Finance Committee on Feb. 2nd, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 39th meeting of the Standing Committee on Finance. This is our second discussion regarding our study of tax incentives for charitable donations, pursuant to Standing Order 108(2).

We have a number of individuals here in person and we have one person by video conference.

First of all, we have Rachel Laforest, associate professor, School of Policy Studies, Queen's University. We have Abigail Payne, professor, Department of Economics, McMaster University. We have Paul Reed, Department of Sociology and Anthropology, Carleton University. We have Adam Parachin, professor, Faculty of Law, University of Western Ontario.

By video conference from Thompson Rivers University in Kamloops, British Columbia, we have Laura Lamb, assistant professor, School of Business and Economics. As you know, you each have up to five minutes for an opening statement.

Nous allons commencer avec Mme Laforest. We'll then have questions from members.

[Professor Rachel Laforest, Associate Professor, School Of Policy Studies, Queen's University, As an Individual]

Merci beaucoup pour me donner l'occasion de vous parler cet après-midi.

My name is Rachel Laforest, and I'm an associate professor at the School of Policy Studies at Queen's University. I head up the public policy and third sector initiative. Most of my research focuses on government and non-profit sector relationships. What I wanted to do this afternoon is to give you a broad-brush overview of some of the trends that I think are important for the work of your committee.

First, I would like to start out by acknowledging that since 1994 the federal government has adopted a number of initiatives to make the tax treatment of charitable donations more generous. I'd like to applaud the committee on these measures, for they have yielded some good results. According to data collected by Statistics Canada, Canadian tax filers claimed $8.3 billion in donations in 2010. This was an increase of over $500 million from 2009. There is reason to be pleased that Canada has one of the highest levels of charitable giving around the world.

However, that doesn't mean that we should be complacent, because this data obscures another reality: the base of donors in Canada has been steadily shrinking. The number of donors has actually declined from 30% in 1990 to 23.4% in 2010. Not only is the base of donors shrinking, but a high proportion of our charitable contributions are borne by very few individuals.

In 2004, the Canada survey of giving, volunteering, and participating showed that 9% of our donors are responsible for 62% of our charitable donations. Therefore, our donor base is fragile and precarious. I believe very strongly that there is cause for concern. The resource base in the voluntary sector is weakening, particularly in light of the current economic situation and the government cuts that are looming on the horizon.

For this reason, there is still more work to be done by your committee to create incentives to foster charitable giving. The voluntary sector is a significant social, political, and economic force in Canada. It accounts for 8.6% of the GDP and has a full-time equivalent workforce of over two million. More importantly, it brings value to all aspects of our communities, and it has a direct impact on the quality of life of Canadians.

The voluntary sector relies on three main sources for its funding. It relies on government funding, charitable donations, and earned income. I'm going to focus on the first two.

As we all know, the federal government and some levels of provincial governments are having to deal with serious budgetary constraints. Already, federal government expenditures as a percentage of GDP have decreased from 21.5% in 1992 to 17.1% in 2007. So in the face of the deficit reduction measures that are coming, we will most likely see reductions in contributions from various levels of government to the voluntary sector.

In addition, many of the services that were formerly provided by the federal government and other levels of government are being reduced or transferred to the voluntary sector. The assumption is that voluntary sector organizations will be able to pick up that burden. I think it's important to ask ourselves whether the voluntary sector actually has the capacity and the ability to take up this additional burden, because ultimately it will have an impact on our communities and our quality of life.

In the context of declining government resources, charitable donations will become even more important as a source of revenue. Already more than half of the $112 billion raised in this sector comes from private funding, and a significant portion of that comes from charitable donations from individual Canadians.

I want to come back to the original fact that 9% of our donors are responsible for 62% of our charitable donations. What this data indicates is that the measure of our society depends, to a large extent, on a small proportion of Canadian adults, who Paul Reed has described as the “civic core”.

I don't know if Paul is going to talk about that today, but the civic core means that there's a small number of individuals that account for more than two-thirds of all volunteering, giving, and community activities in Canada. These contributory behaviours are all linked, and they all come from that same small portion of civic donors. What we know about this civic core is that it tends to be older, religious, well-educated, in higher-status and higher-income occupations, with children between 6 and 12, and living in communities outside of major metropolitan centres.

Two of these characteristics are really important. The first one is the older population. Our population is aging, and the segment of mature donors—those born before 1945—who tend to be amongst the most generous, is rapidly shrinking. Secondly, we are facing a decline in religious belief. This decline may have implications for overall levels of charitable giving in the future, as we may lose more of our generous givers.

