Don­ald K. John­son

The Fis­cal Up­date: A Golden Op­por­tu­nity to Help Canada’s Char­i­ties

Policy - - In This Issue - Don­ald K. John­son

As what has be­come the near-year-round fed­eral bud­get process gears up for Fi­nance Min­is­ter Bill Morneau’s an­nual fall fis­cal up­date, of­fi­cials will be weigh­ing the most ef­fi­cient meth­ods of serv­ing the needs of as many Cana­di­ans as pos­si­ble. Don­ald K. John­son, long a tire­less ad­vo­cate for Canada’s char­i­ta­ble sec­tor, has a sug­ges­tion.

Prime Min­is­ter Justin Trudeau and his cabi­net col­leagues have re­peat­edly stated that their top pri­or­ity is to sup­port mid­dle-class Cana­di­ans. Fi­nance Min­is­ter Bill Morneau has a golden op­por­tu­nity to put those words into ac­tion when he de­liv­ers his fall eco­nomic up­date some­time in the next few weeks. With a mod­est tweak to the rules for char­i­ta­ble do­na­tions, Morneau could do a huge favour to the many hos­pi­tals, univer­si­ties, cul­tural groups and so­cial ser­vice agen­cies (among oth­ers) that serve the needs of or­di­nary Cana­di­ans.

The min­is­ter would open a vast new source of fund­ing for these or­ga­ni­za­tions by al­low­ing pro­ceeds from the sale of pri­vate com­pa­nies or real es­tate to be ex­empt from cap­i­tal gains tax if the money is do­nated to a rec­og­nized char­ity. As a safe­guard, the sale would have to be at arm’s length. In other words, to a party with no con­nec­tion to the donor, and the do­na­tion would have to be made within 30 days of the sale. The re­cip­i­ent or­ga­ni­za­tion would be al­lowed to is­sue a tax re­ceipt for the do­na­tion in the same way it would for a cash gift.

Morneau would sim­ply be con­tin­u­ing along the path that was opened up in 1997, when then-Fi­nance Min­is­ter Paul Martin halved the cap­i­tal gains tax on char­i­ta­ble do­na­tions of listed se­cu­ri­ties. Nine years later, un­der Jim Fla­herty at Fi­nance, the new Con­ser­va­tive gov­ern­ment took an­other step for­ward by re­mov­ing the cap­i­tal gains tax en­tirely on such gifts. Thanks largely to those moves, the Fi­nance De­part­ment es­ti­mates that char­i­ties across Canada are now re­ceiv­ing about $1 bil­lion a year in stock do­na­tions. The Tories’ fi­nal bud­get in 2015 in­cluded a pro­posal to ex­tend the ex­emp­tion to do­na­tions of pri­vate com­pany shares and real es­tate. But that mea­sure was not passed into law be­fore the elec­tion later that year, de­spite hav­ing sup­port from all three par­ties in the House of Com­mons. Scott Bri­son, then the Lib­er­als’ fi­nance critic and now Trea­sury Board pres­i­dent, spoke out in favour of the change, as did NDP Leader Tom Mul­cair.

We es­ti­mate that ex­tend­ing the cap­i­tal gains ex­emp­tion to gifts from the sale of pri­vate busi­nesses and real es­tate would gen­er­ate an ex­tra $200 mil­lion in char­i­ta­ble do­na­tions a year, or about $1 bil­lion over the next five years. That’s not ex­actly small change, and it could be even more, be­cause the move would put Cana-

dian non-profit groups on an equal foot­ing with their U.S. coun­ter­parts when it comes to so­lic­it­ing do­na­tions. South of the bor­der, gifts of ap­pre­ci­ated cap­i­tal as­sets, a def­i­ni­tion that in­cludes listed se­cu­ri­ties, pri­vate com­pany shares and real es­tate, are cur­rently ex­empt from cap­i­tal gains taxes, which is an im­por­tant rea­son why U.S. non-prof­its tend to be far bet­ter en­dowed than Cana­dian char­i­ties.

Some may see our pro­posal as a tax break for the wealthy. In re­al­ity how­ever, it sim­ply re­moves a bar­rier to char­i­ta­ble giv­ing by en­cour­ag­ing the wealthy to give back to their com­mu­ni­ties in­stead of pock­et­ing the pro­ceeds them­selves. The real ben­e­fi­cia­ries would be mil­lions of mid­dle­class Cana­di­ans served by our vi­brant non-profit sec­tor.

I’m con­fi­dent that, given such a change in the tax laws, many busi­ness own­ers would gladly chan­nel much of their wealth back into so­ci­ety for the greater good, rather than keep it in the hands of a few fam­ily mem­bers. What’s more, at a time when gov­ern­ment fund­ing for so­cial pro­grams is un­der threat, in­creased pri­vate sec­tor sup­port is more vi­tal than ever. The stip­u­la­tion that the sale of as­sets must be at arm’s length should ad­dress con­cerns that buy­ers and sell­ers might put an un­fair value on the as­set to suit their own pur­poses.

