Finance Committee on Feb. 9th, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order, the 41st meeting of the Standing Committee on Finance.

The orders of the day, pursuant to Standing Order 108(2), are to continue our study of tax incentives for charitable donations. We have six presenters here today at this session.

We have Ms. Brigitte Alepin, a chartered accountant.

We have John Waters, vice-president of BMO Nesbitt Burns. We have Gregory Thomas, from the Canadian Taxpayers Federation. We have Adam Aptowitzer appearing as an individual, also related to the C.D. Howe Institute. We have Malcolm Burrows, head of philanthropic advisory services with Scotia Private Client Group, and we have Craig Alexander back at the committee from TD Bank Financial Group.

You have five minutes for your presentation.

We will begin with Ms. Alepin.

[Brigitte Alepin, Chartered Accountant, Tax Policy Specialist, Author, As an Individual]

Thank you, Mr. Chair.

Ladies and gentlemen, the tax regime applicable to charities has several flaws. For example, the 2010 Auditor General of Canada's report noted that, in 2010, out of 41,000 Canada Revenue Agency employees, only 40 auditors had been assigned to audit 85,000 charities across Canada. This seems extremely low compared to what we see in other sectors covered by the Canada Revenue Agency.

[Shelly Glover, Conservative, Saint Boniface, MB]

I'm sorry to interrupt, but could we ask the witness to slow down? The translation cannot keep up.

[The Chair, Conservative, James Rajotte]

There's a problem with the translation?

Okay. We'll let you start again. I apologize for that. I guess there was a problem with translation.

[Brigitte Alepin]

Should I continue my testimony or start over?

[The Chair, Conservative, James Rajotte]

As you wish.

[Brigitte Alepin]

I shall continue.

The most obvious and most easily understood flaw with regard to the tax system for charities was highlighted in one of the comments in the 2010 Auditor General's report. That report indicated that there were only 40 auditors for the 85,000 charities across Canada, although CRA had 41,000 employees.

There are also other significant problems with the tax system for charities in Canada. Today I am going to identify a very specific problem. It concerns the tax regime applicable to private charitable foundations. This is a financial problem, and in times of crises or in times preceding crises, I think it becomes increasingly relevant to mention.

The problem stems from the fact that, essentially, the fiscal agreement between taxpayers and the founders of major private foundations is inappropriate, particularly during a crisis. Here is the agreement we are talking about. On the one hand, Canadian taxpayers give tax breaks to private foundations. This tax savings exceeds 50% of the capital of the donation in the first year following the registration of the private foundation.

On the other hand, the private foundation should invest significant funds into Canadian society, in the form of charitable activities, in order to ensure a balance of public finances. However, this is not the case. In reality, current tax law is such that, in our opinion, private foundations are forced to spend for charitable purposes the equivalent of 3.5% of the foundation's capital each year.

Let us take a concrete example. I invite you to note the fiscal deficit in the equation or the agreement referred to. What happens when a $100-million donation is made? On the one hand, the private foundation and founder will receive, starting in the first year, tax savings totalling over $52 million.

On the other hand, Canadian society only gets from the private foundation $3.5 million in charitable contributions to society, since that is the minimum amount imposed through tax law and charitable foundations rarely spend more than these tax laws require them to spend for charitable purposes.

I would like to draw your attention to the fact that this minimum amount was at one time much higher in Canada. In 2010, it was reduced to 3.5% by the Harper government due to the drop in the rate of return on capital, in order to reflect the drop in the rate of return on capital.

In the United States, this minimum requirement mandatory threshold charitable spending is 5%. At present, the Obama government is studying how to amend this agreement which puts taxpayers at a disadvantage. Many lobby groups are studying the issue and proposing ways to resolve the issue by increasing the requirement on charitable spending per year.

In conclusion, if time permits, I would like to draw your attention to two issues. The rules are as follows, meaning that private foundations are being asked to spend only the return on capital to respect the wish of founders who want their major private foundations to last into perpetuity and for ever. During difficult times and prior to a crisis, I think that it is a good time to look again at this power we are giving to founders of major foundations.

Finally, given that, according to the latest Canada Revenue Agency statistics, about $20 billion was tied up in private foundations in Canada, if the present annual spending obligation went from 3.5% to 8%—which has actually been done—we could inject annually up to $1 billion in specific sectors like health and education.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll go next to Mr. Waters, please.

[John Waters, Vice-President, Head of Technical Expertise, Wealth Group, BMO Nesbitt Burns]

Thank you, Mr. Chairman.

On behalf of the BMO Financial Group, I'm pleased to join my colleagues here this afternoon to discuss the topic of tax incentives for charitable giving.

I come to the table this afternoon from two perspectives. One of them comes from working for a company, BMO, which donated over $28.2 million to Canadian charitable organizations in 2011 and saw its employees donate nearly $12.8 million in its annual employee giving campaign. Second, as a tax specialist within BMO Nesbitt Burns who supports our financial planning services, I help individuals and families with their own charitable-giving goals.

All of us here this afternoon share the objective of making charitable giving an easier proposition for Canadians, and BMO is pleased to offer its thoughts on how we might accomplish this through the tax system.