Because the donor base in Canada is neither wide nor deep, these trends place charitable giving in a precarious situation. If they remain unchanged, the long-term consequences will be a serious depletion of civic resources and a diminished capacity for voluntary organizations to support well-being.

To conclude, I invite the committee to consider tax incentives that can reverse the erosion of the donor base. We cannot take the health of the voluntary sector for granted.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Ms. Payne, please.

[Professor A. Abigail Payne, Department of Economics, McMaster University, As an Individual]

Thank you very much for inviting me to appear before this committee.

My testimony is based on 20 years of research on charities and donations. I am a professor of economics and director of the Public Economics Data Analysis Laboratory at McMaster University. I have a Ph.D. in economics from Princeton University and a law degree from Cornell University.

I encourage the committee to take a broad perspective when thinking about tax incentives for charitable donations. Whether and how much a donor gives depend on more than her preferences. Giving can depend on influences of other individuals, on the level of charity interaction with the donor, and on other funding sources such as foundation and government funding.

To understand these influences, my research focuses on the empirical analysis of large data sets. Canada has some of the best data for studying charitable giving. My background statement illustrates that we can observe using measures from these sources. Let me briefly summarize my findings.

To explore patterns of individual giving, I relied on individual tax returns that were aggregated and provided at a neighbourhood level. Between 1991 and 2010, the number of donors increased, but the number of tax filers also increased and at a faster rate. This faster growth rate in tax filers explains why we see declines in the share of tax filers reporting charitable donations. Put in this context, the question, should not be, “Why have people stopped giving?” but rather, “Why is the growth rate in donors slower than the growth rate in tax filers?”

One of the many plausible explanations is that as our communities have become more diverse, giving has fallen. While community diversity is a good thing, it is not uncommon to find that diversity leads to a decline in support for public and charity-provided goods. Our research finds that between 1996 and 2006, neighbourhood diversity increased an average of six percentage points, resulting in an average decline in donations of 12 percentage points.

Overall growth in donations in the last few decades has been in the higher-income areas. Giving by individuals residing in lower- and middle-income neighbourhoods has been declining. While part of this is likely attributable to economic growth during most of the period, the growth in giving in the higher-income neighbourhoods may also be attributable to changes in the tax treatment of donations such as publicly traded securities.

Next, what do we know about charities and their influence on private giving? Over the last two decades, the number of charities and total charity revenues from public and private sources has increased. Religious organizations count for the lion's share, both in terms of the number of charitable organizations and in the receipt of private donations. Charities involved in the provision of social welfare and community-oriented services are numerous, but they receive a low proportion of private donations, and while social welfare and community charities rely more on government grants, more government grants flow to charities in the areas of health and education.

Increasingly, foundation support of registered charities is important, especially for religious and health-related charities. But how do these other forms of funding affect private giving to charities? Much of my research has been focused on trying to understand how government grants to a charity impact private giving. The research suggests, at least for social welfare and community organizations, that charities play an important role in raising funds. Yet charities may care more about their mission than about things like maximizing revenues. We find on average that if charities receive an increase in direct government funding, private giving declines, but this decline in private giving is more attributable to a decline in charity fundraising efforts. There is some evidence to suggest that donors view direct government funding to a charity favourably.

For instance, the funding may serve as a signal of the important work being done by the charity, encouraging tax-receipted giving. Similarly, in preliminary work by one of my doctoral students, we are finding that if a charity receives funding from a foundation, the foundation grant may also serve as a positive signal and increase individual giving to the charity.

This leads me to my last finding. The number of foundations and their revenues have both grown significantly. Foundations represent approximately 12% of registered charities.

Between 1992 and 2008, reported tax-receipted gifts to foundations increased from $1 billion to more than $4 billion annually. This growth swamps the growth in tax-receipted giving to charitable organizations.

While revenues have been growing over the last two decades, not all charities have benefited from this growth. In any given year it appears that for every charity that experiences a growth in revenue, another charity is experiencing a decline. About one-third of charities experience a decline from one year to the next.

I recently conducted a survey of small to medium-sized charities. An increasing number of these charities reported a decline in revenue but an increase in demand for their services in recent years.

I have just provided you with a bit of information about charities and giving in Canada. I hope you can see how taking a broad perspective when evaluating tax incentives for donations will result in providing a stronger foundation to our charitable sector.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Reed, please.

[Professor Paul Reed, Department of Sociology and Anthropology, Carleton University, As an Individual]

Thank you, Mr. Rajotte and committee members, for the invitation to contribute to your deliberations.