The new ex­emp­tion would also re­move a glar­ing in­equity in the In­come Tax Act. At present, en­trepreneurs who take a com­pany pub­lic can do­nate some or all of their shares to a char­ity, free of cap­i­tal gains tax. Yet those who choose to keep their com­pany pri­vate are not en­ti­tled to the ex­emp­tion. The Cana­dian Fed­er­a­tion of In­de­pen­dent Busi­ness, which rep­re­sents 109,000 pri­vate com­pa­nies, strongly sup­ports this pro­posal. Af­ter all, own­ers of small and mid-sized busi­nesses play a vi­tal role in grow­ing our econ­omy. They are an in­dis­pens­able source of in­no­va­tion, new prod­ucts and com­pe­ti­tion. We should en­cour­age them in ev­ery way we can.

We es­ti­mate that the fed­eral gov­ern­ment would forego $50-65 mil­lion a year in cap­i­tal gains tax rev­enues. The char­i­ta­ble do­na­tion tax credit would be the equiv­a­lent of $200 mil­lion in cash do­na­tions, or ap­prox­i­mately $60 mil­lion for the fed­eral gov­ern­ment. The credit is es­sen­tially the same as a de­duc­tion from tax­able in­come. Two-thirds of the cost would be borne by the fed­eral gov­ern­ment and one third by the prov­inces. There would be no cost to mu­nic­i­pal­i­ties, be­cause their tax rev­enues come from prop­erty, not in­come taxes. Ev­ery mayor in the coun­try should welcome the ex­emp­tion be­cause it would pro­vide ex­tra fund­ing to the char­i­ties that pro­vide so many vi­tal ser­vices in their cities and towns.

Here is a real-life ex­am­ple of how the mea­sure would stim­u­late char­i­ta­ble giv­ing. A good friend of mine has been a mi­nor­ity share­holder in a pri­vate com­pany for more than 20 years. He can sell his shares to the founder and con­trol­ling share­holder at any time un­der an agree­ment that also de­ter­mines the fair mar­ket value of the shares. If my friend sold his shares to­day, he would re­ceive $6 mil­lion, but would have to pay cap­i­tal gains tax on what­ever profit he made from the deal. Not sur­pris­ingly, he has cho­sen to hang on to his shares and will likely do so in­def­i­nitely un­der the sta­tus quo. How­ever, he has a keen in­ter­est in giv­ing back to his com­mu­nity. If the cap­i­tal gains tax on do­na­tions of pri­vate com­pany shares was re­moved, my friend says he would gladly sell his shares im­me­di­ately and do­nate the en­tire $6 mil­lion to two char­i­ties—Trin­ity Col­lege School, his alma mater, and the Toronto Western Hos­pi­tal’s Eye In­sti­tute. This would be in ad­di­tion to the $25,000 a year that he al­ready do­nates in cash to var­i­ous good causes.

Last, but by no means least, the change we are propos­ing en­joys strong sup­port among the man­age­ment, vol­un­teer board mem­bers and 2.1 mil­lion Cana­di­ans em­ployed in the non-profit sec­tor. Their or­ga­ni­za­tions will reap the ben­e­fits of more gen­er­ous pri­vate sec­tor do­na­tions at a time when gov­ern­ments at all lev­els are fac­ing bud­get chal­lenges. They rec­og­nize that this pro­posal is the sin­gle most ef­fec­tive ac­tion that the gov­ern­ment can take to stim­u­late more pri­vate sec­tor fund­ing.

We re­al­ize that tax changes are nor­mally un­veiled in the an­nual spring bud­get rather than the fall fis­cal up­date. But the sooner an ex­panded cap­i­tal gains tax ex­emp­tion takes ef­fect, the sooner the ben­e­fits will start flow­ing to our hos­pi­tals, univer­si­ties and char­i­ties. The prime min­is­ter and the fi­nance min­is­ter, with grow­ing the mid­dle class as their pri­or­ity, should waste no time get­ting the job done.

We es­ti­mate that ex­tend­ing the cap­i­tal gains ex­emp­tion to gifts from the sale of pri­vate busi­nesses and real es­tate would gen­er­ate an ex­tra $200 mil­lion in char­i­ta­ble do­na­tions a year, or about $1 bil­lion over the next five years.

Don­ald K. John­son is a phi­lan­thropist, for­mer in­vest­ment banker and an of­fi­cer of the Or­der of Canada. He was pro­moted to the of­fi­cer level in 2009 “for his key role in chang­ing Canada’s tax laws to elim­i­nate the cap­i­tal gains tax on gifts of pub­licly traded se­cu­ri­ties to reg­is­tered char­i­ties, and for his sup­port of health care re­search and the arts”. don.john­

Wikipedia photo

Dr. Sadhna Joshi and her re­search team. They are re­searchers funded by the Cana­dian Foun­da­tion for AIDS Re­search.

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