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Buoyed by the success of last year's removal of the capital gains tax when an investor donates stock to charity, the government is broadening that tax removal to the donation of stock to private foundations.

In last year's budget, Ottawa eliminated capital gains tax on donations of publicly listed securities to public charities. The move took effect in May, and the government said there has been a significant increase in donations to charity since then.

Donations of publicly listed securities to public charities have surpassed $300-million in the 10 months since last year's budget, the government said, including at least $150-million for hospitals and health care, more than $50-million for education, about $20-million for the arts and $80-million to other areas.

In addition to public charities, “private foundations also support a wide range of charitable activities in Canada, including some of the more innovative charitable programs,” the 2007 budget states. Private foundations are often established by wealthy families and are becoming more common.

But, the government had been concerned about “self-dealing” in private foundations, which could happen if individuals with significant holdings in a company also have influence over the management of a foundation's holdings of that same company.

To deal with that, the government is introducing rules on excess business holdings, to provide private foundations with “clear rules to minimize potential conflicts of interest,” at the same time as it plans to exempt donations of securities to private foundations from capital gains tax.

The measures are effective immediately. They are expected to reduce federal income tax revenues by about $75-million in each of the next two fiscal years.

Right now, private foundations report the total value of their investments to the Canada Revenue Agency each year in an information form, but they don't disclose which stocks or securities they hold. The government will increase the amount of information the foundations must report and a penalty will apply in respect to excess business holdings of a foundation that have not been divested as required.