As many of us in this room are already aware, the share of Canadians claiming deductions for their charitable donations has drifted steadily lower over the past two decades, from as high as 30% in 1990 to just 23.4% in 2010. As a point of comparison, this figure is below the 26.6% we currently see in the United States.

Further, the total value of charitable donations claimed has gone down. While it's true that donations rose 6.5% in 2010, to $8.25 billion, that figure is still lower than the level seen in 2006 and 2007. Each were more than $8.5 billion. Donations stood at just over a 0.6% share of total income, and again we find ourselves trailing the Americans with their 1.3% share.

From my experience with clients, the current system can be somewhat confusing. Donations below $200 receive a credit at one rate, while those above $200 are subject to a different rate. At BMO we help people make the best financial decisions. For example, we have created programs such as BMO SmartSteps, and we are committed to improving the financial literacy of Canadians. Indeed, we were an active and enthusiastic supporter of Mr. Flaherty's efforts to establish November as financial literacy month.

For some time I have been of the view that a single rate would have the potential to simplify the tax implications of charitable giving, so I asked BMO's economics department to look at this issue. They agreed that while such a change would have little or no impact to large donors, it would help encourage giving for more modest donors, as the tax benefit would nearly double for gifts up to $200. Not only would this result in greater parity for Canadians by providing a standard rate for all levels of charitable giving, it would also increase transparency and simplicity in the tax system.

Given that the median claimed charitable donation in 2010 was $260, versus an average donation of $1,437, we believe that many donors could benefit from levelling the playing field in this way. Obviously, such a change would result in a fiscal cost, including revenue losses on any donations that currently receive the lower tax credit and revenue losses on any credits for new additional donations.

Our economists estimate the overall cost would be less than $200 million, even if more than 1.5 million Canadians began giving more generously as a result. One cannot underestimate the impact that increased charitable giving would have on the not-for-profit sector, particularly at a time when governments at all levels are monitoring their expenditures.

We recognize the government faces budgetary realities. We therefore recommend implementing this change only when the revenue situation is stronger and the fiscal position is closer to balance.

Mr. Chairman, we're pleased to add our thoughts to this important discussion, and I look forward to joining my colleagues at the witness table in this afternoon's dialogue.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Waters.

We'll hear from Mr. Thomas now.

[Gregory Thomas, Federal and Ontario Director, Canadian Taxpayers Federation]

Thank you, Mr. Chair and members of the committee.

On behalf of our 70,000 supporters from coast to coast, the Canadian Taxpayers Federation would like to thank you for inviting us to today's discussion on tax incentives for charitable donations. We're the largest and oldest taxpayers advocacy group in the nation. Over our 22-year history we have worked for lower taxes, less waste, and more accountability from government.

We support a longstanding policy that seeks to prevent government from taxing income that is donated to charity in the year in which it is taxed. We believe this policy will continue to achieve the most benefit for Canadians and receive the highest level of public support when its design is the most simple and the most fair. We advocate for a lower, simpler, and flatter tax system overall, with almost none of the exemptions, deductions, and credits that currently exist. We believe Canadians allocate charitable funds more efficiently and effectively than does government. We believe that none of the income donated to charity in a given year should be subject to income tax.

We note that the current system of charitable tax credits extends lesser protection against taxation for annual donations of less than $200 for individual filers. The perverse result of that is that those who have little to give and who give little receive less encouragement proportionately than those who give more. There is less incentive to give and fewer Canadians are less encouraged to support charity. According to the parliamentary budget officer, fewer than 5.6 million tax filers claimed a charitable tax credit in 2009. With only 23% of tax filers, the average amount donated was $389 and the average tax relief granted was $58, resulting in a total tax reduction of $323 million.

Clearly, high-income earners get the lion's share of protection from having income donated to charity taxed. We believe a single flat-tax credit rate at the highest level would achieve the best results for Canadians by treating all charitable donations equally with a simple formula that's easy to understand and easy to explain to potential donors. You might study the benefits of simply making charitable donations deductible, as opposed to employing a current tax credit approach. We congratulate government on its decision to phase out the vote tax, the per-vote financial subsidy to political parties. We encourage you to take the next step and reduce the tax credit for political donations to the same level as you extend to charities. It is absolutely disgraceful that someone can receive a $75 tax credit for funding $100 of attack ads and robo-calls when they only receive a $15 tax credit for funding $100 of cancer research.

We would like to comment briefly on tax treatment of deductions of real estate and shares of private corporations. We believe all types of charity should be encouraged and we believe that freely granted charities will create more social benefits than taxing the same funds and passing them through the apparatus of government on their way to the people who need them. That being said, we urge the committee to insist on cash money, arm's-length transactions to document the true value of these charitable donations. CRA has a long, unhappy, and costly history of chasing down fraudulent charity scams involving appraisals and assessments of non-cash donations.

Simply said, we believe a receipt should only be issued after a charity sells a charitable donation of real estate, private company shares, artwork, or what have you, to an arm's-length buyer in a properly documented transaction. Any other method leaves too much wiggle room and too much temptation for shenanigans and brings the entire practice of extending tax protection to charitable donations into disrepute.

