; Kathryn Chan, “Constitutionalizing the Registered Charity Regime: Reflections on Canada Without Poverty v Canada (A.G.)” [forthcoming in Can J Comparative L, Summer 2020]; Florence Carey, “Canada Without Poverty: When is Political Activity Charitable?” (4 November 2018), online: MLT Aikins: <www.mltaikins.com/taxation/canada-without-poverty-when-is-political-activity-charitable> [perma.cc/6UNM-VJZ7].
39 See Canada Revenue Agency, “Public policy dialogue and development activities by charities”, supra note 38.
40 Ibid.
41 Canada, Department of Finance, Tax Expenditures and Evaluations 2014, Catalogue No F1-27/2014E-PDF (Ottawa: Department of Finance 2015) at 44 [DF 2014 CDTC Evaluation].
42 See DF Tax Exp 2019, supra note 20.
43 See e.g. Charitable Giving by Individuals, supra note 33.
44 See Malcolm D Burrows, “Charitable Tax Incentives in Canada: Review and Opportunities for Expansion” (2009), 22:1 The Philanthropist 2003 1 at 15.
45 Ibid.
46 For a more detailed description of price elasticity, see Amy Gallo, “A Refresher on Price Elasticity” (21 August 2015), online: Harvard Business Review <hbr.org/2015/08/a-refresher-on-price-elasticity> [perma.cc/S47G-B35M].
47 Note that assessments of price elasticities almost always produce negative values as increases in price result in decreases in demand. Magnitude is therefore used in this paper to refer to the number value and not its classification as negative or positive.
48 See John Peloza & Piers Steel, “The Price Elasticities of Charitable Contributions: A Meta-Analysis” (2005) 24:2 J Public Policy & Marketing 260.
49 Supra note 24 at 471.
50 See John Robinson, “Estimates of the Price Elasticity of Charitable Giving: A Reappraisal Using 1985 Itemizer and Nonitemizer Charitable Deduction Data” (1990) 12:2 J American Taxation Ass 39; Jiang-Ming Johnny Wu & Robert Ricketts, “The Price Elasticity of Charitable Giving: Additional Evidence from the Panel Data via the EM Algorithm” (1999) 11 American Statistical Society 831. Findings range from -7.07 (Robinson) to +0.12 (Wu and Ricketts 1999). See also Peloza & Steel, supra note 48 at 261.
51 See Brooks, supra note 24 at 472; DF 2014 CDTC Evaluation, supra note 41 at 59.
52 See Peloza & Steel, supra note 48 at 267.
53 See DF 2014 CDTC Evaluation, supra note 41 at 62.
54 See Peloza & Steel, supra note 48 at 264-265.
55 See DF 2014 CDTC Evaluation, supra note 41 at 63.
56 Ibid at 64.
57 Ibid at 59.
58 See eg. RD Hood et al, “Economic Determinants of Individual Charitable Donations in Canada” (1977) 10:4 Can J Economics 653 (price elasticity of -.86); Graham Glenday, Anil K Gupta & Henry Pawlak, “Tax Incentives for Personal Charitable Contributions” (1986) 68:4 Rev Economics & Statistics 688 (price elasticity of -.2); Harry Kitchen & Richard Dalton, “Determinants of Charitable Donations by Families in Canada: A Regional Analysis” (1990) 22:3 Applied Economics 285 (price elasticity of -.93).
59 See DF 2014 CDTC Evaluation, supra note 41 at 63.
60 See Amornrat Apinunmahakul & Rose Anne Devlin, “Social/Capital and Private Philanthropy” (2004) (University of Ottawa, Department of Economics, Working Papers: 0406E); Belayet Hossain and Laura Lamb, “Does the Effectiveness of Tax Incentives on the Decision to Give Charitable Donations Vary Across Donation Sectors in Canada?” (2012) 19:13-15 Applied Economics Letters 1487; Ross Hickey, Bradley Minaker & A Abigail Payne, "The Sensitivity of Charitable Giving to the Timing and Salience of Tax Credits" (2019) (University of Melbourne, Melbourne Institute of Applied Economic and Social Research, Working Papers: wp2019n02).
61 See Hossain & Lamb, supra note 60.
62 Ibid; See also Apinunmahakul & Devlin, supra note 60. Apinunmahakul & Devlin concluded no statistically significant impact while Hossain and Lamb concluded there was a statistically significant impact.
