Charitable Giving: Future Tax Policy Directions

By Kevin Wark, LLB, CLU, TEP, Chair of Tax Policy, CALU

March 2010

As most CALU members are aware, the federal government has proactively encouraged Canadians to increase charitable contributions by enhancing the tax benefits of such gifts. Since 1996 there have been a number of new tax measures introduced, including:

1. Increasing the annual charitable contribution limit from 20% to 75% of net income and 100% at death.
2. Permitting a charitable tax credit in the year of death where the donor directly designates a charity as the beneficiary of insurance proceeds as well as RRSP, RRIF and TFSAs benefits.
3. Eliminating any capital gain on the gift of qualifying public securities to a charity.

Recently the C.D. Howe Institute released two reports that have reviewed the success of the federal government´s tax initiatives, as well as outlining other tax changes that could be implemented to encourage even greater charitable giving by Canadians. We know many of you work in this field and thought CALU members would be interested in a summary of these two reports.

The first report was authored by Malcolm Burrows, who was a speaker at CALU´s 2007 AGM.[1] In this report the author notes that from 1995 to 2007, receipted charitable gifts has grown $3.6 billion to $8.65 billion. At the same time, there has been a trend toward fewer donors making larger gifts. This conclusion is supported by the fact that the largest increase in gifting came from taxpayers with incomes in excess of $85,500, with their gifting increasing by 220% from 1991 to 2006.

The report then notes that while the new tax incentives, in particular the elimination of capital gains on certain capital gifts, can be deemed a success, there are several issues of concern:

1. The number of taxpayers claiming donations has declined significantly since 1990.
2. The enhanced tax treatment of gifts of public securities favors this asset class over other types of capital property such as shares in private corporations and real estate.
3. Donations of public securities are extremely market sensitive, with the result that gifting will be curtailed during a market decline, a time when charities are particularly in need of funding.

The report then goes on to suggest that these issues could be addressed, at least to some degree, by extending the tax treatment provided to gifts of public securities to gifts of shares in private corporations and real estate.

The concerns with providing similar treatment to these two asset classes is then acknowledged. For shares in private corporations, there may be valuation abuses. Similar concerns may arise with respect to the gifts of real estate, as well as issues relating to the charity being liable for environmental claims as well as ongoing maintenance costs.

The report then offers solutions to deal with those concerns. With respect to gifting shares of a private corporation, it is noted that the Income Tax Act already contains rules to prevent abuse when shares of a private corporation are gifted to a non-arm´s-length charity. In this situation no receipt can be issued unless the security is disposed of within 60 months of the donation. As well, the ultimate receipt is based on proceeds received by the charity, not the appraised value at the time of transfer.[2] While the realization of any capital gain is also deferred until the charity disposes of the shares, there is no reduction in the amount of capital gain realized on the transfer as is the case for publicly traded securities.[3]

The report recommends that the gift of private company shares to both private and public registered charities should fall under the above regime in terms of the non-recognition of the gift (and nonrecognition of any gain) unless the charity disposes of the shares within 60 months. Should such disposition take place within the 60-month period, the charity can provide a receipt equal to the sale proceeds, and as well, any capital gains arising from such transaction would be eliminated. This tax change would primarily assist shareholders who wish to make donations simultaneously with the sale of all of his or her shares in the company, either while alive or upon death.

With respect to real estate, the report recommends that any tax resulting from the disposition of real estate be partially or fully eliminated if any of the proceeds of sale are gifted within a certain period of time to a charity (e.g., 30 days). This would remove the valuation risk for the charity, as the receipt is based on the amount of cash actually received. This would also ensure the charity does not need to worry about discharging real estate mortgages, paying the costs of the property transfer, or assuming any liabilities with respect to the underlying property. The report also makes recommendations relating to the elimination of capital gains on the gift of real estate for use by the charity. It is also noted that if the donor has claimed capital cost allowance with respect to the real estate, and there is "recapture of CCA" as a result of the gift, such recapture should continue to be recognized for tax purposes as the taxpayer has already received the tax benefit of those deductions.
 
The second report,[4] authored by A. Abigail Payne, provides additional information on historical gifting patterns as well as tax recommendations to stimulate more charitable gifting from lower- and middle-income Canadians.

The report discusses the fact that only a small percentage of charities have benefited from gifts of public securities. For example, in 2007 less than 2% of registered charities reported receiving such gifts. But among charities ranked in the top 10% in terms of reported revenues, close to 10% received gifts of publicly traded securities. This suggests that most charities continue to rely primarily on cash donations or government subsidies.

As discussed in the Burrows report, it is also noted that the average donation per taxpayer has been increasing since 1991, with the highest percentage growth coming from higher income taxpayers. This suggests the increasing reliance of charities on higher income individuals for donations.

The report then suggests two tax changes that might encourage greater giving from the lower and middle income groups:

a) Single Tax Credit for Cash Gifts
The existing two-tier tax credit[5] provides greater tax relief for donations once the total amount of gifts reaches $200. A single-tier tax credit based on the 29% federal tax rate would presumably increase the base of donors making gifts under $200, as well as simplifying administration of the credit. It is also suggested that such a change would only have a nominal impact on federal tax revenues.

b) Higher Tax Credit for the First Dollar of Giving
Another suggested approach would be to offer a higher federal tax credit for the "first dollars" of charitable donations (i.e. 40%), with a 29% credit for the excess contribution. Again, the purpose of such an approach is to encourage more gifting by the lower-and middle-income groups. The higher tax credit would be capped based on taxable income. The report suggests that the exact levels of the amounts eligible for the credit and the income cap amount would require further study. But it provides an example where the cap for the higher credit amount could be equal to 1% of the taxpayer´s income to a maximum of $500. Thus, a taxpayer earning $40,000 would be allowed a higher rate tax credit on the first $400 of gifts. A taxpayer earning $100,000 would be capped at $500 for the higher rate credit, with any remaining gifts qualifying at the 29% federal tax rate. It is also proposed that any amounts eligible for the higher credit be allowed to accumulate for up to five years, preserving the enhanced tax benefit for "catch up" gifts made in future years.
 
As is noted in both reports, the reliance of charities on a narrower base of wealthy donors leaves charities exposed to small changes in gifting patterns, as demonstrated through the most recent downturn. Both reports provide new ideas on how the federal government can increase the charitable donor base through innovative tax policies. It will be interesting to see if the federal government picks up on any of these recommendations in the 2010 budget proposals.

Endnotes

1. Malcolm Burrows, "Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities," C.D. Howe Institute E-brief dated Sept. 15, 2009.

2. Subsections 118.1(13), (18) and (19) of the Income Tax Act (the "Act").

3. The exemption for "listed securities" is set out in paragraph 38(a.1) of the Act.

4. A. Abigail Payne, "Lending a Hand: How Federal Tax Policy Could Help Get More Cash to Charities," C.D. Howe Institute E-Brief dated Nov. 30, 2009.

5. Subsection 118.1(3) of the Act.

Copyright the Conference for Advanced Life Underwriting, March 2010

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