I am going to offer you a summary of a summary of a summary, and I may end up being cryptic, but there is a lot of material in my brief. In the next several minutes I'd like to hit some high points, some main items that I'd like to encourage you to consider.

At first glance, looking at tax credits for charitable donations may have the appearance of a routine administrative matter, but beneath it lie some profound issues, such as how to encourage Canadians to be aware of and contribute directly to the collective good, and what should be the nature and size of the government's role in fostering that contribution.

While there may appear to be a considerable volume of information in my brief to the committee, I now want to speak in support of only three or four straightforward points.

Before addressing the tax credit issue, it's important to recognize that long-term trends indicate that charitable giving in Canada is changing in a number of ways. I'm not going to cover the same ground that Professor Laforest did, but there are some very important developments there that I believe have to be taken into account.

Principal among them is a softening and possibly a weakening of charitable giving. Second, the evolving patterns and flows of charitable giving may be resulting in increasing financial support going to a limited number of large charitable organizations and a diminishing, disproportionately smaller volume of financial support going to the many thousands of smaller, often local, community-oriented ones, an important consequence of changes in the charitable domain.

Increasingly, we hear references to the charity industry because it is becoming increasingly rational, seeking ever more efficiency and successful techniques of fundraising. A response to that is a growing sign of donor fatigue in reaction to aggressive fundraising.

Charitable donations to religious entities, such as churches and synagogues and related organizations, once accounting for well more than half of all charitable donations, are now less than half and in ongoing long-term decline.

Charitable giving is not a single, homogeneous, uniform phenomenon. It takes a number of forms that are quite different. Incidental and occasional or sporadic giving are the most common forms, in contrast, for example, to proactive planned giving, which is practised by a minority of Canadians but accounts for the lion's share of charitable giving every year.

Some forms of charitable giving are not likely to be responsive to increased tax credits, and analysis of Canadians' behaviour and views regarding tax credits shows this incentive to have modest effects at best. There are some hard numbers in my brief supporting that.

Yet another point is that a good portion of charitable giving—and I really want to underline this point—is strongly driven by particular values and ideals. It doesn't surprise us, but it needs underlining. This fact merits closer scrutiny in any consideration of how to strengthen charitable giving.

My final point is that encouraging and increasing charitable giving may benefit from considering other approaches in addition to changing Canada's charitable donation tax credit regime.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Reed.

We'll now hear from Mr. Parachin.

[Professor Adam Parachin, Faculty of Law, University of Western Ontario]

Thank you. My name is Adam Parachin. I am an associate professor at the Faculty of Law at the University of Western Ontario, where I research and lecture in the field of the legal definition and regulation of charity. Perhaps not surprisingly, then, I'm going to bring the committee a distinctly legal lens through which to approach this matter.

A useful starting point is to recognize that any tax regime providing for the recognition of charitable donations has to deal with three key issues. The first is identifying eligible recipients. That raises the complicated issue of the definition of charity, about which I understand there were some questions from committee members on Tuesday.

The second deals with the design features of a donation incentive. Should it take the form of a credit or a deduction, and if a credit, how much? Should it be a two-stage credit, as we have now, or a three-stage credit, as has been proposed with the stretch tax credit?

The final issue a regime dealing with charitable donations needs to deal with is what eligible donations are. What kinds of contributions to charities qualify for donation incentives in the first place? That's the issue I'm going to be making some submissions on.

In a simple world, we could confine ourselves to simple donations—unconditional cash donations. The law does a pretty good job of recognizing those, because frankly, you probably can't get that wrong. But we don't live in a simple world and we don't have the luxury of confining ourselves to simple donation arrangements. There are many other forms of donations that often arise. I can list some examples.

We can contemplate a person creating in his or her will a trust for a charity whereby the charity gets a fixed income entitlement for a period of years. That's not recognized as a gift under current regulatory publications.

We can also think of a scenario in which a donor contributes capital to a trust under which a charity has a fixed entitlement to receive that capital at some determined date in the future. That also might not be recognized as a gift under current law.

We can contemplate a scenario in which there's an estate dispute over the interpretation of a will, and the parties resolve in their resolution to the dispute that a portion of the estate proceeds be given to charity. That will not be recognized as a gift under current regulatory publications.

We can contemplate a scenario in which a donor forgives a debt owed by a charity. Rather than transfer funds, they forget a debt owing. It's not clear that this will qualify either. Neither will necessarily allowing the charity the temporary use of property, such as the free occupation of land, a leasehold, for no charge for a limited period of time. It's not clear that this will qualify under current law, nor will it when a corporation issues shares or stock options directly to a charity.

