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Do the math before changing tax credits for charity

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Tammy Schirle is an Associate Professor of Economics at Wilfrid Laurier University



Recently, the House of Commons Standing Committee on Finance announced it will be studying tax incentives for charitable donations. They are expected to consider ideas like the "stretch tax credit" whereby becoming more generous year-to-year is rewarded with higher tax credit rates. The Imagine Canada proposal suggests the federal government increase the tax credit by 10 per cent on new giving that exceeds previous donations.



This could create some very strange incentives, and that might not include raising your charitable giving.

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Suppose I have a long-term budget whereby I donate $500 to food banks over five years. I can spread that out evenly with $100 donations each year, and receive a $75 tax credit, or I can think strategically.





Current Tax Credit



Stretch Tax Credit



Year

Donation

Tax Credit

Donation

Tax Credit

1

$100

$15

$0

$0

2

$100

$15

$50

$12.50

3

$100

$15

$100

$20

4

$100

$15

$150

$27.50

5

$100

$15

$200

$35

5-year total

$500

$75

$500

$95







I could start out with no donations and then increase the donations by $50 per year. Then the existing donation is credited at 15 per cent while the new $50 is credited at 25 per cent. Timing my donations strategically, I gain $20 in tax credits. This didn't require donating anything extra. Alternatively, I could donate less and walk away with the same tax credits in dollar terms.



I'm very supportive of encouraging philanthropy -- especially with food banks. But we really need to think through the strange incentives that such tax credits can create.



Economy Lab, winner of the 2011 Eppy Award for best business blog. Follow Economy Lab on twitter

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