Aid charity through tax system

Posted on October 11, 2009 in Governance Debates, Social Security Debates – comment – Aid charity through tax system: Two amendments to Income Tax Act would give donations a significant boost
October 10, 2009.   Donald K. Johnson Senior Adviser, BMO Capital Markets, Volunteer Board Member of five Not-for-Profit Organizations

The government’s fiscal stimulus plan has provided crucial funding for Canada’s economy during this global economic and financial crisis.

While a few not-for-profit organizations have benefitted directly from the fiscal stimulus plan, Canada’s hospitals, universities, social service agencies and arts and cultural organizations are facing fundraising challenges.

The collapse of the stock market and the decline in the value of endowment funds and their disbursements has reduced funding for professors, doctors, researchers, students, and artists, as well as individuals in need of assistance.

Given the huge fiscal deficit, it is unrealistic to expect the federal government to increase direct funding for these organizations. We must find a way to provide a tax-effective fiscal stimulus for Canada’s not-for-profit sector.

After conducting extensive research on alternatives for stimulating increased private sector funding for our charities, we have concluded that two amendments to the Income Tax Act would result in significant increases in private sector donations. These measures capitalize on the great success of the government’s decision to eliminate the capital gains tax on gifts of listed securities.

We strongly recommend that the government expand the capital gains tax exemption to include gifts of private company shares and gifts of taxable real estate.

To address any concern about the potential for valuation abuse, we propose that the charity would not issue a tax receipt to the donor until the charity had received the cash proceeds from the sale of these gifts. If the purchaser of these assets from the charity is not at arm’s length from the donor, an independent, third-party valuation would be required.

Removal of this major barrier to charitable giving would unlock significant amounts of private wealth for public good. The total value of all private companies in Canada is greater than the total market value of all public companies – currently estimated at around $1.4 trillion. If the donation of real estate to a charity is to be retained by the charity to fulfill its mission, an independent, third-party appraisal would be required to provide an appropriate value for the tax receipt.

Gifts of private company shares and real estate are already exempt from capital gains taxes in the United States. Implementation of these two measures would level the fundraising playing field for Canada’s charities, which are competing with the U.S. for the best and the brightest talent.

Our proposals also enable the donor to sell private company shares or real estate and gift all or a portion of the cash proceeds to a charity within 30 days, under an existing provision in the Income Tax Act. This “Made in Canada” provision would be more effective and less costly for the recipient charity than the current U.S. system, which requires that the charity actually takes ownership of the asset.

The tax revenue cost to the government depends on the amount of the increase in charitable gifts and the adjusted cost base of the donated property.

The C.D. Howe Institute, Canada’s leading, independent, non-partisan think-tank, recently published an e-brief, Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities, which supports these proposals. The e-brief estimates that annual gifts of real estate could increase by $100 million to $200 million and annual gifts of private company shares by $200 million to $500 million. The tax revenue cost is approximately 60 per cent of these increased donations, shared two-thirds by the federal government and one-third by the provinces. In essence, for each $100 of federal and provincial tax revenues foregone, charities would receive $167.

All four political parties supported the 2006 budget measure, which eliminated the capital gains tax on gifts of listed securities. There is every reason to believe that all four parties would support these measures as well. Six former prime ministers have confirmed that they are supportive.

While amendments to the Income Tax Act are normally implemented as part of a budget, if all four parties confirm their support for these two proposals, we urge the government to implement these measures as soon as possible, for the benefit of all charities across Canada.

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