Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 3 - Evidence - Meeting of December 1, 2004
OTTAWA, Wednesday, December 1, 2004
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:03 p.m. to study on issues dealing with charitable giving in Canada.
Senator Jerahmiel S. Grafstein (Chairman) in the Chair.
[English]
The Chairman: Ladies and gentlemen, we are expecting a number of other senators who are now involved in the house and also in other committees. It is so important that we start the process of getting information to the committee. I have a core, knowledgeable group of senators. Therefore, with your permission, I would like to start.
We have the appropriate numbers here to start the hearings and I would like to begin with a short introductory statement about our purpose here.
I hope that you will have read the Hansard, because when this reference was approved unanimously both in this committee and by the Senate, I tried to sum up as best I could the purposes of this particular hearing.
Ladies and gentlemen, thank you for attending. It is a great pleasure on behalf of the Standing Senate Committee on Banking, Trade and Commerce, and our deputy chair, Senator David Angus, to welcome you today and hear your comments on our study on charitable giving.
I would like to thank the witnesses here today. Their ability to prepare for these hearings, on short notice, is deeply appreciated. We know you are under tremendous time pressures; we have been pressed by Parliament under equally difficult time frames. We are trying to accomplish a lot in a short time, but we want to take a careful look at everything you say and everything you send to us in writing. We will read everything and listen carefully to what you have to say.
The objectives of these hearings are simple: to encourage ideas and to propose policies that will unlock, we believe, greater amounts of personal wealth for charitable purposes in a cost-effective way, always cognizant of the restraints on government revenues.
While we wish to unleash and channel large sums of private wealth into generally charitable objectives, we are always conscious and will be conscious of the cost effectiveness in terms of government revenues.
Our principal target is tax policy, to determine what may be done to enhance the opportunities for affordable giving by Canadians at all levels of civic society and all levels of income, while the potential for such giving exists.
In doing so, we will be looking at giving at all levels and by all different means. All of us are aware of the encouragement and incentives to give that already exist within our tax structure and our tax system. We are also aware that there are ideas and proposals at various stages of study elsewhere. We are interested in hearing about them. Further, we are hoping that the study we are undertaking will stimulate new thinking and different ideas within and without government.
We will now turn to our first witnesses, from the Department of Finance, and we ask you to introduce yourselves; and again, I hope you will work within the time constraints that we have allotted. I hope our questions will be succinct and answers in response will be the same and pointed.
[Translation]
Mr. Serge Nadeau, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance: My name is Serge Nadeau and I am from the Tax Policy Branch of the Department of Finance. With me today is Carl Juneau.
Thank you for inviting us to come here to discuss charitable giving in Canada. I would like to begin by giving you an overview of registered charities in Canada. I will then share with you some facts about Canadians who donate to charities and some figures on the amount of donations. Finally, I will give you current tax support highlights.
Today they are approximately 80,700 registered charities in Canada. The purpose of nearly 50 per cent of these charities is the advancement of religion. In fact, that is true of 43 per cent of all registered charities. Social services, including the relief of poverty, account for the second largest category of primary purpose.
Another interesting statistic is that more than half, or 54 per cent, of all registered charities have assets of less than $100,000.
[English]
The next slide provides background on the regulation of charities. My colleague will spend time on this slide.
The point I would like to stress relates to some of the obligations that registered charities have under the Income Tax Act. One obligation is that charitable purposes are limited to those recognized under the common law. This means, for example, the charity cannot have a political purpose. I should be clear here. Although they cannot have a political purpose, they can perform political activities as long as they are non-partisan and fall under the 10 per cent limit. They can also engage in public awareness campaigns or communications with elected representatives. There is no limit on such activities.
Another important obligation of registered charities is that they must fulfil minimum annual disbursement requirements for receipted donations. While there are obligations, there are several benefits to being a registered charity. First, registered charities are exempt from income tax. Second, and probably more important, donations to registered charities benefit from what is often touted as the most generous tax incentive in the world. In particular, individuals receive a 16 per cent federal tax credit on the first $200 donated and 29 per cent on donations thereafter, irrespective of the donor's income. Why is this often touted as one of the most generous tax incentives in the world? It is because most other countries provide a deduction for charitable donations, as opposed to tax credits, at the top tax rate. Also, for public charities, only 25 per cent of capital gains are subject to tax on gifts such as publicly traded securities.
Slide 9 provides interesting facts on donations. In 2003, 5.6 million Canadians made financial or in-kind donations worth approximately $6.5 billion. While 90 per cent of tax assistance went to individuals, 10 per cent went to business. The average amount of receipted donations is slightly greater than a thousand dollars. Another interesting fact is that donors whose total annual income is less than $60,000 represent 73 per cent of all donors and their donations amount to 43 per cent of all donations. On the other hand, donors whose total income is greater than $100,000, while they represent only 8 per cent of all donors, their donations amount to 34 per cent of all donations.
Slides 11 to 14 highlight income tax changes that have been introduced over the last 10 years to provide additional support for charitable giving or to improve the integrity of the support. I will not go through all these changes because of time constraints, but you might find that useful for your deliberations.
Slide 15 quantifies in dollars current tax support. This slide tries to compare how much tax support is provided to three different types of donations. The first type of donation is a cash donation. The second is a donation of a publicly traded security to public charities under the current provisions, where 25 per cent of the inclusion rate on capital gain is in place. The third scenario is a donation of publicly traded securities to public charities, but under what has been proposed as a zero inclusion rate on capital gains. Here, we start with the assumption of a same $100 of after-tax income. This tells us that for cash donations, for example, $100 donated out of after-tax income will bring $29 in federal income tax credit. Here I am making the assumption that the individual has already given $200. In addition to this $29, the individual would get approximately $17 in provincial tax credit for a total tax assistance of $46. In other words, for a cash donation of $100, current tax assistance is $46, or 46 cents on the dollar, which means the donor's share is 54 cents on the dollar.
The second example, the donation of a publicly traded security to public charities, we start with $100 donated out of after-tax income. This donation will benefit from the federal and provincial tax credits. In addition, this donation would benefit from a reduction in capital gains tax of approximately $7. The total tax assistance in this case is 53 cents on the dollar, which means that the donor's share is 47 cents on the dollar, or 47 per cent.
The last example is in the case where there is no tax on capital gains on such donations. The difference here is that the rebate on capital gains tax is higher than before. It is $14 instead of $7, which means that the total tax assistance is 60 cents on the dollar and the donor's share would be 40 cents on the dollar.
To sum up, we have three scenarios. In one scenario, on the cash donations, the total tax assistance is 46 cents on the dollar. The total tax assistance on the donation of publicly traded securities is typically 53 cents on the dollar. Finally, if there was no capital gains tax, the total tax assistance would be 60 cents on the dollar.
Senator Angus: May I ask a point of clarification, sir? Excuse me for interrupting, and welcome. At slide 15, when you say ``proposed'' in the third column, that is not the current law.
Mr. Nadeau: No.
Senator Angus: Why are you telling us about it? Who is proposing it? We will, I can assure you.
The Chairman: Let him respond.
Mr. Nadeau: This is ``proposed'' in the sense it has been proposed to us many times. This is an example of what has been proposed. Perhaps ``proposed'' might not have been a well-chosen word.
Senator Angus: I wanted to make it clear for all of us. The heading is ``current tax support highlights,'' and that last column is still hypothetical. It is not actually law.
Mr. Nadeau: You are right, senator. I apologize. This was prepared very quickly.
The Chairman: We appreciate that and understand it.
Mr. Nadeau: The last slide is about total tax expenditures related to charitable giving. In 2004, it is estimated that the total tax expenditure is $2.2 billion: $1.6 billion going to charitable donation tax credit claims by individuals, $300 million related to the deduction of charitable donations claimed by business, and finally, $300 million related to the GST rebates.
This concludes my presentation. I will be more than happy to answer any of your questions.
