The federal government's fiscal stimulus plan has provided crucial funding for Canada's economy during the global economic and financial crisis. While a few not-for-profit organizations have benefited directly from the plan, hospitals, universities, social-service agencies and arts and cultural organizations are facing fundraising challenges. The collapse of the stock market and the decline in the value of endowment funds and their disbursements have reduced funding for professors, doctors, researchers, students and artists, as well as individuals in need of assistance.
Given the huge fiscal deficit, it is unrealistic to expect the government to increase direct funding for these organizations. We must find a way to provide a tax-effective fiscal stimulus for Canada's not-for-profit sector.
After conducting extensive research, five not-for-profit organizations on whose boards I am a voluntary member have concluded that two amendments to the Income Tax Act would result in significant increases in donations. These measures capitalize on the great success of the government's decision to eliminate the capital-gains tax on gifts of listed securities.
We strongly recommend that the government expand the tax exemption to include gifts of shares in private companies and gifts of taxable real estate. To address any concern about the potential for valuation abuse, we propose that the charity would not issue a tax receipt to the donor until the charity had received the cash proceeds from the sale of these gifts. If the purchaser of these assets from the charity is not at arm's length from the donor, an independent, third-party valuation would be required.
The removal of this major barrier to charitable giving would unlock significant amounts of private wealth for public good. The total value of all private companies in Canada is greater than the total market value of all public companies - currently estimated at $1.4-trillion. If the donation of real estate to a charity is to be retained by the charity to fulfill its mission, an independent appraisal would be required to provide an appropriate value for the tax receipt.
Gifts of private-company shares and real estate are already exempt from capital-gains taxes in the United States. The implementation of these two measures would level the fundraising playing field for Canada's not-for-profit organizations, which are competing with the U.S. for the best and the brightest talent.
Our proposals would also enable the donor to sell the private-company shares or the real estate and gift all or a portion of the cash proceeds to a charity within 30 days, under an existing provision in the Income Tax Act. This "Made in Canada" provision would be more effective and less costly for the recipient charity than under the current U.S. system, which requires that the charity actually takes ownership of the asset.
The tax-revenue cost to the government depends on the amount of the increase in charitable gifts and the adjusted cost base of the donated property. The C.D. Howe Institute, Canada's leading, independent, non-partisan think tank, recently published an e-brief, Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities, which supports these proposals. The e-brief estimates that annual gifts of real estate could increase by $100-million to $200-million and annual gifts of private-company shares by $200-million to $500-million. The tax-revenue cost is approximately 60 per cent of these increased donations, shared two-thirds by the federal government and one-third by the provinces. In essence, for each $100 of federal and provincial tax revenues forgone, charities would receive $167.
All four political parties supported the 2006 budget measure that eliminated the capital-gains tax on gifts of listed securities. There is every reason to believe that all four parties would support these measures as well. Six former prime ministers have confirmed that they are supportive.
Although amendments to the Income Tax Act are normally implemented as part of a budget, we urge the government to include these amendments in the fall economic statement, if there is no election. If there is an election, we urge the government to include these measures in its first budget, which presumably would be tabled in the spring of 2010.
Donald K. Johnson is senior adviser at BMO Capital Markets.