Tax considerations are an important and critical aspect of how donations are processed and how charities and supporters benefit. It varies significantly from country to country. In this article, we explore the tax implications and differences of a £100/$100 donation across the UK, the US and Canada.
In the UK, those who work in the charity sector take a system called Gift Aid for granted. This system, run by the treasury, raises an extra 25% on donations. This is because the UK government has agreed to give the tax benefit of each donation directly to the charity, rather than to the supporter. For example, for each £100 donated, the charity can reclaim the tax the donor has paid at the rate of 25%. So a £100 donation becomes worth £125 to the charity. The donor doesn’t have to reach further into their pocket, and so long as they are a UK taxpayer, they can be confident in knowing that each donation they make will be topped up by an additional 25%. The impact of this scheme in the UK has been massive. In the past year Gift Aid has been worth over £3.8bn ($6bn) to UK charities. That’s an equivalent amount of money to the entire GDP of Nicaragua, and it’s set to get bigger as Gift Aid is now being applied to donations of clothes, furniture and any item given to a charity shop. However, in the US, the system is entirely different, with the donor benefiting from a tax deduction equal to the amount of their donation to a certified 501c(3) charity. The charity receives the full amount donated by the supporter, but without the tax top up familiar to fundraisers in the UK. In Canada, rather than the donor getting a reduction in their net taxable income, they get a rebate. The Donation Tax Credit is the Canadian government’s way of ensuring donations aren’t made with “pre-tax dollars”. Although the scheme varies from province to province, in terms of the percentage of the donations that is rebated, ultimately, like the US, the donor receives the tax benefit. The Canadian and American systems clearly have an impact on encouraging donors to give. The US is the world’s most mature and developed fundraising marketplace. But what is the actual financial difference between the three country’s schemes? In the UK, it is a flat rate across all parts of the country but in the US and Canada the scheme varies from state to state and province to province, depending on regional tax rate differences. We have selected two different US states and Canadian provinces to make the point. What is interesting is the real cost to the donor and the total value for the charity. These schemes have quite different outcomes for both parties. Example of tax benefits for a 100 (£/$/CAN$) donation.
|Average Income*||Donation Value||Real Cost to Donor**||Total Value for Charity|
* Average income used in calculations to allow for differing tax rates ** Real cost to donor after tax deductions/rebates taken into account.
Oregon is selected as it has the highest state income tax rate for someone on the average income. In contrast, in Texas there is no state income tax. Meanwhile, in Canada, Quebec has the most generous donation tax credit and Ontario the least. Observe that a donation of 100 dollars/pounds is worth more to the charity in the UK—£25 more. Conversely in Quebec, a $100 donation effectively costs the donor only $50.60. The question is does this encourage a donor in Quebec to donate twice as much as they would otherwise? In the UK, do donors donate less than they could if the tax system worked in a similar way to North America? Let’s examine the statistics. Below is a table of the average annual donation levels for the US, Canada and the UK with a focus on the states and provinces mentioned earlier.
|USA (Oregon) Median||$2,163.00|
|USA (Texas) Median||$3,284.00|
|USA (Utah) Median – Most generous state||$5,255.00|
|USA (New Hampshire) Median – Least generous state||$1,497.00|
|Canada (Quebec) Mean – Least generous province||CAN$208.00|
|Canada (Ontario) Mean||CAN$526.00|
|Canada (Alberta) Mean – Most generous province||CAN$562.00|
*Because the USA and Canada figures are average donation level per household the UK figure has been doubled to make an approximate household figure. Donation levels in the US are far greater than those in Canada and the UK. Compared to the UK, donation levels in the US are 2.8 times higher and donations in the US are 3.1 times higher than donations in Canada. (Based on currency rates 15th January 2013). But in the US and Canada there is a state-by-state and province-by-province variance in giving levels too. In the US, Utah is the most generous state giving on average $5,255.
If tax implications were the primary driver for donation levels, by comparing Texas, one of the least taxed states, and Oregon we would expect to see higher gifts in Oregon where the tax benefit is higher than for the donor in Texas. In fact the opposite is the case, countering the argument that tax breaks are the main factor in giving levels. A similar result is shown in Canada. Quebec, which has the highest rebate for donors, is the least generous province. These observations seem to show that the question of whether it is the tax benefits which result in higher donations is almost impossible to answer (with overall results comparing the UK with North America suggesting it is, and state results suggesting it isn’t). What is clear is that tax effective giving makes up an important element of philanthropy both in the UK and North America, and that all three countries governments make charity donations tax effective.