Ms. Elizabeth Tromp, Director General, Charities Directorate, Policy and Planning Branch, Canada Revenue Agency: I am pleased to be here today to provide you with information on the roles and responsibilities of the Canada Revenue Agency with regard to the regulation of Canada's charities under the Income Tax Act.
Mr. Nadeau stated that to be a registered charity means meeting certain criteria for initial registration and fulfilling ongoing commitments for continued registration.
An organization must be established for exclusively charitable purposes and show that it will govern itself in such a way that it devotes all its resources to achieving those purposes.
To continue to be a registered charity, the organization must continue to act in a manner that reflects its stated charitable purposes, manage its financial dealings responsibly and file an annual return.
Each year, over 3,000 organizations apply for registered charity status, with most being approved. Nearly 2,000 charities, however, lose registered charity status for a variety of reasons. Some cease to exist, some merge with other organizations and others fail to live up to their obligations by failing to file an annual return. The net result is that the number of registered charities has been growing by about 1,000 per year.
The regulatory environment within which CRA regulates charities is complex. Under the Constitution, the provinces have sole jurisdiction over the establishment, maintenance and management of charities. The federal role is therefore limited to the rules that are applied to registered charities under the Income Tax Act.
Notwithstanding this limited role, Canadians generally view the CRA as the regulator of the sector as a whole, given the generally limited extent to which the provinces exercise this constitutional authority.
An additional complexity is the meaning of the word ``charity'' itself. It is neither defined under the Income Tax Act nor under any other statute. Instead, its meaning is left to common law and the interpretation of hundreds of years of decisions by the courts on what is charitable.
As was mentioned briefly, to be registered under common law as a charity, an organization must be established to perform charitable works under what are known as the four categories of charitable purposes: the relief of poverty, the advancement of education, the advancement of religion, and other purposes beneficial to the community in a way the law regards as charitable.
While the first three speak for themselves, the fourth category has evolved over time to reflect changing societal values. Among others, the common law now recognizes as being charitable relief of the aged, relief of the sick and disabled, the prevention of cruelty to animals and the provision of facilities for community recreation.
Determining whether a particular organization meets the common law definition of ``charity'' is not always easy. As society evolves, so do the issues with which society is faced. As groups form to deal with these issues, their purposes do not always match what the courts have traditionally viewed as being properly within the bounds of charity.
This tests us as regulators, as we use our judgment to draw analogies between new purposes and those that have already been determined by the courts to be charitable to ensure that the law remains up to date and reflective of current societal values.
Charities make a significant contribution to the Canadian way of life. Canadians depend on charities to fulfil roles not played by any other segment of society and support charities directly through donations and, indirectly, through tax assistance. By regulating charities through the administration of the Income Tax Act, the CRA plays a key role in creating an environment where Canadians can donate with confidence, knowing that the money they give will be used only for the purposes for which it is intended.
To achieve this end, the CRA monitors the ongoing activities of registered charities to ensure they stay within the rules. We know the great majority of charities want to comply with the law. Some do so as a matter of course; others need assistance in understanding their obligations and conducting their activities in a satisfactory way.
A small minority of registered charities misuse the system, abusing their charitable privileges for personal gain. These we seek to root out. More extreme still is the misuse of charitable funds in the support of terrorism. Here we work with colleagues across the government to take appropriate steps to shut this down.
The activities we employ to keep registered charities compliant with the law are many and varied. To determine if individual charities are meeting their obligations, we review annual returns, conduct periodic audits and respond to complaints; and we monitor the media for reports of unacceptable activities.
Our response to non-compliance is centred on an ``education first'' principle. On a broad level, we conduct information sessions across the country to give key compliance-related information geared to the majority of charities. Over 4,000 charities' representatives attend these sessions annually. We also issue a quarterly newsletter, use a new electronic e-mail list service and maintain an extensive website containing a wealth of policies and practical information for the charitable sector. This site includes a list of all registered charities, as well as direct access to the public portions of their annual returns.
When individual charities are found to be non-compliant but not wilfully so, our first action is to write or talk to them to ensure that they understand the rules and what they must do to comply. This is generally all that is needed. When charities deliberately abuse the system or refuse to take corrective action, stronger measures are required, often resulting in their registered charity status being revoked.
Four years ago, the federal government initiated the voluntary sector initiative. This joint initiative was designed to look at many aspects of the relationship between the government and the sector to see where improvements could be made, both to the relationship itself and the environment within which charities operate in Canada. One component of the initiative was the creation of a joint regulatory table, charged with exploring opportunities for improvements to the way charities are regulated under the Income Tax Act. The result was a report to government containing 75 recommendations, 69 of which were accepted, either in whole or in part. Legislative amendments to support these accepted recommendations, as well as new funding to implement them, were announced in the spring 2004 budget.
The implementation of these recommendations is what we now refer to as our regulatory reform initiative. This initiative is in recognition of the fact that, due to changes in public expectations, changes in the way the charitable sector operates and in the way regulatory oversight is conducted in the modern regulatory world, a broad spectrum of activity was required to respond in a meaningful way.
Reform initiative is driven by a five-point action plan, with reform activities grouped under the following headings: accessible and transparent service; public awareness and sector outreach; enhanced monitoring and sanctions; appeals; and collaboration with provincial and territorial governments.
Accessible and transparent service means we will provide the public and the charitable sector with much more information on what we do and how we conduct our business.
Public awareness means that we will be letting the public know that someone is looking out for their interests and making sure charities operate within the law.
Consulting means talking and listening to charities and bringing them into our policy development process.
Enhanced monitoring will be used to ensure that only charities that operate within the law achieve and maintain registered charity status. This effort is accompanied by the implementation of a new sanctions regime to give us new tools to help get charities to comply without having to take the drastic step of revoking their registered charity status.
A new appeals system will be put in place to give charities a quicker, cheaper means of accessing an independent review of decisions when they disagree with us.
Finally, we will be working with the provinces. Canadians do expect different levels of government to work together to meet their needs, and in charity regulation we will be working hard to achieve that.
I realize this is a brief presentation and only scratches the surface of many of our initiatives and activities under way. I hope it serves your purposes. I would be pleased to answer any questions you may have.
The Chairman: If you want to give us a further and more intense look at what you do in writing, feel free to do that — as quickly as possible. As I say, I undertake this committee will not only listen and question but also read material, because we want to ensure that you have ample opportunity to present everything you wish to present. Feel free to bury us in your paper, but ensure it is cogent, please.
Senator Angus: How do numbers in Canada that you have generated in your research — this is addressed to either or both of you — stack up? Are we good givers in Canada relative to other OECD countries, for example, both as to per capita and absolute numbers?
Mr. Nadeau: That is a good question. Unfortunately, I do not have the figures with me. I have seen figures that I am sure show that in Canada we do not give as much per capita as in the United States. I cannot remember if I have seen figures about other countries, but as for Great Britain and European countries, I think that we would compare more or less with Great Britain. We could endeavour to gather some information on that for you, with more solid figures. The casual evidence I have, from remembering what I have read about these things, is that we do not give as much as they do in the U.S.
The Chairman: The Senate, as you know, represents the five regions of the country. Many of our public do not know that under the Constitution, we are an equal chamber. The five regions are equally represented in the Senate. Could you please break down, if possible, region by region, according to our constitutional framework, the percentage absolute and total amounts of giving? Some of the anecdotal information I have is that the poorest parts of the regions give more, both percentage and per capita wise. I would like to know if that is correct.
Senator Oliver: Such as Newfoundland.
The Chairman: Newfoundland was one example. There are others. Please give us that information. It would be helpful to us as senators who represent all of the regions.
Senator Angus: The government chose in its wisdom to improve the tax incentives in the area of capital gains three or four years ago. Have you measured whether this has led to greater charitable giving?
