One Comment About Taxation – Alternative Minimum Tax Amendments (AMT) and its Impact on Charitable Giving

 

Decades and decades ago, Canada made a deliberate policy choice to use our taxation system to help encourage philanthropy.  Such a choice included providing tax-exempt status for registered charities (and tax incentives for donors to make gifts to such organizations) and non-profit organizations.  During Canada’s only comprehensive taxation review (the Royal Commission on Taxation from 1962 – 1966), the commission recommended the taxation system continue to be used as a means of encouraging philanthropy (see Chapter 20 of the report).

Overall, I think using the taxation system to encourage philanthropy and non-profit activities is sound from a policy perspective. Still, on a day-to-day basis, it can be subject to abuse.  Things need to change to improve compliance and curtail abuse, including more timely audits of charities and non-profits. In the 2014 Canadian Federal Budget, the government of Canada announced it was going to consult with Canadians on whether the tax exemption for non-profits was targeted correctly.  In my opinion, this consultation – which would not have included registered charities – was long overdue and a step in the right direction.  Unfortunately, when the Liberal Party won the general election in 2015, this consultation did not proceed. It should be resurrected.

If the taxation system is to be used to encourage philanthropy – which has obvious social benefits – then all related policies announced by the government should be consistent with those policy objectives.  A recent tax proposal – the proposed amendments to the “alternative minimum tax” (AMT) – is certainly inconsistent with that objective.

Some quick background: In 1985, the federal government announced it was exploring the introduction of an AMT: “The measure will have the effect of increasing the tax liability of those high-income individuals who use the tax incentives provided by current law to structure their affairs so as to pay little or no tax.  This initiative will thus enhance the fairness of the tax system”.  In 1986, the AMT became law.  Overall, the AMT is a poor taxation policy, especially considering the AMT is a refundable tax (for a maximum seven-year period following its application to the extent AMT is not applicable in those subsequent years).  The AMT architecture has not changed much since its introduction.  Fast forward to the election period of 2021, and the Liberal Party had one small paragraph in its election policy platform stating it was going to “create a minimum tax rule so that everyone who earns enough to qualify for the top bracket pays at least 15% each year, removing their ability to artificially pay no tax through the excessive use of deductions and credits”. The tax community was puzzled by this since Canada already had an AMT.  Did the policy writers know this?

After being re-elected, the 2022 Federal Budget doubled down on the Liberal Party election policy platform promise by stating its “commitment to examine a new minimum tax regime, which will go further towards ensuring that all wealthy Canadians pay their fair share of tax”.  A year later, the 2023 Federal Budget announced details of its so-called “examination,” which ultimately was a tinkering of the existing AMT regime and proposed it effective January 1, 2024.

This “tinkering” has some very significant amendments.  For example:

• Capital gains type income is proposed to now be fully included (as compared to the existing law of 80%) for purposes of calculating AMT exposure;
• The new proposed tax rate for AMT is to be 20.5% as compared to the existing 15%;
• The new proposed exemption for AMT is to be the amount at the bottom of the fourth personal federal tax bracket (estimated to be $173K for 2024), which is intended to exempt modest income earners from the revised AMT. This is a significant increase from the existing exemption of $40,000; and
• All personal tax credits are now only 50% creditable when calculating AMT exposure as compared to the existing 100% creditable. This includes charitable tax credits.

For individuals who have capital gains type income, beware.  Why?  Well, the highest current federal tax rate on capital gains is 16.5% (50% – since capital gains are only 50% includable in income – of the highest personal tax rate bracket of 33%).  This simple fact could trigger AMT in certain circumstances since 16.5% is less than the AMT rate of 20.5%.  This is clearly a “back-door” capital gains inclusion rate increase.

However, one of the most significant proposed amendments – as mentioned above – is that 50% of individual charitable donation tax credits (and other personal tax credits) will be a preference item when calculating exposure to the amended AMT.  Large charitable gifts are often made by high-income earners and / or high-net-worth individuals.  Under the new regime, the resulting AMT liability when making large charitable gifts can be shocking because of the 50% add-back for the charitable tax credit. My good friend – Jay Goodis of Tax Templates Inc. – has been busy building their great suite of tax templates to help calculate various tax scenarios, including the new AMT proposals.  I’d highly recommend the Tax Templates Inc. spreadsheets when planning for these new amendments.  As mentioned, the AMT liabilities under the new proposed regime are truly shocking and eye-opening.

