Stimulating charitable giving – Opinions – Stimulating charitable giving
January 22, 2009. DONALD JOHNSON

The global economic, financial and credit crisis has created a significant challenge for Canada’s hospitals, universities, social service agencies, arts and culture organizations and community foundations. With the collapse of the stock market, many donors have significantly less financial capacity. Furthermore, the asset values of endowment funds and community foundations have declined, as a significant portion of their portfolios have been invested in the stock market. This decline in asset values has resulted in a reduction of disbursements that provide crucial funding.

Three measures, tax-effective for both donor and government, that would encourage greater charitable giving are:

Exempting gifts of private company shares from capital gains taxes;

Exempting gifts of real estate from capital gains taxes;

Levelling the playing field between “arm’s-length” and “non-arm’s-length” employees who exercise stock options and give the shares to a charity within 30 days.

The first and second proposals simply capitalize on the enormous success of the government’s measure to eliminate the capital gains tax on gifts of publicly listed securities. In the U.S., gifts of private company shares and real estate are exempt from capital gains tax. To address concerns about the valuation of private company shares and real estate, the donor would receive a tax receipt when the assets are monetized and the charity receives the cash proceeds.

All four parties – the Conservatives, Liberals, New Democrats and Bloc – supported the 2006 budget measure. There is every reason to think they would support these ones too.

The total market value of private companies is greater than the market value of all Canadian companies listed on the TSX. The majority of these companies would have a very low tax cost base, relative to their current market value. There are hundreds of thousands of small businesses that constitute almost half of Canada’s GDP and account for 60 per cent of all private-sector employment. It is relevant that a significant portion of these private companies are located in smaller communities, who would logically benefit from a significant number of donations of these assets.

Real estate is the most widely held asset in Canada, estimated to represent more than 40 per cent of wealth. In looking at potential donations of real estate, however, principal residences should be excluded, because sales of these residences are already exempt from capital gains taxes. To demonstrate the potential of such gifts, consider the experience of the University of Florida. It receives gifts of $170-million to $220-million a year, $30-million to $50-million of which is in real estate.

Finally, family members who are officers and/or directors of a public company, and collectively control over 50 per cent of the votes, are classified as “non arm’s-length” employees. When “non arm’s-length” employees exercise their stock options, the stock option benefit is taxed like ordinary income, regardless of whether or not the shares purchased by exercising the options are subsequently donated to a charity. For all other publicly listed companies, however, “arm’s-length” directors and/or officers who exercise options, have their option benefit taxed at 50 per cent of the normal income tax rate, effectively like a capital gain.

Furthermore, if they exercise their options and donate the shares to a charity within 30 days, they are completely exempt from any tax on the option benefit. They also receive a charitable donation tax receipt for the full market value of the gift. The government should amend the Income Tax Act so in this case “non arm’s-length” employees receive the same tax treatment as “arm’s-length” employees.

The upcoming budget presents a unique opportunity for the government to stimulate private-sector funding for our charities. As Winston Churchill once said, “You make a living from what you get. You make a life by what you give.”

Donald Johnson is a senior adviser at BMO Capital Markets.

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