Mr. Nadeau: A tax evaluation report came out of the Department of Finance in 2002. This is difficult to assess, especially given that there had been a stock market bubble, in which stocks had risen tremendously. At that time, the conclusion of the Department of Finance was that there was no evidence to the contrary, that this had contributed to an increase in donations. To be fair, a couple of articles were published in the Canadian Tax Journal that, in a sense, criticized the department. The articles said that the time frame had not been long enough to assess whether the incentives had increased the level of donations. Their conclusions were less positive than ours.
Senator Angus: This is important to me and we have to get this straight. Is either of you able to say that shares in publicly traded companies that have an accumulated capital gain have been increasingly used for charitable donation purposes in Canada since 1995?
Mr. Nadeau: There was definitely an increase from 1997 to 2000. However, I believe, and I would have to double check, that since 2000 there has been a big decrease. One reason is the performance of the stock market. Therefore, it is difficult to distinguish the reasons for the decrease. Between 1997 and 2000 there was a big increase, but was it because of the tremendous rise in stocks — the stock market bubble — or was it because of increased tax incentives? It was likely for both of those reasons, but the contribution split between tax incentives versus the boom in the stock market we cannot distinguish.
Senator Angus: Still, I am intrigued by that third column. As well, I am intrigued by Ms. Tromp's remarks about the 2004 budget and the ways and means measures that were in process. Is that third column covered by any of that?
Mr. Nadeau: Not at all. I want to make it absolutely clear. Rather than ``proposed'' it should have said ``often proposed.'' We have received many representations on it and that is all I should say.
Senator Angus: I realize that you are not the policy makers, but part of our job is to recommend policy. Would proposals such as column 3 find favour, in your view?
Mr. Nadeau: That is —
Senator Angus: I will rephrase my question. What are the reasons against it? Can you give us any practical reason against doing it? Would it be a huge drain on the Consolidated Revenue Fund, for example?
Mr. Nadeau: I can answer part of that. Depending on the amount of the donations, it could be a significant drain. The problem with such measures is that if they truly provide a strong incentive to donate, then of course it is costly. The greater the incentive and the more take-up there is, then the greater the drain on the Consolidated Revenue Fund. In this case, it is not only the removal of the half of the inclusion rate that is costly and, in fact, that is the least costly part. Rather, the other tax credits attached to it are even more costly.
Senator Angus: I understand.
Mr. Nadeau: That is why the size of the drain depends on how the stock market behaves.
Senator Angus: It would also depend on the charity and the amount of the donation. On the one hand, if the private sector gave large donations, it might be a fiscal drain in the first instance. On the other hand, it is substituting that money for money that the government might otherwise be spending. I take that as an assumption going in, and I put it to you that we are in a rapidly and dynamically changing environment, where public-private partnerships are being advocated, having the private sector pay for such things as hospitals and other health care institutions. Heretofore, they were always paid for by the government. If there were favourable incentives, from a column 3 kind of viewpoint, do you not think this could save more? What do you think about that?
Mr. Nadeau: I think that such incentives would provide for greater donations. Again, it is difficult to measure how much greater the level of donation would be. There were three articles in the Canadian Tax Journal that came to different conclusions on that. One thought it had been a good idea and two others thought it had been not so good.
The Chairman: Could you send us those articles, please?
Mr. Nadeau: We will do that.
Senator Moore: I have a question for each witness. We skipped over slide 14, which addresses current tax support highlights, 2003, and changes to eliminate buy-low, donate-high schemes. Could you tell us about that, including the numbers involved, what was done and whether the abuses have been eliminated? What is the status today?
Mr. Carl Juneau, Personal Income Tax Division, Tax Policy Branch, Department of Finance: ``Buy-low, donate-high schemes'' is a label applied to a number of schemes in order to extract funds from the public treasury. Typically, a promoter will incite a donor to buy artwork, for example, at a bulk price and then donate it to the charity. In collusion with the charity, the donor then —
Senator Moore: Does that purchase have an appraisal?
Mr. Juneau: Yes, in collusion with the charity, the donor obtains an appraisal that values the artwork at supposedly fair market value, but one that is highly inflated from the original price. The donor eventually receives a tax credit that covers his initial outlay and much more. It means that every other taxpayer in Canada is paying for this kind of arrangement.
We have seen that scheme associated with artwork, used cars, comic books and computer programs. I believe CRA may have some figures on these schemes. I have heard figures, although I am not willing to volunteer them unless I verify them first, in the area of several hundred million dollars associated with this kind of abuse.
Senator Moore: How did you stop that?
Mr. Juneau: We established a tax shelter scheme whereby any promoter who was involved in this kind of scheme would have to register with the department. Obviously, that does not indicate approval by the CRA of the scheme, but it brings the arrangement to the surface, so that the department can act against the promoters if they find that they are abusing the system.
Senator Moore: If a donor gave a piece of art that had an appraisal valuing it at $10,000, for instance, and the recipient later sold it back to the donor, if they needed cash, for $5,000, would you know about that or would that concern you?
Mr. Juneau: It certainly would. If this kind of thing did happen, the artwork would be sold back to the promoter and then recirculated in the system.
Senator Moore: How would you know?
Mr. Juneau: We have ways of knowing. We know because we get complaints from other charities, for instance, that know that this scheme involves a compatriot charity. We know because donors are genuinely concerned. They are approached and think this is a little dubious.
Senator Moore: Did you indicate that the level was around several hundred?
Mr. Juneau: Several hundred million dollars.
Senator Moore: Have we eliminated that as a result of your actions?
Mr. Juneau: I am not in a position to know that, but again, the people at CRA could provide that information.
Senator Moore: It would be interesting to know.
Ms. Tromp, on page 4 of your presentation, about halfway down, you talked about ``enhanced monitoring that would be used to ensure that'' and so on. What is enhanced monitoring?
Ms. Tromp: It is a combination of things. First, it is more resources.
Senator Moore: Were you about to say ``red tape?''
Ms. Tromp: No, more resources so that we can conduct more audits and increase our audit coverage. It is also resources so that we can increase our monitoring of annual returns, for example; and perhaps more fundamentally, it is resources so we can enhance the tools we use to manage risk and become smarter and more sophisticated about where we should be looking and to what we should be paying more attention.
Senator Moore: In regard to the monitoring of the filing of returns, you have a list of all these charities. You mentioned there are over 80,000. Do they all file at a different time, or all the end of September?
Ms. Tromp: No, they all file within six months of the end of their fiscal year.
Senator Moore: It is not within six months of the government's fiscal year; is that correct?
Ms. Tromp: That is correct, it is their timetable.
Senator Moore: You have to be constantly, daily, going through the monitoring; is that correct?
Ms. Tromp: That is right. There are approximately 80,000 per year. It is quite the challenge. These come in on paper and need to be keyed into the system. Generally speaking, which ones will be looked at will depend on various circumstances. For example, if certain key fields are not filled out, that will come to our attention immediately and we would take appropriate action.
The Chairman: To help our senators and also the witnesses, we are trying to do two phases of studies. The first focuses on the immediate tax implications if we changed the existing structure and a cost/benefit analysis of that, and the second is the larger question of governance, control and the issues you have raised here. We will deal with some of these issues, Senator Moore, in our second phase, but I would hope that the questions would focus on the first phase, which is the tax sensitivity to the system with respect to additional giving.
We started very well on that. It is quite interesting, and frankly, many questions have been raised, but it would be helpful if senators could focus on the first phase because of time constraints.
I undertake to the witnesses that in our second phase we will have you back for a more generous opportunity to question you. I apologize to the witnesses and senators.
[Translation]
Senator Chaput: You stated in your opening presentation that 75 recommendations were made concerning the proposed new regulatory regime.
What is the purpose of the changes that you are proposing to the regulatory regime for charities? Will the definition of a ``charity'' change? What impact will these changes have, in your opinion?
Mr. Nadeau: The aim of the recommendations was to improve the regulatory regime that applies to charities. These recommendations were put forward by the Joint Regulatory Table of the Voluntary Sector Initiative and they were well received by charities in particular and by organizations in general.