63 See Peloza & Steel, supra note 48.
64 Ibid at 265.
65 Ibid.
66 Ibid, Table 2-Panel B.
67 See e.g. Gabrielle Fack and Camille Landais, “Are Tax Incentives for Charitable Giving Efficient? Evidence From France” (2010) 2:2 American Economic J: Economic Policy 117; Maja Adena, “Tax-Price Elasticity of Charitable Donations- Evidence from the German Taxpayer Panel” (2014) online (pdf): <citeseerx.ist.psu.edu> [perma.cc/PN9N-79PJ].
68 Supra note 24 at 471.
69 See Government of Canada, “Take advantage of the new first-time donor’s super credit” (last modified 16 December 2013) online: <canada.ca/en/news> [perma.cc/Z9QK-PF8M]. First time donors were defined as such if “neither the individual nor the individual's spouse or common-law partner has claimed the charitable donation tax credit since 2007.”
70 Ibid.
71 Ibid.
72 See Government of Canada, 2013 Budget- Economic Action Plan (21 March 2013) at 10, 211, online (pdf): <budget.gc.ca> [perma.cc/H7TR-LMQB].
73 Ibid at 237.
74 Statistics Canada, Tax filers with charitable donations by sex and age, Table No 11-10-0002-01 (last modified 4 December 2019), online: <www150.statcan.gc.ca> [perma.cc/R56F-7ZPQ].
75 Ibid.
76 Ibid.
77 Ibid.
78 Statistics Canada, Population estimates on July 1st by age and sex, Table No 17-10-0005-01 (last modified 4 December 2019), online: <www150.statcan.gc.ca> [perma.cc/8VEG-XWXA].
79 This is particularly concerning considering the finding of economists that temporary changes in tax policy are more elastic than are permanent changes. See Part III-B-iii above.
80 See Burrows, supra note 44 at 16.
81 See Statistics Canada, Summary of Charitable Donors, supra note 12. Charitable giving increased in Alberta from $1,289,145,000 in 2006 to $1,383,715,000 in 2007. Note that Burrows indicates increased giving in Alberta of 7.3% from 2006 to 2007. Ibid at 16. The source of Burrows figures are not clear but it is assumed that differing percent increases arises as a result of the use of marginally different data-sets.
82 Ibid.
83 See CDTC Tax Rates, supra note 7.
84 See Statistics Canada, Summary of Charitable Donors, supra note 12. Charitable donations in Alberta rose from $1,383,715,000 in 2007 to $1,566,425,000 in 2017.
85 Ibid. Charitable donations across Canada rose from $8,648,660,000 in 2007 to $9,576,975 in 2017.
86 See DF 2014 CDTC Evaluation, supra note 41 at 45.
87 Ibid.
88 See James Andreoni & Abigail Payne “Is Crowding Out Due Entirely to Fundraising? Evidence From a Panel of Charities” (2011) 95:5-6 J Public Economics 334; James Andreoni & Abigail Payne, “Crowding Out: The Effect of Government Grants on Donors, Fundraisers, and Foundations in Canada” (2013a) (McMaster University, Department of Economics, Working Paper 2013-10); Timm Bönke, Nima Massarrat-Mashhadi & Christian Sielaff “Charitable Giving in the German Welfare State: Fiscal Incentives and Crowding Out” (2013) 154 Public Choice 39.
89 See Andreoni & Payne 2013, supra note 88.
90 See DF 2014 CDTC Evaluation, supra note 41 at 46.
91 See CanadaHelps, “The Giving Report 2018” at 10, online (pdf): <canadahelps.org/media/the-giving-report-2018.pdf> [perma.cc/VC3E-ZFHQ]. As per CanadaHelps, 85% of government funding went to the 1% of charities that reported more than 200 employees.
92 Ibid at 36. Note that over 90% of charities reported having 10 of fewer staff members in 2016, and charities with 2 or fewer staff members made up 78% of all registered charities.
93 Ibid at 35,36. Over 90% of charities reported having 10 or fewer full-time staff members in 2016, yet those charities received less than 5% of direct government funding.
94 Ibid at 10. Charities with 10 or fewer staff relied on receipted gifts to provide 33% of their revenue. Charities with 200 or more employees, on the other hand, relied on receipted gifts for less than 1% of their revenue.
95 This could be the case as drastic reductions in credit percentages received would necessitate higher levels of total donations to meet the high end of total creditable donations (75% of income).
96 See CTDC Rates, supra note 7. Note that outside of Quebec, the maximum credit to be received in this scenario would be 25.8% and all provinces & territories outside of Quebec, Manitoba, and Saskatchewan having rates at or below 25%.