{"id":15659,"date":"2024-10-10T07:04:17","date_gmt":"2024-10-10T14:04:17","guid":{"rendered":"https:\/\/peartreecanada.com\/?post_type=perspectives&p=15659"},"modified":"2024-10-22T08:16:51","modified_gmt":"2024-10-22T15:16:51","slug":"how-new-tax-rules-will-reduce-funding-to-charities-and-economic-development-in-northern-communities-2","status":"publish","type":"perspectives","link":"https:\/\/peartreecanada.com\/fr\/perspective\/how-new-tax-rules-will-reduce-funding-to-charities-and-economic-development-in-northern-communities-2\/","title":{"rendered":"How new tax rules will reduce funding to charities and economic development in Northern communities"},"content":{"rendered":"\n

Changes to the AMT and capital gains will undermine worthy causes and the vital mineral exploration sector.<\/strong><\/h2>\n\n\n\n

First published in the Canadian Family Offices<\/a> on October 10, 2024.<\/p>\n\n\n\n

\"\"
The bottom line, says PearTree’s Ron Bernbaum, is that some donors may now \u00ab\u00a0give considerably less\u00a0\u00bb<\/figcaption><\/figure>\n\n\n\n

For high-net-worth Canadians, recent federal government changes to tax policy are presenting a host of new challenges and complexities.       <\/p>\n\n\n\n

The first hit came in 2023, when Ottawa announced significant changes to the rules around the alternative minimum tax (AMT), a tax calculation for high-income individuals that must be done in parallel with a regular return and allows fewer deductions, exemptions and tax credits. Then, in its 2024 Budget, the Liberal government changed the tax regime for capital gains, raising the inclusion rate from 50 per cent\u2014where it had been since 2000\u2014to two-thirds for capital gains over $250,000, effective June 25 of this year.<\/p>\n\n\n\n

Taken together, the changes could add up to a double-whammy for at least some high-net-worth families and individuals, business owners and corporations.<\/p>\n\n\n\n

Yet Ron Bernbaum, Founder and CEO of PearTree Canada, which for nearly 20 years has helped high-net-worth individuals and corporations donate to charities tax efficiently through its flow-through share donation platform<\/a>, says that the shock waves from the new rules extend far beyond the \u201crich\u201d\u2014and could take a toll on charitable organizations, on the people they serve and on economically vulnerable, resource-dependent communities.<\/p>\n\n\n\n

For Canadian charities<\/a>, he explains, the tax changes reduce the incentives for wealthy donors to give at the same level. The new AMT, for instance, applies a 30 per cent capital gains inclusion rate to donations of publicly listed securities (up from zero), while the higher general inclusion rate on capital gains could mean less money available for donations after the sale of a business or a property.<\/p>\n\n\n\n

\u201cEspecially in the case of larger gifts made when individual donors have a once-in-a-lifetime economic windfall and see the opportunity to make a significant gift, the bottom line is that they will give considerably less due to the AMT changes,\u201d says Bernbaum.<\/p>\n\n\n\n

Over the long term, it\u2019s too early to tell how much less money will be donated to charitable organizations, which provide vital services in everything from hospitals and mental health treatment to community programs, assistance for unsheltered and food-insecure Canadians, and countless other valuable social benefits.<\/p>\n\n\n\n

Imagine Canada, an umbrella organization that supports more than 86,000 nonprofit organizations and charities, noted in a submission<\/a> to the federal government last fall that wealthy philanthropists have been \u201cthe only category of donors whose contributions reliably fill the gap\u201d created by a general decline in the number of charitable donations in recent years.<\/p>\n\n\n\n

\"\"
Flow-through donations help fund a huge proportion of Northern mineral exploration, says Kendra Johnston, helping to create jobs in vulnerable communities<\/figcaption><\/figure>\n\n\n\n

Meanwhile, Bernbaum says that high-net-worth individuals account for about 40 per cent of all the money donated to charity in Canada every year, or $4 billion of the roughly $10 billion given annually. So, even a small reduction in donations from wealthy Canadians could have a significant adverse impact on charitable funding.<\/p>\n\n\n\n