[English]
Ms. Tromp: Briefly, the overall intent of the reforms is to increase the trust of the public in the charitable sector, and certainly to increase the sector's confidence in CRA and the government as an effective and impartial regulator.
With respect to the definition of ``charity,'' that was not dealt with in the legislation and it remains a definition based in common law.
[Translation]
Senator Plamondon: First of all, I want to comment on the decrease in charitable donations. According to a recent report on child poverty in Canada, Canada has become a poorer country. An entire segment of the population simply cannot afford to donate.
I have noticed an increase in fundraising activities to offset the withdrawal by the government of its support for education, social clubs, scouts and so forth. People are solicited for donations everywhere, whether at their own door or in shopping malls. This is one side of the business of charitable giving that you never see.
People must find a way to raise money for supplies no longer furnished by schools or clubs. Receipts are not issued for donations of this nature. Increased solicitation may account for a decline in official, receipted donations.
The Christmas season is also fast approaching and people are being asked to make donations, whether of money to the United Way or of non-perishable food items. Everyone is busy organizing food drives and no one bothers to issue receipts. Donations of this nature are not tracked.
In my region, some 40 agencies that help those less fortunate do not conform to your definition of charitable organization. This year, these agencies will lose their funding because they are not officially registered as charities. Yet, they had been recognized as such for over 20 years by the United Way. If they do not soon receive a charitable number, thus conforming to your definition of the word ``charity,'' they will be forced to shut their doors.
How can we recommend to a small group that helps people develop literacy skills that they close down? It is not easy for a group to start over again or to mobilize people in a small community, just because it will no longer qualify for a United Way grant as a result of its not being recognized as a registered charity. Since we are rethinking, debating and redefining the word ``charity,'' could we not declare a moratorium on the department's requirements?
A tax credit is awarded for charitable donations, just as credits are awarded for donations to political parties. What has greater merit? A donation to a political party, or a donation to a charity, which now stands to lose its funding?
Mr. Juneau: Contributions to political parties and donations to charities are two entirely different things.
A person who contributes to a political; party receives a federal tax credit that cannot be carried forward for five years and that is in the form of a cash payment only. Credits for charitable donations, whether financial or in kind, regardless of the amount, can be carried forward for five years. You are comparing apples and oranges.
Senator Plamondon: I was simply trying to make the point that there is a benefit associated with making a donation to a political party. It is an entirely different matter when it comes to charities. I know that for a fact because I see forty or so agencies that are about to lose their charitable status and the situation bothers me.
Mr. Juneau: I understand and I can sympathize with these agencies.
Senator Plamondon: They need more than your sympathy.
Mr. Juneau: I am wearing two hats here, so to speak. I have been detached by CCRA to the Department of Finance. I am somewhat familiar with this file and I am dealing with two separate areas. Before we proceed to change the definition of a charity, we need to see why these agencies have not been able to get registered status. There is no question that agencies dedicated to building literacy skills are charities. Something is not quite right here, but I would have to review the files.
Senator Plamondon: A person who works with the disadvantaged or lobbies for social assistance or employment insurance is engaged in a political action. How do you calculate your 10 per cent when the donation exceeds 10 per cent?
Mr. Juneau: It is calculated according to how the funds are used. To some extent, it is necessary to account for the resources used in order to determine if more than 10 per cent of the funds were used for political purposes.
Senator Plamondon: Are you also planning to review the definition ``political purposes?'' Just how would you define this expression?
Mr. Juneau: In case law, it is defined as pressure brought to bear for the purpose of changing government policies or legislation or of opposing changes to such policies or legislation.
[English]
The Chairman: I do not like to interrupt and do not normally do this. Senators know that. I try to give us full faith and credit, but we are pressed for time. We have another senator who wishes to ask questions and we are trying to focus our attention on the first phase of the study. This is something I think the senators could come back to, and if you do not mind and you want to respond in writing, that is fine.
Mr. Juneau: I will be glad to provide any information I can.
The Chairman: Please do. We must complete today's hearings by six o'clock on the dot. I beg you to be brief.
Senator Oliver: I will be very brief. Some companies, large corporations, will do charitable-type projects to improve their image and to improve marketing. Why would they not write that off as a business expense, and if they can do that, what is the real justification for corporate charitable donations? I would like to have both of your views on the record.
Mr. Nadeau: However we categorize it, in fact you are right. It is difficult to make a distinction, for many corporations, between whether it is a charitable donation or a way of improving image. However, from a tax point of view it has the same impact. Both of them are deductions. Therefore, from a fiscal point of view, for us, for the government, it does not make a difference whether they present it as a charitable donation or a marketing expense.
Senator Oliver: Should it be a deduction or should it be a tax credit?
Mr. Nadeau: It is a deduction in both cases.
Senator Oliver: Should it not be a credit from the tax payable?
Mr. Nadeau: Actually, it would be if it was put on the personal income tax system. A tax credit would be higher, probably, in many instances. It would provide more, but as you put it, when a corporation does this, whether it is a charitable donation or marketing, the main objective is to improve image. They do it happily, but the fact is that it is good for the corporations. Therefore, I guess the policy intent is that it should be considered like any other expense to earn income. This would mean a deduction. It is just a tax policy principle. We have tax credits for persons, but we do not have tax credits for businesses, because the expenses that businesses incur are other income, and that should be, from a tax policy principle, a deduction.
Senator Oliver: Do you agree with that, Ms. Tromp?
Ms. Tromp: I do not think that I agree or disagree. That is the statement, I suppose, of the policy intent. In terms of how we would administer or monitor or look at that, I suspect it would be on a fact-based case-by-case basis, but I could see if I have information on that that I could provide to you.
The Chairman: Thank you. I have a question arising from what Senator Plamondon said. It would be helpful to us if you could look at your page 4, and give us more detailed information about these categories — religion, social services or culture. For instance, does culture include buildings, or arts, and which arts? Which religions? Which social services? It might be useful if you give us more written detail on that. The reason I raise that, just to help you, is that we are about to hear from witnesses who will argue, based on their briefs, that we should enhance their opportunity to obtain higher deductions and therefore to utilize tax revenues in a different way. Senator Plamondon and others have raised the question. If the government, for instance, has a priority, such as research, or poor children, is it possible to create a higher incentive — if the government so chooses — for charitable donations to that sector that the government feels it cannot fully fund, for example, single women with children? Is there a way of doing that? I raise that with you so that you might give it some thought and see if there is a model that you can present to us that might allow the government to direct, in effect, charitable giving based on higher incentives. Do you want to respond quickly to that? Is that something you can give me later?
Mr. Nadeau: If it was the government's choice, probably that would be possible. Although there would be some administrative challenges that Ms. Tromp will mention, because many charities have more than one purpose. They can be educating as well as relieving poverty. Therefore, what would you do in certain circumstances? If it were decided to do that — and that is a two-minute analysis — maybe.
Ms. Tromp: We can look to see how we might be able to get you some additional information. We do not necessarily have the information collected to the level of detail you are suggesting.
The Chairman: Our charitable system is based on charitable entrepreneurship. A good charity can go out and raise a lot of money because they are better organized to obtain funds. I am thinking of some of the ecology groups that obtain huge amounts of money internationally for purposes that are interesting. I leave the thought with you, that something will come to you, and it may be something our witnesses will address in the future.
[Translation]
Senator Hervieux-Payette: Quebecers understand that at one point in time, receipts were issued by the truckload for donations to religious institutions. There was no tracking process in place. I see here that 43 per cent of all donations are for the advancement of religion. Do all of these donors provide you with an audited financial statement to account for this 43 per cent? During bygone days in Quebec, the priest would issue receipts totaling $200,000, and receive only about $20,000 in donations. Today, people are issued receipts.
[English]
My question is simple: Do you have audited financial statements for every religious donation?
[Translation]
Senator Plamondon: I served as church warden for three years not so very long ago. We insisted on having proof of any donations made before issuing receipts.