While the devil is in the details (since each individual’s income profile and charitable gifting is different), if the AMT proposals get passed as is widely expected, there is no doubt that Canada’s charitable sector has cause for concern since it would make little sense for high-income earners to make charitable donations that would cause the revised AMT to be triggered.

In my opinion, using the taxation system to encourage philanthropy makes sense to encourage a variety of social positives.  However, sound public policy often gets in the way of good – but flawed – politics like “ensuring that all wealthy Canadians pay their fair share of tax”.  If the proposed AMT amendments get passed in their current form, Canadian charities should worry since the possibility of significantly reduced charitable donations by higher income earners is high.  And that would be bad for Canada overall.

 

One Comment About Leadership – What Happens When You Make a Mistake?

 

It happens.  We’re all human beings.  And human beings make mistakes.  Lots of them.  Regularly.  And particularly leaders.  Leaders are forced to make many decisions throughout the days, weeks, months and years and without a doubt, there will be a good chunk of those decisions that leaders would likely want to have back to make a different decision.

Mistakes can take many forms.  For example, repetitive errors mean you’re not learning or don’t fully grasp the issues.  These can usually be dealt with by slowing down, asking for help, and then applying the learning.  “Stupid” mistakes mean you didn’t take the necessary time to thoroughly understand the situation at hand nor fully think through the consequences of such a decision (which, if you had, the decision would have been different).  That is never a good feeling, but thankfully, “stupid” mistakes can usually be dealt with by slowing down and trying to grasp the situation at hand with a forward lens.

So, when you’re in a position of leadership, and you know you’ve made a mistake, what should you do?  One leader I know would often go out of his way to try to paint a narrative that often stretched the truth about the mistake when communicating the error(s) to affected parties.  When I confronted this person about such a “strategy” (after I started noticing that this was a behavioural pattern), the response was that he was embarrassed.  Embellishment saved him from being embarrassed in front of the affected parties.  I was shocked.

While I understand not wanting to be embarrassed, I have always found that the best learning is from my mistakes.  Yes, it isn’t very comfortable. But the teaching is invaluable.  The mistakes I’ve made certainly help me to avoid those mistakes or try a different approach again.

So, back to the original question.  As a leader, what should you do when you realize you’ve made a mistake?  In my opinion, you need to own it.  Be the first to admit it.  Don’t try to deflect the blame for a poor decision on your teammates.  Instead, again, own it.  Depending on the gravity of the mistake, there may be situations that demand quiet ownership of your error under the advisement of your legal counsel.  But those situations are likely rare.

Instead, a transparent leader trying to build a positive culture can go a long way in showing empathy and authenticity to their teammates if they assume ownership of mistakes and try learning from them.  And by that, I’m not saying you should “celebrate” or “cheer” your mistakes.  But you can certainly be the first to admit when you’ve made a mistake and own it.

Leaders, don’t hide from your mistakes. You’ll be a better leader and person by owning and learning from them.

 

One Comment About Economics and Politics – The Canadian Carbon Tax

 

Depending on your politics, you either cheer a Canadian carbon tax or despise it.  For me, I see it as nothing but a cash grab and income re-distribution tool that does absolutely nothing in its apparent objective to fight “climate change.”  It needs to be abolished, notwithstanding the many left-leaning economists and some tax policy wonks who think it is an effective tax tool.

Notwithstanding, late last week, Canada announced that it would suspend the carbon tax on “home heating oil” to help affordability for Canadians. Well, most Canadians don’t use home heating oil to heat their homes.  But….surrrrrprissse!!!  Atlantic Canada does.  And the governing Liberal Party polling numbers are in the tank in this crucial area of support for them.  While this is classic politics, it is shocking in its audacity (yes, I shouldn’t continue to be shocked by this government, but I do).  How does exempting home heating oil but no other forms of energy like natural gas reflect good policy for Canadians overall??  It doesn’t. Again, this is simple but ugly politics confirmed by a Liberal Minister saying that “…perhaps they need to elect more Liberals in the Prairies…” if they want relief.  Totally disgusting and poor leadership (the link to the television clip is here).

It’s shocking to me that Canadians accept this type of poor economic policy.  It’s time to abolish this divisive and unnecessary carbon tax.

 

Bonus Comment – Quote From John C Maxwell – Leadership Speaker and Author – About Leaders Making Mistakes

 

“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them. This sequence is something that all achievers have in common. They do not see a mistake is as their failure; rather it is simply a learning experience. Achievers view a mistake as an opportunity to do something over again and do it right the second time. A mistake is simply the price they pay to achieve success.”

 

Totally agree!

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