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The Globe and Mail

Scrapping tax on charitable stock donations 'worked unequivocally,' Paul Martin recalls

Former prime minister Paul Martin on Sept. 13, 2011.

Yvonne Berg for The Globe and Mail/yvonne berg The Globe and Mail

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

Of all the lobbyists, executives, economists, international politicians and taxpayers who tried to bring Paul Martin's view around to their own in the mid-1990s, one individual distinguished himself as a particularly sharp thorn in the federal finance minister's side. Donald K. Johnson, an investment banker with a philanthropic bent, wanted Mr. Martin to do away with capital-gains tax on stock donations to charity.

The idea wasn't new – wealthy Americans who chose to donate shares of a publicly listed firm don't pay such a tax – but the argument fell on deaf ears in Ottawa. Policies that decrease tax revenues are always a difficult sell in the Finance Department, and Mr.  Johnson's pitch came at a time when Ottawa was facing staggering deficits. And this particular measure could be viewed as a tax break for the rich – not a great way for a Liberal government to enhance its appeal with the electorate.

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In Mr. Martin's recollection, however, the class optics were not a consideration. "When Don first approached me with this, there were really two things that concerned me," he said in an interview. "One of them was that the department was not in favour of it. But the second reason, and actually more important, was the worry I had that this would buy us certain types of philanthropic gifts – all of which were very worthwhile – at the expense of other kinds."

Specifically, Mr. Martin was worried about the pet charities of the rich receiving significantly more donations than others. "So, what I did was talk to people like the United Way, people like community organizations across the country, all of those groups who might not have received their fair share of these kinds of gifts. I asked them if they were worried that some forms of charity would benefit at their expense. And the answer that I got was virtually unanimous. They said, 'No, go and do it, we will get our fair share.'"

Thanks to that input and the persistent Mr. Johnson, Mr. Martin cut 50 per cent of the capital gains tax on stock donations in 1997. Nine years later, his successor Jim Flaherty eliminated the other half.

While Ottawa doesn't officially release donation numbers, they can be gleaned from government data. And the story they tell is that the changes have led to hundreds of millions of dollars in stock donations annually. In 2006, the first year that the tax was removed completely, there were 108 donations of $500,000 or more, totalling $718.6-million. That was up from 54 gifts worth $215.5-million in 2003.

But smaller donations were vastly more significant. Total donations were about $12-billion in each of 2006 and 2007, up from about $11-billion in 2005.

However, the amount donated fluctuates dramatically depending on stock market conditions, according to Malcolm Burrows, head of philanthropic advisory services at Bank of Nova Scotia. While the value of donations is not released by Ottawa, the value of forgone capital gains tax is: That figure declined from $215-million in 2007 to $115-million in 2008, the year the financial crisis caused stock markets to plunge.

These days, Mr. Martin happily admits that his initial resistance to Mr. Johnson's idea was misguided. And he is thankful that Mr. Johnson spared him no grief.

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"It has resulted in a large increase in philanthropic gifts. It has worked unequivocally," says the former prime minister. "The response has been so overwhelming that actually everyone has benefited."

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