Expand the capital gains exemption to pre-empt a charitable crisis

Posted on November 3, 2011 in Inclusion Policy Context

Source: — Authors:

TheGlobeandMail.com – life/giving/commentary
Published Monday, Oct. 31, 2011.    Donald Johnson

This is part of The Globe and Mail’s in-depth look at the evolution of philanthropy. Read more from the serieshere.

The global financial crisis has created significant challenges for all levels of government in Canada. They must strike the right balance between restoring fiscal responsibility through deficit reductions and stimulating the economy to avoid another recession. The collapse of stock markets has also created major challenges for Canada’s not-for-profit sector – our hospitals, universities, social service agencies, and arts and cultural organizations desperately need more money. Our charities cannot expect significant funding increases from government. But they do have an opportunity to access additional financing from the private sector that is more tax effective than direct government support.

The 2006 federal budget measure that eliminated the remaining capital gains tax on gifts of listed securities has been an enormous success. Every year since then, Canadian charities have received donations in the form of listed securities of more than $1-billion. When no capital gains tax exemption existed, Canadians simply did not donate shares.

It’s now vital for our government to capitalize on this enormous success by expanding the capital gains tax exemption to include charitable gifts in the form of private company shares and real estate. I should note that charitable gifts of both of these asset classes are exempt from capital gains taxes in the United States. By introducing these measures in the next budget, the government would be levelling the fundraising playing field for our not-for-profit sector with their American counterparts, with whom we compete for the best and brightest talent.

The introduction of these measures also would give entrepreneurs deciding to maintain private company status the same tax treatment as entrepreneurs who take their companies public and subsequently donate shares to charitable causes. It’s estimated that introducing these measures in the next budget would result in $200-million a year of incremental donations to our vital not-for-profit sector.

Three issues need to be addressed in order for the government to implement these measures in the 2012 budget: the fiscal cost to the federal government; concerns about valuation abuse; and the level of awareness and support for these measures across Canada.

With respect to the fiscal cost, an expert on charitable giving has said the tax revenue cost would be just $50-million to $65-million a year, a fraction of the $200-million estimated increase in funding for our charities.

As to concerns about evaluation abuse, they can be addressed by a regulation that the charity may not issue a tax receipt to the donor until the charity has received the cash proceeds from the sale of the asset. If the purchaser of the asset from the charity, moreover, is not at arm’s length from the donor, the charity would need to obtain two independent appraisals to confirm that the asset was donated and sold at fair market value.

With respect to the level of awareness and support for these measures, earlier this year, prominent charities across Canada were signatories to letters to the Prime Minister and Finance Minister published in 13 prominent newspapers; the total circulation of these papers was 3.2 million, and the readership five million. These letters made clear to the government and the public the necessity of these reforms. We believe these measures would have the support of the NDP and the Liberals, because Thomas Mulcair, when he was the NDP’s finance critic, and Scott Brison, the Liberals’ finance critic, both expressed their approval.

This is one of the few public policy issues on which all political parties would probably agree, and all Canadians would salute the government’s willingness to act.

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

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