[English]
The Chairman: Do you want to respond?
Mr. Terry de March, Director, Policy, Planning and Legislation Division, Charities Directorate, Policy and Planning Branch, Canada Revenue Agency: On the question of the audited financial statements, it is not a requirement that they all be audited financial statements. There are requirements to submit financial statements, but they are not all audited.
Yes, they do provide financial statements justifying their expenses.
The Chairman: Thank you very much, witnesses. We apologize, but the restraints are not ours. This committee could go on for hours and hours.
I welcome the next set of witnesses. We are mandated by the Senate to complete this portion of the hearing by 6 p.m. today. I know that this has been a long and important journey for many of you to come before our committee to make your case. We are prepared to listen, but I hope that you have organized yourselves in such a fashion that we can hear from you all.
Ms. Georgina Steinsky Schwartz, President and Chief Executive Officer, Canadian Centre for Philanthropy: Mr. Chairman, we have ordered ourselves so that we begin with the general and move to the particular.
The organization that I head up does extensive research into both giving and volunteering trends. Also, with Statistics Canada, we have recently done a landmark study not only of the size of the charitable sector in Canada but also the size of the non-profit sector. We thought it might be useful to share some of these findings with you to set a context for the broader recommendations.
It is probably worth noting that you have heard something already from the officials from the Department of Finance and the Canada Revenue Agency about levels of charitable giving. Our research also tries to take a qualitative look at some of this information. Over the last three to four years, we have noticed that traditional ways of giving are declining. For example, the response to door-to-door canvassing is declining significantly. We are also seeing that the decline in religiosity in Canada has begun to pose a major challenge to sustained charitable giving. As was noted, the number of donors is actually decreasing if one looks purely at tax filings. We are also finding that donors are making much more careful and informed decisions about the kinds of organizations they will support. They are looking to groups to demonstrate results or they will not win repeated support from their contributors.
Through the studies, we have noticed a trend such that more Canadians are saying that tax credits impact how they give. For example, between two surveys we did in 1997 and 2000, we saw a substantial increase in Canadians who said that they would increase their donations if tax credits were enhanced. In 1997, that figure was 37 per cent of Canadians, and in 2000, that number was 49 per cent.
The other factor that we thought would be relevant for the committee is an understanding of the overall size, not just of the charitable sector in Canada, but also of the non-profit sector. I know this is not the purpose of the hearing today, but we believe that in the long term we need to look at the definition of ``charity.'' To provide the committee with a sense of the possible broader scope, the research that we have recently conducted with Statistics Canada shows that the non-profit and charitable sector in Canada composes 8.6 per cent of gross domestic product, employs 13 per cent of the Canadian labour force and constitutes revenues in the amount of $112 billion.
On a point made by a senator earlier, on the issue of public-private partnership, it is probably worth noting that of those revenues, 49 per cent come from government; 35 per cent are earned by the non-profits and charities; and 13 per cent are from donations, of which about 4 per cent represents corporate donations.
Another trend shown in the study is that the more significant revenues are going to the larger organizations. We are seeing an emerging gap between the small and medium organizations that have revenues of less than $10 million and the larger ones. Based on the results of the studies, we believe that tax treatment does make a difference and there are some specific measures outlined in our brief, including the removal of some of the barriers to private foundation giving and the treatment of capital gains portions of certain donations. As well, we have found that the historic real value of the charitable tax credit has been diminished because of differing provincial tax regimes, where historically, there was a 50-50 cost-sharing between donors and governments for donations, and we believe this should be restored.
We also believe that over the longer term, we need to look at the definition of ``charity.'' For now, Mr. Chairman, I will ask my colleague, Mr. Brown, to proceed.
Mr. Tad Brown, Chair, Government Relations Committee, Association of Fundraising Professionals: Mr. Chairman and members of the committee, I am here as a representative of the Association of Fundraising Professionals. By way of a brief background, the AFP is the largest association of professional fundraisers in the world, with approximately 25,000 members worldwide and over 2,500 members in Canada who represent organizations literally from coast to coast, from Victoria, British Columbia, to St. John's, Newfoundland. Our members represent the full diversity of charities, from the largest charities in the country to small grassroots organizations. They champion the full diversity of issues in the country, from health care, housing and literacy, to the environment, education, the arts and scientific research, to name a few. Our members are also required each year to sign our code of ethical principles and standards of professional practice, which were first developed in 1964.
I give you this background for two reasons: One is to emphasize the importance that AFP places on ethical fundraising. We believe that fundraisers are stewards of public money, and we take that public trust and confidence seriously. Secondly, our membership is diverse. Any policies, including tax policies, which we advocate must benefit the entire charitable sector.
Over the last few years, government and the third sector have spent an enormous amount of time, energy and money, including on the voluntary sector initiative referenced earlier, to finding a way of charting the best path forward for the growth and strength of the sector. One of the outcomes of that was the identification of capacity building and sustainability as essential tools in the success of the charitable sector in achieving that goal.
Funding is the key to this. Support for the charitable sector has to come from a variety of sources. Direct government funding remains the primary and essential source of funding for many organizations. However, as we have heard, in an era of shrinking budgets and expanding needs, philanthropy — the giving of private funds for the public good — is becoming an increasingly important component of the solution. That is why the work of this committee is so important and timely.
I would like to make two recommendations today that will encourage and enhance donations from the public. They are, first and foremost, the complete elimination of capital gains on gifts of securities to charities, including private foundations, as well as extending that same exemption to gifts of real estate. The second, which I recognize is not a tax policy, is the creation of a government-sponsored day, such as a national philanthropy day, to recognize and celebrate the importance of the charitable sector and increase public awareness of charitable giving. The complete elimination of capital gains on gifts of securities remains the number one priority for us and is the single most effective measure that this committee could recommend to enhance charitable giving.
I would note that the Standing Senate Committee on National Finance has recommended this approach for the past two years in its reports, as well as extending that to private foundations and gifts of real estate. I would strongly encourage this committee to do the same.
I would like to take this opportunity to briefly describe for the committee why this recommendation is so vital to the sector and why it is virtually unanimously supported by the sector itself. It is a measure that will positively affect all charities, large and small, across all sectors, and provide them with a valuable tool to increase charitable giving. The evidence of the success of the current measure, of reducing it by half, has been dramatic and empirical. As mentioned earlier, the Department of Finance prepared a report on it and a further report was done by Deloitte & Touche evidencing this.
Since 1997, when the measure was first introduced, there has been an absolutely incredible transformation in what we call ``transformative gifts'' from individuals to charities across the country. The submission from Mr. Don Johnson includes an appendix that shows a number of these gifts were in excess of $5 million, and collectively represent additional giving of almost $1.3 billion. As someone who deals with these kinds of donors on a regular basis, I can say that these gifts would not have happened but for this provision. Pre-1997 gifts of this kind, particularly of stock, were almost non-existent.
One of the latest examples was the announcement last month of a $25-million gift to Princess Margaret Hospital in Toronto from Ms. Audrey Campbell and her three daughters to create the Campbell institute for breast cancer research. This was the largest gift to cancer research in Canadian history. I would like to point out that the impact of these provisions is not just in financial but in human terms. The true impact is that the Princess Margaret Hospital is now able to retain the world-renowned cancer researcher, Dr. Tak Mak, and allow him and his team of researchers to stay in Canada to do their important work.
Donors do not give just because of the tax benefits, but because they passionately believe in the mission of the charity that they support; however, the size of their gift is affected. While we should celebrate the fact that the wealthiest citizens in the country are giving back to their communities more than they have before, it is important to recognize that this provision applies to all. This measure has been effective in encouraging people to give the largest gift of their lifetime to the charity of their choice whatever their means.
The Chairman: Mr. Brown you are poaching on the other witnesses' time.
Mr. Brown: I will sum up quickly.