Until recently, when a donor sold property to a charity—for example, land worth $100,000 for a price of $10,000—most of us would sit here and probable instinctively and intuitively realize that it was the fundamental and functional equivalent of a $90,000 gift. Until recently, that was not recognized as a gift. It took draft amendments to the Income Tax Act to bring about that outcome.

Similarly, incurring expenses on behalf of a charity might not qualify as a gift. I have found this, as a legal analyst, somewhat perplexing.

I think three questions emerge. Why has this happened? Should we do something about it? And if so, what should be the something?

In terms of why this has happened, quickly, I will provide a statement: it is because the Income Tax Act does not define the term “gift”; it has been left to courts to define. The law in the area has developed somewhat haphazardly and somewhat reactively. I would suggest to you that there has been insufficient attention paid in the case law and regulatory publications as to why we have donation incentives in the first place.

The academic and theoretical literature on the point supports the view, and this is the prevailing view, that donation incentives exist to help raise funds for charities. If that's the case, then presumably all donation arrangements that essentially achieve that goal should qualify as tax receiptable donations. If that's what we're trying to achieve, then those are the kinds of donations we're trying to target. But all too often we miss the mark in the law by focusing on variables that frankly lack any policy relevance.

What to do, or rather, should we do something about it? In my submission, we should. Currently, a lot of charitable funds are used to support legal opinion work in this area, where answers should be clear. I shouldn't be complaining, because it means charities have to hire people like me, but that's probably not the best use of charitable funds.

In terms of what we should do, I've proposed in my brief a statutory definition of charitable donations, and I would be happy to take questions on that, should that be of interest to the committee.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Ms. Lamb, please, for your five-minute opening statement.

[Professor Laura Lamb, Assistant Professor, School of Business and Economics, Thompson Rivers University]

Thank you to the committee for inviting me to participate in this meeting today. I'm an assistant professor at Thompson Rivers University, in the Department of Economics. I have a Ph.D. in economics from the University of Manitoba.

A colleague of mine, Dr. Belayet Hossain, and I have completed a couple of empirical studies on the effectiveness of tax incentives on charitable giving by individuals in Canada. That's the information I'd like to present today—some of the results we found there.

As I mentioned, we've done two studies. The first focuses on an individual decision to give to charity, and the second is on the decision on how much to give to charity. Our studies used data from the public use microdata files of the 2007 Canada survey of giving, volunteering, and participating, published by Statistics Canada. The target population for this survey was all persons 15 years of age and over residing in the ten Canadian provinces.

Our first study explores two aspects of the Canadian tax credit system. First of all, it assesses the effectiveness of tax incentives on the decision to give, and, secondly, we evaluate and compare the effectiveness of tax credits across different donation sectors. The analysis includes the four largest donation sectors according to value of total donations, which are religious, health, social services, and international.

The empirical results indicate that the current tax incentive does have a statistically significant effect on the decision to give. For example, a 10% increase in the tax credit is expected to increase the likelihood of making a donation by 5%, on average.

The results of the second part of the analysis show that the tax incentive varies across the different sectors. It was found that the tax incentive does have a significant effect on giving to health, social services, and international sectors, but not to the religious sector; people give for other reasons.

Our second study focuses on the effectiveness of the tax credit on the donation expenditures themselves. Again, we extend the analysis to compare effectiveness across the same four donation sectors. The statistical significance again appears, and the tax incentive variable implies that the tax credit is effective in influencing the amount of total donation expenditures of an individual, as well as to each of the donation sectors. The results imply that a 10% increase in the tax incentive would cause a 17% increase in total donation expenditures.

The term “price elasticity of donating” is applicable here. It's a measure of the responsiveness of the donation expenditure to changes in tax incentives. It's considered price elastic because the expected increase in donation expenditure is greater than the proposed increase in the tax credit itself.

It has also found that the responsiveness of the different donation sectors varies to a given increase in the tax credit. For instance, a 10% increase in the tax incentive is expected to lead to an increase in individual donation expenditures of 17% to social services, 15% to health, 22% to international, and 8% to religious organizations.

The results imply that a marginal increase in the tax credit will result in a proportionately larger increase in the level of total individual donation expenditures and donation expenditures to the health, social services, and international sectors. The amount of tax revenue foregone will be less than the rise in donation expenditures for the three sectors, except for religion.

[The Chair, Conservative, James Rajotte]

Ms. Lamb, you have about one minute left.

[Prof. Laura Lamb]

Okay, thank you.

