First of all, I'd like to thank the House finance committee for providing me with the opportunity to present our proposals for a tax-effective stimulus for Canada's not-for-profit sector.
The government's fiscal stimulus plan has provided crucial funding for Canada's economy during this global economic and financial crisis. While a few not-for-profit organizations have benefited directly from the fiscal stimulus plan, Canadian 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, artists, as well as individuals in need of assistance.
Given the estimated $56 billion fiscal deficit for this year, it is unrealistic to expect the federal government to increase direct funding for health care, education, social services, and arts and culture, but we must find a way to provide a tax-effective stimulus for Canada's not-for-profit sector.
After conducting extensive research on alternatives for stimulating and increasing private sector funding for charities, we have concluded that two amendments to the Income Tax Act would result in significant increases in private sector donations on the basis that it is more tax-effective than direct government funding. These measures capitalize on the great success of the government's decision to eliminate the capital gains tax on gifts of listed securities, which began with the 1997 budget and was completed in the 2006 budget.
We strongly recommend that the government expand the capital gains tax exemption to include gifts of private company shares 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 was not at arm's length from the donor, an independent third party valuation would be required for the private company shares or the real estate.
Removal of this 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 actual total amount of the value of public companies, currently estimated at $1.4 trillion. Also, real estate represents a significant portion of the personal net worth of most Canadians.
If the donation of real estate to a charity is to be retained by the charity to fulfill its mission, an independent third party appraisal would be required to provide an appropriate value for the tax receipt.
Gifts of private company shares and gifts of real estate are already exempt from capital gains taxes in the United States. An implementation of these two measures would level the fundraising playing field for Canada's charities, which are competing with the United States for the best and the brightest talent.
Our proposals would 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 of the closing of the sale, under an existing provision in the Canada Income Tax Act. This made in Canada provision would be more effective and less costly for the recipient charity than the current U.S. system, which requires that the charity actually takes ownership of the asset. These amendments would provide the same tax treatment to donors of private company shares and real estate as currently applies to donors who give publicly listed shares to a charity. In principle, all three asset classes should have the same tax treatment when they are donated to a registered charity.
That raises the issue of what would be the cost to the government of these measures. The tax revenue cost depends on the amount of the increase in charitable gifts of private company shares and taxable real estate, plus the adjusted cost base of the donated property. Based upon the e-brief published today by the C.D. Howe Institute, gifts of taxable real estate are estimated to increase by $100 million to $200 million per annum. The forgone tax for the federal and provincial governments combined would be between $60 million and $115 million per annum.
For private company shares, the e-brief estimates new donations of $200 million to $500 million per annum, with the forgone tax estimated at between $130 million and $325 million. Two-thirds of this tax revenue cost is borne by the federal government and one-third by the provinces. It should be kept in mind that the cost of a charitable donation tax credit is roughly 45% of the gift, whether the gift be in the form of a capital asset or in the form of cash.
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. Furthermore, six former prime ministers have communicated to me that they support each of these two proposals in principle.
While amendments to the Income Tax Act are normally implemented as part of the budget, the government does have the option of including these measures in the fall economic statement. If there is no election this fall, we urge the government to include these amendments in the fall economic statement; however, if there is an election this fall, we urge the next government to include these measures in its first budget, which presumably would be tabled in the spring of 2010.
Thank you. I would be happy to answer any questions.