Most Canadians' wealth and assets are held in the form of public securities and real estate, which is why this measure applies to all. For that reason, we would also recommend extending the capital gains provision to gifts of real estate. If there is any hesitation about doing this, we would recommend that it be introduced in the same way as was done for gifts of securities, on a five-year trial basis.
We believe that its effects will be as equally dramatic as it was for securities, and it would be made permanent.
My last point, which I will make very briefly —
Senator Angus: On a point of order, on the issue of real estate, is there not something for these ecological lands already? They are totally tax free.
Mr. Brown: They are — which is fantastic — but this is much more broadly based to include gifts of real estate for all charities, which would most likely be sold for cash to be used for their purposes or operations.
The Chairman: To be fair, there are other witnesses.
Mr. Brown: Fair enough.
The Chairman: I hope the other witnesses understand that this witness is poaching on their time. Please try to be more succinct.
Mr. Brown: Thank you. We will come back to talk about a government-sponsored national philanthropy day, which is a non-tax issue.
The Chairman: Thank you for your restraint. The next witness, please.
Mr. Donald K. Johnson, As an individual: It will not surprise you that I agree with my colleague, Tad Brown, that the single most tax-effective measure that the government could introduce in the upcoming budget to unlock private wealth for public good is to eliminate the remaining capital gains tax on gifts of listed securities.
In my submission, as Mr. Brown has mentioned, those were anecdotal lists of gifts since 1997, when the capital gains tax was cut in half. That is $1.3 billion of gifts, including pledges, and that is only gifts of $5 million or more. The aggregate total would be well over $1.5 billion if you include gifts below $5 million.
I thought that rather than repeat anything in my submission, I might address some of the issues that my good friend, Mr. Nadeau, raised in the previous session.
First, with respect to how much of an impact this has had, I think the United Way of Greater Toronto is an excellent example. The United Way in Toronto was formed in the 1950s. Between the 1950s and 1996, the total value of gifts of stock to the United Way was $40,000; since 1997, as the result of that tax change, gifts of stock to the United Way in Toronto total over $22 million.
That is gifts representing 845 donations, with an average of $26,000. Interestingly enough, 40 per cent of those gifts are less than $5,000 each. The United Way serves 200 agencies across the Greater Toronto Area, so it has been a great success.
With respect to the cost to the fisc if the government were to implement this complete capital gains exemption in the budget, I will give a couple of numbers that I think are relevant. Let us assume it results in $100 million of incremental donations of stock, and let us assume the cost base is zero. The charitable donation tax credit would cost the government $46 million for gifts of stock, but that would be the same as if it were a gift of cash. To me, it does not matter, from either the government's or the charity's point of view, whether they receive cash or stock.
The incremental loss of capital gains tax revenues on $100 million of gifts of stock would only be about $12 million. It is like an 8-to-1 leverage. The government foregoes the remaining capital gains tax on gifts of stock of $100 million; it costs them $12 million, but the charities receive $100 million. It is a 12-to-1 leverage. I think it makes good public policy sense.
With respect to other issues that were raised in the previous session, there was reference made to three articles in the Canadian Tax Journal — two by professors at the University of Toronto and one from Osgoode Hall. Frankly, I disagreed strongly with a number of the issues raised in those publications. In February of this year —
The Chairman: You can sum it up, but I have read one of those articles, and it would be useful if you would respond in point form as to why you think those articles are not valid.
Mr. Johnson: I wrote a letter to the Canadian Tax Journal in February of this year and responded to every one of the issues they raised. It is an attachment to my submission.
Senator Angus: We have it in front of us.
Mr. Johnson: Another point about the cost, in terms of what is relevant to the government and what is relevant to the donor, I understand that from the government's point of view, it is the level of tax assistance they look at — how much tax are they giving up? However, from my experience as a fundraiser and a volunteer on boards of charities, what is relevant to the donors is the net benefit to them.
I will give the example of the current status quo in the U.S. compared with Canada. The U.S. has a complete capital gains exemption; in Canada, you pay capital gains tax at half the normal rate.
Let us say a donor in the United States gives $100 worth of stock with a zero cost base. In New York, the federal and state tax marginal rate is 44 per cent. Therefore, the net benefit to the donor is that he gets $44 back from the government; he pays no capital gains tax. In Canada, currently, with a marginal tax rate of 46 per cent in Ontario, the donor gets $46 back from the government through the charitable donation tax credit; however, the donor pays a capital gains tax at half the rate, which is $12. The net benefit to the donor in Canada is $46 less $12, which is $34. In the U.S, the benefit is $44. I believe that is what is relevant to the donor. That is why I also believe that we should finish the job in the upcoming budget and level the playing field with the United States.
That sums up the main points raised in the previous session. I will turn it over to my colleague, Mr. Burrows.
The Chairman: Mr. Johnson, I do apologize to you; it is here and it is very precise. Thank you very much. I read your brief, but I did not read the appendix.
Mr. Malcolm Burrows, Chair, Government Relations Committee, Canadian Association of Gift Planners: Mr. Chairman and members of the committee, the Canadian Association of Gift Planners is a volunteer professional association focused on philanthropy enabled by charitable gift planning.
There are a number of duplicate points in our submission; therefore, I will drop two of the four entirely rather than repeat myself and the other witnesses, and emphasize the context we are in since 1996, and particularly what has been happening with the charitable sector, working with government, the Department of Finance and the charities directorate of Canada Revenue Agency to improve the incentives.
When you are looking at incentives for charitable giving, you have to look at places where tax actually changes behaviour. Typically, that is not done when giving gifts of cash flow or income. It is gifts of assets. That is the focus.
It has been the focus of all the legislation since 1996; and there have been over 15 changes to the Income Tax Act since 1996 by this government that have virtually transformed the charitable sector. It has been backed up by remarkable collaboration and cooperation on the part of the public servants.
In our submission, we have a chart that shows giving trends — this came from the Canadian Centre for Philanthropy — from 1984 to 2002. You can see that before 1995, as a baseline year, to 2002, for which we have the most recent figures that I am quoting, giving went up 62.5 per cent after years of just moderate growth. It flatlined entirely in the 1990s because it was cash flow giving; there was no increase. All of a sudden, the Income Tax Act switched the focus to gifts of assets. We had twice GDP at a time when median income was changed.
This is effective tax policy. It changes the behaviour of taxpayers and creates a more philanthropic society.
That is the great emphasis and, frankly, that has been the emphasis of the government all along. This is a tremendous increase for a mature sector.
Two things that we are doing through CAGP that again are complementary with my colleagues in the charitable sector: One is charitable remainder trust. Charitable remainder trust may seem like an obscure point, but it is an invaluable tool for estate planning. When you are giving gifts of assets, particularly if you are a middle income Canadian, this is money you live on, and you have to structure it in order to give it to charity. Charitable remainder trust is a life income gift that allows donors age 65 plus to create a trust and retain a life interest, with the gift going to the charity upon their death.
We have been working collaboratively with the Department of Finance — and it has been quite a process — to look at creating a proposal to put the charitable remainder trust in the Income Tax Act to enable further giving. I want to highlight this as a positive example of collaboration between public servants and the charitable sector. There is ongoing work to be done, but we are positive this will eventually work out and again have significant long-term effect on the sector.
The second point, and my last, is about extending the one-half capital gains inclusion rate for gifts of listed securities to private foundations. The issue here is not so much equity, although that is an exceptionally important principle. Over the last short while, and particularly the last year, the regulatory regime for the sector, the audit controls, the provisions to ensure that the money goes to charitable causes, have been significantly strengthened. This is a positive thing for the sector and the initiative of the government and, again, in collaboration with the public servants.