The less-bad news is that it could have been worse. The steadfast commitment and hard work of charitable-sector groups, along with their allies like PearTree, which regularly lobbies the federal government in support of the philanthropic and mining exploration sectors, helped secure a softening of some of the originally proposed changes. (For instance, revised rules allow for 80 per cent of charitable donation tax credits in AMT calculations, up from 50 per cent in the original proposal but down from 100 per cent pre-2024.)<\/p>\n\n\n\n

For many donors, flow-through share donation platforms like PearTree\u2019s still present a tax-efficient opportunity to support charitable causes, although, because the new rules are so complex, no two donors are likely to feel the same impact. \u201cNet-net, somebody who would have given away $100,000 last year can still likely give away about $65,000 this year in the same format,\u201d Bernbaum says.<\/p>\n\n\n\n

For charitable organizations, such declines might be unwelcome, but they are unlikely to be fatal. There is, however, another stakeholder group that might be more vulnerable: the resource-dependent, typically Northern communities that rely on the mineral exploration industry for income, infrastructure and jobs.<\/p>\n\n\n\n

Flow-through share donations\u2014whereby donors buy and then immediately donate shares of qualifying mineral exploration companies to charity, followed immediately by the charity selling the shares stripped of their tax value to equity investors\u2014are an important driver of the Northern economy. Bernbaum and PearTree Canada\u2019s Managing Director Kendra Johnston say that the roughly $850 million raised with flow-through share donation platforms every year (PearTree accounts for more than $500 million of that total) comprises nearly 75 per cent of all the money that is spent on mineral exploration in Canada. But less money donated using flow-through shares will mean less capital for exploration projects, and less economic activity in the North.<\/p>\n\n\n\n

\u00ab\u00a0The flow-through regime is where the money to create those jobs is coming from\u00a0\u00bb Kendra Johnston<\/p>\n\n\n\n

\u201cThat could have a rather large impact on big projects that need to raise a lot of money and are going to create a lot of jobs in Northern communities,\u201d says Johnston. \u201cBut it could arguably have an even larger impact on many smaller projects that need to raise only a few million dollars. Losing a third of their budget because of these tax changes could be make-or-break for them and their local suppliers.\u201d<\/p>\n\n\n\n

Such projects, Johnston adds, are critical to Canada\u2019s overall economic security, as metals such as lithium and copper will be central to the emerging green economy. Mineral exploration is also an important creator of jobs. \u201cThe sector is the largest employer of Indigenous people across the country and one of the largest employers in the Northern Territories,\u201d she says. \u201cThe flow-through regime is where the money to create those jobs is coming from.\u201d<\/p>\n\n\n\n

In response to PearTree\u2019s submissions, the federal government acknowledged the economic harm potential of the AMT legislation on mineral exploration. In the recent Aug. 12, 2024 Income Tax Act draft legislation, it eliminated the flow-through share deduction (Canadian Exploration Expense, or CEE) as an add-back to AMT. As of the writing of this article, the legislation is yet to be passed, but if passed as drafted, it will go a long way towards preserving the flow-through share tax incentive\u2014the flow-through share deduction of the CEE. <\/p>\n\n\n\n

\u201cFinance ought to be commended for its analysis and response,\u201d says Bernbaum. \u201cHopefully, with further work, it will see the benefits of eliminating capital gains from the AMT calculation. The AMT approach preserves the capital gains inclusion rate at two-thirds but enables larger gifts and greater exploration job creation.\u201d<\/p>\n\n\n\n

This story was created by Canadian Family Offices\u2019 commercial content division on behalf of PearTree Canada, which is a member and content provider of this publication.<\/em><\/p>\n","protected":false},"featured_media":14503,"template":"","content_type":[55,16,56],"topic":[31,29,46],"class_list":["post-15659","perspectives","type-perspectives","status-publish","has-post-thumbnail","hentry","content_type-flow-through","content_type-news","content_type-tax-updates","topic-flow-through-shares","topic-mining-finance","topic-tax-regulatory"],"acf":[],"yoast_head":"\nPearTree | How new tax rules will reduce funding to charities and economic development in Northern communities<\/title>\n<meta name=\"description\" content=\"How new tax rules will reduce funding to charities and economic development in Northern communities\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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