The results of the two research studies suggest that tax incentives have a significant effect on both the likelihood of Canadians making a donation and on the amount of the donation, suggesting the ability of government policy to be successful in influencing both the number of donors and the level of donation expenditures. The tax credit also appears to be fiscally efficient, as indicated. In other words, the increase in the tax credit is expected to lead to a loss of tax revenue to the public sector, which would be more than fully compensated by a rise in donation expenditures.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions with five-minute rounds, starting with Mr. Julian, please.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you, Mr. Chair, and thanks to all our witnesses, particularly Dr. Lamb; it's nice to have a voice from British Columbia out here in Ottawa.

I wanted to come back to your study because I find it quite intriguing. What you are saying is that a 10% increase in the tax credit brings in a marginal increase in the number of people who donate but a significant increase overall in the contributions made: 3.6% more contributors to the social services sector and 17% more donations overall. It's pretty significant.

I'm wondering if in your model you've projected what the overall impact would be right across the country. We've got tax incentives at this point of $2.9 billion and overall contributions of $8.3 billion. If we look at that change, that increase in the tax credit, what is the overall contributory envelope across the country? What would be the expenditure by governments?

[Prof. Laura Lamb]

I have to say that we didn't make those calculations; we just went to the extent of calculating the price elasticities themselves. The assumption or the statistics suggest that those percentages could be applied to the fiscal information.

I'm sorry, I don't have that information.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

It's a very interesting model.

I would like to go to Madame Laforest. You said that about 9% of the donors are providing 62% of the overall donations. Could you give us a sense of that 9% of donors? Are we talking about high-income donors, generally speaking? If you gave us a profile of what that 9% is, how would you describe it?

[Prof. Rachel Laforest]

It tends to be any of these characteristics, but not all together: older; highly educated, which links up with having both high income and high status; young families who tend to be in that high civic core; and those who are living in rural areas outside of major metropolitan areas. It has some of those characteristics.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you.

I'd like to ask all of our panellists a question. On Tuesday we had representatives from the Department of Finance who came forward to talk about the assistance from government for tax incentives for charitable donations. The testimony indicated the following: that for cash donations, governments pick up the tab through tax incentives, about 46%, but when we're talking about exemptions from capital gains tax, the rate of assistance on donations from listed securities is typically 60% and can be as high as 69%. So there is a very clear differentiation within the tax system of charitable donations cash, such as the donation from the widow who lives next door to me who gives a small amount because she's low-income, as compared to donations of listed securities.

I'm wondering if you can give us your opinions on that structure and how you feel about it: whether you feel that it's an appropriate structure, whether you feel that it's out of equilibrium in some way, and whether changes would need to be brought to how that differentiated treatment is in place.

[The Chair, Conservative, James Rajotte]

There's a little over a minute left. Do you want to direct it to perhaps two panellists?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Perhaps Mr. Reed and Mr. Parachin can answer.

[Prof. Paul Reed]

First of all, there is no question that charitable giving is concentrated in a small minority of the Canadian population.

Secondly, that small minority practises what you might call planned giving, and within that small minority the largest chunk is religious. About half of all giving in Canada is religious. So we have concentration within concentration within concentration. When developing a changed tax credit regime, I think that really needs to be taken into account.

[The Chair, Conservative, James Rajotte]

Mr. Parachin, can you give just a brief response, please?

[Prof. Adam Parachin]

Yes. I have two points, just quickly.

On the difficulty with the calculation regarding the tax expenditure for the capital gains exemption for gifts of capital property, it's very difficult to determine what revenue would have otherwise been realized, because the donor may well have sold at a time when the price was depressed or further elevated. It's a very speculative calculation that actually elevates the tax expenditure to that precise degree.

Second, just quickly, the tax policy question is whether or not donating shares is a realization event that's indistinguishable from selling the shares to purchase a new home, or some other form of personal consumption. I think there's at least a policy case to be made that when someone gives shares to charity, that's not an indistinguishable form of personal consumption, and we may well want to treat that differently for tax law purposes.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Julian.

We'll go to Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I would like to thank all of the witnesses, of course, but I do have to acknowledge Ms. Lamb from Kamloops, my hometown.

It's really great to have you join us from not just British Columbia but Kamloops.

First of all, to Mr. Parachin, I really appreciate your comment regarding the definition of gifts. I think it's something that makes perfect, logical sense. If we're struggling with the definition and it's creating a lot of challenges, then I think that's an important point.

Maybe I can let the academics debate this a little bit, but I think Mr. Reed said that tax credits had a modest effect at best. I think we heard from the research coming from Ms. Lamb that it seemed to have some significant impact in terms of giving. One of the critical things we need to understand is the effectiveness of the current system, so perhaps you could elaborate and we could have a bit of back-and-forth on that issue.