In 1997, there was prejudice against private foundations put into the act. At the time, it was possibly justified because there was a lot of negative planning of private foundations that was not charitable in nature. Frankly, these holes have been well filled and now private foundations are increasingly coming back into the mainstream and are exceptionally important tools for funding small charities. Small charities cannot get to wealthy individuals, but they can get to their intermediaries, the private foundations, through a granting process. There is $12 billion in private foundations in the country and $1.8 billion in the community foundation movement. There is a lot of faith in private foundations on the part of affluent Canadians, and it is an excellent transfer mechanism, a funding mechanism, particularly for small and medium-sized charities because they do not have access to the wealthy individuals. It is a translation of asset gifts that become cash flow gifts that fund the sector. It is also important because, as I said, the sector has changed, the regulations have changed, and the abuses are significantly minimized due to the good work of this government.
Ms. Sarah Iley, President and Chief Executive Officer, Council for Business and the Arts in Canada: Our organization straddles the line. We deal with business supporters of the arts, who make up our membership, and we have noticed that many of those people are often involved as individual supporters of the arts. Many of them, when they have accrued significant wealth, also decide to structure their charitable giving by developing their own private foundations. On the one hand, we are very connected to what donors are thinking and, on the other hand, we are very familiar with the needs of the arts sector.
The arts represent about 7 per cent of the registered charities in Canada. I can give you some background as what has happened with the arts over the past decade or so. As governments regularly and routinely reduced their support for the operating budgets of the arts, the arts organizations that are registered charities had to look elsewhere for support, and they found it, dramatically, from individuals. Individual giving to the arts has grown at a rate of 9 per cent a year over the past decade. If I can give you a comparison, about 10 years ago, the Canada Council for the Arts accounted for 23 per cent of the revenues of performing arts organizations in this country and it now accounts for 8 per cent.
One of the senators made the point earlier that what we are looking at here is not only tax incentives for charitable giving, but a different way of looking at the balance of private and public support for the charitable sector. Certainly, in the arts we have seen that balance tipping more and more towards the private sector because of the generosity, particularly, of individuals.
We have seen that dramatically; my colleagues have alluded to it, but I do want to pluck out a couple of numbers. We were all engaged in this. The Association of Fundraising Professionals, the Canadian Centre for Philanthropy, the Canadian Association of Gift Planners and CBAC were the four driving forces, with Mr. Johnson at the helm, in encouraging Deloitte & Touche to do that survey of the impact of the publicly listed securities measure. It is incredible that the average number of gifts of publicly listed securities increased 22-fold in three years, and the average value increased by 1,832 per cent. We were clearly on to something.
The Department of Finance's own research figures, which Mr. Nadeau could not remember this afternoon, are right here. Their own report showed that the value of such donations to charities amounted to $200 million in 2000, and estimated that for every dollar of tax revenue foregone in that year, an additional $13 was made available to charities. Again, that is an important point: What was made available to the charitable sector and what is being made available by the extension of these tax incentives, which have been extremely effective.
I wish to echo Mr. Burrows' point on that. We have seen some impressive work by both the Department of Finance and the Canada Revenue Agency. We implore the government to pass the bill that was tabled two years ago, which contains important technical amendments. The most important, in my opinion, is the definition of a ``gift.'' The proposed change to the definition enables an eligible gift for tax purposes to also have a portion recognizing a benefit to a donor. That means that a charity does not have to worry, when making effective moves around donor recognition, that they may compromise the gift. In the past, it was either a gift or it was not. Now, there is recognition that some benefit may accrue to the donor in connecting with their charity. That is an important point, and I would urge you to influence the government to pass that bill.
I echo my colleagues on the importance of private foundations. These are an increasingly important tool. We have seen a surge in people wanting to structure their giving. Of course, as Mr. Johnson mentioned earlier, we sincerely believe that the single most effective tax incentive that could be introduced is to completely eliminate the capital gains tax on gifts of appreciated securities.
I will end with an anecdote. Yesterday, many of us were at the Association of Fundraising Professionals' annual philanthropy luncheon and there were over 1,000 people in the room. Ten years ago there were 30. We were honouring people for the gift that they had made to a number of different charities, but in making their acceptance speech, they acknowledged people in the room who had come up to them and said, ``How did you go about doing that? I would like to do something.'' Then they referred to their four children, each of whom could not have been older than in their forties, all of whom had established patterns of philanthropic support.
Senators, you are looking at a revolution in philanthropy, and anything we can do to support that increased per capita giving in Canada is truly important.
I have some numbers that you were asking about earlier. In the United States, the per capita giving for the arts alone is $42 per person.
I can tell you it is not anywhere near that in Canada. It is under 10, I believe.
In the department's excellent presentation, they revealed that the tax assistance to individual donors totalled $1.6 billion last year. That sounds like a big number, but I am also familiar with the fact that the Department of Canadian Heritage's total budget is $3.8 billion, and that represented about 4 per cent of the federal budget. In that context, $1.6 billion in tax assistance to enable a broad band of organizations that work for the public good is money extremely well foregone.
The Chairman: Thank you very much for your passion and clarity. We will go around the table quickly.
Senator Angus: Those were excellent presentations backed up by excellent memoirs and briefs. It is helpful.
Obviously, to complement what you have said, we need more ammunition on the downside. What are the arguments? I have a hard time seeing any arguments against it. I should be sitting with you.
It is important for people to understand this. Let us use the example of $100 of appreciated securities. To give the full $100, and let us say the capital gains is reduced to zero, you still have to have income; do you not? I am talking about the leverage factor, and it seems to me when people are criticizing it, they are always forgetting that. If someone wants to give $1 million today in appreciated securities, they have to have $1 million or more of taxable income to get the full benefit. Am I not right on that?
Mr. Johnson: That is a good point. To give an example, in the United States, Bill Hewlett and David Packard a few years ago gave $300 million in Hewlett-Packard stock to one of the universities in California. How, then, would they possibly use the tax receipts they received? The answer is the following: In a planned way, they sold additional Hewlett- Packard stock for their own use; the sale of those shares triggered a capital gains tax; and they then used the charitable donation receipt to offset the capital gains. That is essentially how they created income.
Senator Angus: You have given an amazing list of three pages of donations, from $100 million down to $5 million, and there are thousands of others between $1 million and $5 million. Those are large numbers of donations.
The people who are attacking your proposal do not, in my view, understand that it is not just a big ``freebie.'' You are avoiding the capital gains tax on that appreciation in the stock value, but you still have to pay a huge tax on the income or capital gain against which you will benefit from that deduction.
I do not know whether I am making myself clear or whether that point has been made sufficiently.
Mr. Johnson: The reality is that the donor is giving a real asset to the charity. From the charities' perspective, it does not matter whether they receive shares or cash. They typically sell the shares immediately after they receive them to convert them to cash. From the charities' perspective, it does not matter, and from the donor's perspective, the donor is giving up a real asset. The capital gain is foregone, but in many cases, while the government typically adds the cost of the charitable donation tax credit to the foregone capital gains tax, in reality, the government would not necessarily receive the capital gains tax immediately, because the donors' alternative is to sit on the shares until they pass away. It is the discounted, present value of the capital gains tax that is the true foregone incremental amount.
Mr. Burrows: That is an excellent point. The most significant change to the act since 1996 has not been the incentive for gifts of publicly listed securities. It is contribution limits that allow people to claim more against their income. It used to be 20 per cent of net income, but it is now 75 per cent, plus a bump-up provision during life and 100 per cent at death. That is to your point. That is the most significant change in the act over the years.
Mr. Brown: You asked about the possible reasons to be against this. The one comment, again made by Finance, was reference to the couple of articles in the Canadian Tax Journal. I know there is a submission from Don Johnson in there. I would point out, as they noted, that there were three articles. The third was in fact completely supportive of the provision and highly endorsed it.
I would also note that in response to that, Wolf Goodman, who is arguably the country's leading tax and charity authority, wrote a vehement letter strongly opposing those opposite views and supporting this provision on behalf of the Canadian Bar Association.
That couple of opposing views are often brought out, but I would submit they are only two views in a sea of many to the contrary.
Senator Hervieux-Payette: I would like Ms. Iley to explain something. I did not understand your 1,000 per cent figure from the Deloitte & Touche study. Could you give me more detail? It was so high that I tried to figure out what it means.
