Cut the capital gains tax, cut the income gap

Posted on December 29, 2013 in Inclusion Delivery System – Globe Debate
Dec. 24 2013.   Donald Johnson

There has been significant news coverage recently on income inequality and the increasing income gap between the average worker and the top 1 per cent. The federal government now has the opportunity to reduce this inequality by removing the barrier to charitable donations of gifts of two appreciated capital assets: real estate and private company shares.

There are hundreds of thousands of people across Canada who have significant wealth in these two asset classes. Many would consider making major donations to social service agencies, such as United Way/Centraide, if they weren’t required to pay capital gains tax on such gifts. I propose that the government introduce these measures in its next budget.

Social service agencies have already benefited enormously from the removal of the capital gains tax on charitable gifts of listed securities. The experience of the United Way of Greater Toronto is a perfect example. From 1956 to 1996, the total gifts of listed securities it received during those 40 years was $44,000. Since the elimination of half the capital gains tax in 1997 and the rest of it in 2006, it has received more than $128-million in gifts of stock.

This money has been distributed to the 200 social service agencies supported by the United Way in the Greater Toronto Area. In turn, these agencies have provided crucial support for tens of thousands of people. They need and deserve assistance from those who have the capacity to give it. Removal of this barrier would help increase charitable giving.

In addition to this crucial support for people who have little or no income, our proposal would also provide incremental funding for health care, education and arts and culture. With the government’s commendable focus on returning to a budget surplus in fiscal year 2015/16, it’s not in a position to provide this kind of support.

For example, there are growing demands on hospitals as our population ages, and pressure on education to stimulate innovation and productivity and strengthen our competitive position by attracting the best and the brightest professors and students. Universities and colleges desperately need endowment funds that provide for professorial chairs and student bursaries – these funds could become available if the government were to take the next step in amending the Income Tax Act. It would make our country more productive, creative and competitive.

The government now forecasts a budget surplus of $3.7-billion in fiscal 2015/16. Given that it will take several months before prospective donors can actually make such donations, there is a compelling case for introducing these measures in the 2014 budget rather than delaying it until 2015.

Besides the millions who benefit from the vital services provided by our charities, the beneficiaries of these measures would include the 2.1-million Canadians employed in the sector, the management of these organizations, the volunteer board members involved in fundraising, and the donors.

The government, too, would benefit from the outcome of helping the wealthy give to those with much lower incomes. In effect, the gap between rich and poor will have been reduced.

Donald K. Johnson (OC, LLD) is a volunteer board member of four not-for-profit organizations in each area of the charitable sector and a member of the advisory board of BMO Capital Markets.

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