Reports and presentations

Statement

A statement respecting tax provisions for charitable donations

OTTAWA, October 28, 1996

Purpose

This Statement is intended to contribute to the discussion about the need for improved voluntary support of important public services, for a proactive governmental role in encouraging that support and, in particular, for improved tax provisions affecting charitable donations of appreciated property.

In its Budget Plan of March 6, 1996, the Government of Canada acknowledged the need as follows:

As the role of government evolves in keeping with fiscal circumstances, the charitable sector is playing an increasingly important role in Canadian society...

The government recognizes that it is in the interest of all Canadians that the charitable sector have the ability to raise sufficient funds to fulfill that expanding role. (p. 69)

The 1996 Federal Budget announced some improvements respecting the limits for testamentary gifts, and adjustments to the way deemed taxable capital gains (as a result of property donations) would be treated. The stated intention was "... to prevent taxpayers who make gifts in forms other than cash from facing a cash-flow impact ...." (p. 70)

The federal government also acknowledged that more may be needed:

In the coming year, the Department of Finance will examine ways of further encouraging charitable giving and charitable activities, particularly in areas where, due to the fiscal situation of governments, individuals and communities are being asked to do more.

Ways of ensuring that increased government support to charities is effectively translated into activities of direct benefit to Canadian society will be examined. (p. 70)

For a variety of reasons outlined below, the AUCC wishes to add its support to those who argue that the current provisions fall far short of the mark. They fail to provide the impetus needed to trigger the kind and amount of increased voluntary giving that is urgently needed, particularly in an area where there is considerable potential for major expansion.

AUCC's view is that governments can and should adopt a more active posture to stimulate major increases in gifts of property, in particular through an important change to tax policy in relation to such gifts.

Context and challenge

The kinds of changes espoused above are needed, important and can be expected to produce significant results of benefit to Canadians in a variety of ways. The reasoning is straightforward and increasingly familiar:

• Important public or quasi-public programs, activities and institutions -- including charitable, not-for-profit or voluntary entities -- are under severe and increasing strain as governments continue to trim their spending;
• Many of the affected activities and services are valued by Canadians because they contribute positively to Canada's social and economic cohesion and progress, and it is widely desired that they continue to do so;
• This is clearly true in areas of health, education and social/cultural services, as well as the linked ancillary and support systems, including research activities, that back them up and stimulate their advancement;
• It is well understood that service institutions are expected to improve their cost-effectiveness, searching vigorously for cost-savings while also seeking alternative funding sources. All organizations are struggling with these challenges, as they seek to maintain and improve programs.

New sources of revenue are being vigorously pursued everywhere. Canadian universities, for example, have been engaged in recent years in unprecedented efforts to attract new resources. Their experience shows that more needs be accomplished. The shortfalls are not being offset. Efforts need to be escalated, and government assistance is required.

Voluntary support by individuals and communities, consisting of contributions of time, expertise, materials and assets as well as money, will be needed in increasing measure if Canada is to continue to have the kind of valuable services that governments can no longer "carry" to the extent they have in the past.

It seems, consequently, that we must seek ways to stimulate and encourage a greater "civic engagement" in general, including greater voluntary contributions and, more specifically, charitable donations to those institutions and activities that clearly matter for both our present social, economic and physical health, and for their positive future development. It is also clear that government must help motivate and support these adjustments, since they are directly linked to the changes it is engineering in its own roles and responsibilities.

Charitable donations

The wide variety of socially valuable activities that are now associated with the "charitable" label, and the financial stress they are under, brings the issue of charitable donations into the spotlight. The evolution to a more important role for this nonprofit social "sector," let alone the maintenance of its current levels of service, can only be accomplished with a concomitant shift in the flow of resources to it. Financial resources are obviously key, even while other resources are useful and welcome as well.

Capital Gains and Appreciated Property

Tax policy matters. It has powerful impacts on organization and behaviour, particularly (and obviously) respecting financial decisions and flows of funds. AUCC believes that the specific tax provisions affecting charitable contributions or donations have significant impact on the nature and amount of such donations, and that changes in relevant provisions can stimulate significant responses. We share the view that taxation of capital gains in the case of donations of appreciated property stands as a significant impediment to such donations, even while there is great potential for increased gifts of property in Canada.

Comparisons with the United States reveal generally more pro-active or generous treatment there, and it has been noted that significantly larger gifts have been made by Americans than by Canadians. The cause-effect relationships are not simple, of course. Historically Americans have espoused a somewhat different role for their governments than have Canadians, and their stronger adherence to private institutions and services has been accompanied by a similarly stronger habit of private giving, with tax provisions both encouraging and accommodating these preferences.