Ms. Iley: It is hard to comprehend. We asked Deloitte & Touche to survey as many Canadian charities as they could, of all sizes, acting in all different sectors. In the end, I think about 2,600 charities responded to the survey, and they had to fill out how much they had received in the way of donations in the form of shares over the past three years.
In that survey, it became clear that the reality was that prior to 1997, most of them had received zero in the way of shares. By the end of 1999 — we did the survey in 2000 — there was extraordinary growth in not only the number of shares that had been received but also in their value. Because many of them were going from nothing, it was an extraordinary increase in the amount. We do have that survey. We have more copies of it if the senators would like to see the data.
Senator Hervieux-Payette: You mentioned the $34 versus the $44 under the U.S. system, and I hope we are reminding ourselves that we pay a lot more taxes than they do in the United States. I am being told all the time, ``Well, through charities we provide all the social services and help every good cause,'' and so on, but it is only voluntarily. It seems at the end of day, 30 million people are still without certain health services. We have a different system; and that is just a comment, because I like to compare similar things, and they are not the same, certainly, in the overall picture of taxation.
If $100 is given, how much money will the charity get and how much will it cost the donor? What amount goes to the government, if 50 per cent is still taxable? Give me the breakdown of who gets what on the $100.
Mr. Johnson: I was using the example of the gift of stock of $100 with a zero cost base. In the United States, the charity receives $100 worth of stock, sells the stock, and gets $100 cash. The donor receives $44 as a result of the tax deduction for that gift.
In the case of Canada, the charity also receives $100 worth of stock, sells that stock and so it too gets $100 cash. Under the current tax system, the donor receives a tax benefit of $46, the marginal tax rate less the capital gains tax that is triggered when he or she makes the gift.
Senator Hervieux-Payette: The government gets $12?
Mr. Johnson: Yes, that is correct.
Senator Hervieux-Payette: Fine. At least the equation is complete because I think that there was something missing. What is the time frame? I know there is a time frame for cashing the shares, because if I give a $25 share and I get the benefit for that share this year, when do they have to sell it, knowing that the markets sometimes go down, not necessarily up? How does it work?
Mr. Brown: There is no time frame for the charity to sell it. However, the practice of most charities that I am aware of, including mine, is to sell it immediately. In fact, for the University of Toronto, we sell them on the same day. They are gone as soon as we receive them. Charities have the option of retaining them as part of their investment strategy, but most do not choose to base their investment strategy on what donors propose to give. Most charities sell the shares immediately upon receipt.
Senator Angus: The converse is true, because they go up too sometimes.
Mr. Johnson: I would like to respond to Senator Angus's question about who is opposed to it. Part of the responsibility of the tax policy people in the Department of Finance is to challenge any proposal that could cost the government tax revenue, which is understandable. That is part of their job. Many volunteers have received letters from the finance minister responding to their letters of support for this proposal. I will deal with the two issues raised in these letters. One is that Canada has a higher annual limit on the donations that can be claimed in a given year. It is 75 per cent of net income. In the United States it is 30 per cent of adjusted gross income, so they are not quite comparing apples and oranges. That is an advantage we have vis-à-vis the U.S. However, if you asked a donor, ``Would you prefer to pay zero capital gains tax on that gift and have a lower annual limit,'' I think the typical person would say ``Yes. I can carry the unused charitable donation tax credit forward to next year or the year after that, so I will still use it up.''
The other issue that has been raised in these letters is the U.S. has a clawback provision.
The Chairman: Mr. Burrows is disagreeing.
Mr. Burrows: I do disagree with that point. When we get significant gifts of assets to the sector that have a transformative effect, often people are giving at their limit because they are one-time gifts. I say that as a charitable gift planner. The point is well taken, but if I was to give up one of the two, I would actually give up gifts of publicly listed securities before the contribution limit — just to dramatize this point.
Mr. Johnson: Do I understand you properly? Would you rather pay the capital gains tax than have a lower limit and be able to carry forward your unused donation? I can say from my perspective, I know which I would choose.
Mr. Burrows: I appreciate that, but it is a good distinction. It is the enabling of very large gifts. For example, gifts to a private foundation and the super-large gifts will always be larger than income, so it is often not tax driven, in my personal experience.
[Translation]
Senator Plamondon: I am curious as to how you use life insurance policies. Do you give a tax credit to a person who designates you as the beneficiary of his life insurance policy, but who continues to pay the policy premiums?
For example, a person designates you as the beneficiary of a $100,000 life insurance policy and pays the premiums. What type of tax credit is that person eligible to claim? If he stops paying the premiums on the policy and you have already issued some tax credits, what happens then? Do you continue to pay the premiums to ensure that the policy remains valid?
[English]
Mr. Burrows: There are a number of ways that you can give using life insurance. The two most common ways are to make a gift of the life insurance policy itself, so the charity becomes the owner as well as the beneficiary. Every premium payment is tax receiptable because the charity owns the policy. The death benefit is not tax receiptable, in contrast to when the beneficiary is the charity, but the owner is still the insured individual, the donor, and the death benefit is the gift and is counted as a bequest. It is a well-established system, and from a charity perspective, it works very well.
Senator Plamondon: If he stops paying the premium, do you pay it?
Mr. Burrows: In most cases, no. There is a problem. One of the issues with life insurance policies is the value is in having the person's life insured for a year. Life insurance is essentially a gamble, it is a bet.
Senator Plamondon: It could be a gamble that profits the broker because he gets the commission. The consumer gets the deduction and you get nothing.
Mr. Burrows: You do get something. You are covered for the years that you are insured. However, the long-term effect is that you might not get anything. Your point is valid in that regard, but there is value.
The Chairman: We have heard much about foundations versus individual gifts. Is it possible for you to give us a financial model whereby if someone gave $1 million to the University of Toronto or one of your charities, as opposed to giving it to his or her foundation, what is the benefit of the foundation donation as opposed to the gift? Could you give us a mathematical model of that? Give us some insight into what the benefit to the individual taxpayer is and the cost to government revenues between an individual gift and foundations. That might assist us, because I noticed that a number of witnesses said that one of the fastest growth sectors in giving is to private foundations. Maybe you can give us a financial model or address it quickly for us, but I would like to see it in writing if possible.
Ms. Iley: I will not leap into the mathematical model, but part of the reason it is growing is because it is part of a planning model for the donor. That is the primary motivation. It is not so much that there is any particular tax incentive, but it is a way of planning.
The Chairman: In the United States there is a huge benefit to the donor in transferring wealth into a foundation, and the tax treatment and utilization are different. I have not gone into the details or done a comparison, but maybe you could help us with that. Some people believe there is a huge problem in the United States with that because they think that has not been an appropriate means of allocation of tax revenues to offset that. If you can give us any help on that, it would be useful, but we need it quickly.
Mr. Brown: Just the one point. Many of our submissions have been on the tax consequences of giving to private foundations. The one submission we have made is that the numerical difference is the current deduction, the half-rate inclusion for gifts of publicly listed securities to charities, does not apply to gifts to private foundations. Therefore, if you are an individual who makes a gift to a private foundation, you do not get, in the mathematical numbers we have been using, that $12 benefit and you will have to pay the $12 of capital gains tax in the $100 example. It is a disincentive right now for individuals to give money to private foundations.
The Chairman: What is the administrative cost, the benefit of administrative carriage and deductions that are available within the foundation for operations? It would be good for us to see a financial model. If you would do that it would be helpful to us.
First, witnesses, I apologize on behalf of the committee. This has been a short time, and you opened a box of questions for all of us. We will go through your material. I myself will go through your material carefully again. If you have anything else you would like to give us based on what you have heard today or hear tomorrow, please give it to us in writing because we are on a very tight time schedule.
I apologize to you for having to ask you to come on short notice to accommodate our public duties. Thank you very much. Your evidence has been helpful and enlightening to all of us.
The committee adjourned.