In the United States, the capital gain is not taxed and 100 per cent of the asset's fair market value is deductible from taxable income (with an annual deduction limit of 50 per cent of income). This treatment was recommended in the January 1996 Report of the Standing Committee on Finance. One might argue further that for Canadians to change their habits toward increased voluntary giving involving property could require even stronger stimulus than in the United States, where the practice has been well and long entrenched. However, the AUCC's position here is that we should do at least as well as the Americans in terms of tax incentives, and certainly not do less, which is the present case with regard to donations of appreciated capital property.

The Need for "Pro-active Measures"

Recently promised changes in relevant Canadian tax provisions are positive, but fall short of the Finance Committee s recommendations and in our view do not provide the impetus to stimulate a significant donor response. Technical or modest improvements are valid, but what is needed in this situation is an active policy decision to promote a "shift" in donor behaviour. Specifically, what is called for is the elimination of capital gains taxation on donations of appreciated property to approved charitable activities and organizations.

A targeted capital gains exemption in cases of donated property can be seen -- along with the credits available against income tax -- as maintaining a support policy for valued activities, albeit at lower levels (than program funding before cutbacks). The tax expenditure format allows for precisely the kind of "financial partnerships" that governments are promoting.

Through such "partnering" initiatives, governments are actively seeking to "lever" their scarce dollars in order to continue to support the maintenance and even growth of valued activities and services. That is precisely what is argued for here. In effect, government contributions through capital gains and income tax relief will be automatically linked to and augmented by the gifts of the donors. From the perspective of the donors, of course, they see government willing to participate in their generous decisions, and know they are supporting public policy goals in ways that suit their personal circumstances and priorities.

Tax Breaks for the Rich?

Since the tax change recommended in this statement is targeted to those Canadians with assets and who may be willing and able to give them up for a good cause, it may be tempting to characterize the measure as "doing something for those who are already privileged and don't need government tax relief."

It is true that the hope is to stimulate giving by Canadians with large wealth holdings. It is also true that there are many thousands of Canadians with more modest assets who nevertheless might be willing to contribute. Canadian generosity has never been confined to the wealthy. Of course, large gifts, that by themselves fund institutions, buildings, laboratories or various forms of endowments, are extremely important, now more than ever. But also important is the cumulative effect of small and medium-size donations. This will be true of gifts of property, just as it is true of money. And the recommended changes may be particularly attractive to people with significant assets but modest income levels, such as retired or semi-retired Canadians, since the tax credit allows them to "cash in" part of their assets, thereby augmenting their immediate cash flow.

But the point is simple: "tax relief" typically implies changes that allow income earners and asset holders to retain more resources for themselves and their families. What we are dealing with here are changes that encourage people with means to give their resources away! The beneficiaries are the myriad organizations and programs who render service to a wide spectrum of Canadians, many of whom are poor, disadvantaged, in ill health or who otherwise need assistance to access the opportunities that other Canadians take for granted. In other cases, the tax-assisted resources help provide the research, facilities and services that underpin our health and education systems -- and more broadly economic and cultural activities as well -- that benefit all Canadians. This is tax assistance for valued public programming to meet important public needs; it is not tax relief for the rich.

Conclusions

Governments need to recognize and give substance to their continuing interest in the vitality of institutions and programs that they agree contribute positively to the well-being of Canadians as individuals and to Canada as a society. Canadians do not want their governments to abandon these responsibilities. Cutting back on public subsidies may be an unavoidable fiscal necessity. But public financing generally, and targeted or strategic investments and initiatives specifically must remain significant governmental functions.

Canada's universities and colleges are aggressively pursuing new ideas and new models for effective, cost-efficient restructuring of their practices, programs and services. Confronting the financial challenges has been a top priority for many years now, and efforts to seek out new sources of funds remain vigorous and are continuously expanding.

AUCC members have been identifying and learning about the points of both opportunity and resistance when it comes to fundraising in general, and to donations in particular.

The need for facilities, for research funds, and for endowments to support scholarships, chairs and specialized programs is increasing. New funding sources need to be tapped and nurtured. In our view, one such area with considerable potential is gifts of appreciated property. We believe a very large number of Canadians could be persuaded to make sizeable donations of property if the conditions for doing so were significantly improved.

In order to provide the kind of boost that is needed, we recommend that capital gains taxation be eliminated when appreciated property is donated to approved charitable activities and organizations. This targeted tax relief, in combination with income tax credits based on the fair market value of the gift, would bring Canadian practice into line with the successful equivalent provisions in the United States and would, we believe, open up a new range and level of much-needed voluntary giving in Canada.

We urge governments to adopt these measures as an appropriate way of continuing their partnership with Canadians in support of valuable public services, while also encouraging the increased voluntary action and personal commitment that is needed if we are to preserve and enhance the cohesive, resilient society that we all want Canada to be.