In closing, I want to tell the members that the Canadian Tax Federation is not a charity. We do not issue charitable tax receipts. We collect and remit GST and HST. We've never taken a penny of government money, we never will, and we're fine with that.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Thomas.

We'll go to Mr. Aptowitzer, please.

[Adam Aptowitzer, Drache Aptowitzer LLP]

Thank you.

Mr. Chairman and members of the committee, good afternoon.

I practice law with the law firm of Drache Aptowitzer LLP. We are engaged in the practice of both charity law and tax law, and we are, on a daily basis, involved in minutiae and technical aspects of charity regulation and donations.

We also have an interest in public policy in the area, having studied and written on the topic of charity law for many years. We applaud Parliament's decision to examine the charity area, as historically Parliament has paid only scant attention to some aspects since special treatment of certain wartime charities was introduced in the Income War Tax Act of World War I.

We agree with previous witnesses from the Department of Finance that from a tax perspective the current system is quite generous, so we are not proposing any additional measures where the purpose is to increase the generosity of the tax credits. But fundamentally, there must be two factors present in any incentive system. The first factor is that Canadians must understand the system so that they can act accordingly. The second factor is that disincentives should be, to the extent possible, eliminated from the system. In this regard, the biggest disincentive to giving is the latent mistrust that comes with the charity sector, which is less than perfectly regulated.

In our written brief we make five suggestions to improve the incentive system and at the same time improve public trust in the regulation of charities. Specifically, our suggestions are as follows.

Our first suggestion is to introduce a single rate for the calculation of tax credits to replace the current two-rate system.

Our second suggestion is to move the deadline by which donors may take advantage of donation tax credits resulting from donations from December 31 to the end of February. By divorcing the tax deadline for gifts from the sentimental Christmas season of giving, charities could use the new deadline to campaign for new donations and to better educate donors about the tax incentives for giving.

Our third suggestion is to increase the maximum deduction or credit that can be taken on donations from 75% to 100%, in order to support social enterprise.

Our fourth suggestion is to legislate a definition of “charity” in order to ensure that charities can be created to meet the needs of modern society. We would point out that this issue was debated by Parliament in the 1930s and questioned in the Senate in the 1970s, but to our knowledge it has not been seriously studied since the current income tax system was implemented. The question of what qualifies as a charity is a fundamental concern to this country and should not be glossed over.

Our fifth suggestion is that the federal government should begin discussions with the provinces to bring them into the regulation of charities.

Of these five suggestions, I believe the fifth one requires the most additional explanation. It may surprise the committee to know that the constitutional jurisdiction to regulate charities belongs to the provinces, but because the provinces have effectively abdicated their authority, Parliament has used its taxing power to impose some level of regulation over the sector. Unfortunately, federal jurisdiction relating to charities is restricted to what can be reasonably justified to maintain an income tax, and Parliament is therefore quite limited in the types of rules it can impose. As a result, some parts of the sector are poorly regulated or are left unregulated.

For example, there is no statutory regulation of charity fundraising expenses, and the CRA recognizes, in its guidance to the sector, that it has no legal authority to do so even administratively. As the committee may know, controversy over fundraising costs receives media attention with some frequency, and the distrust caused by the lack of regulation of this, and of other areas, is a significant disincentive to charitable giving.

In our submission, the provinces, as those with the constitutional authority to govern charities, must be brought into a joint regulating body so that proper regulations can be drafted. This, of course, would apply equally to areas such as fundraising, transparency, and political advocacy by charities. I outlined in much greater detail the problems with the current regulatory structure and my proposed solution in a paper I wrote, which was published by the C.D. Howe Institute in 2009. The paper has garnered significant interest and support, but no solution to the problem of charity regulation is possible without parliamentary agreement. I have e-mailed a copy of the paper to the clerk of the committee for your review.

I'm happy to answer any questions you may have about our submission, but for now I confine my oral comments to the above.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

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

[Malcolm Burrows, Head, Philanthropic Advisory Services, Scotia Private Client Group, Scotiabank]

Thank you, Mr. Chair.

I'm Malcolm Burrows, and I'm head of philanthropic advisory services at Scotia Private Client Group, which is the arm of Scotiabank that deals with affluent clients. I'm a charitable planner. I'm also a charitable tax policy wonk, which I've been happy to contribute to over the last 15 years through a number of sector organizations.

I grew up in the charitable sector and worked there for 13 years before coming to Scotiabank, including at Imagine Canada, for the Canadian Association of Gift Planners--who you met earlier in the week--and for the C.D. Howe Institute.

I was very involved with the development of three proposals, including the stretch tax credit, that have been put forward by a number of groups. I chaired the committee at Imagine Canada that developed the stretch tax credit proposal. I also wrote a paper for the C.D. Howe Institute that outlined some of the basic principles proposed for the elimination of capital gains on gifts of private company shares and taxable real estate.

That being said, those proposals are quite well defined, so I want to confine my comments today to a bit of a framework for what constitutes good tax policy in the charitable space. I want to comment on the state of the Canadian system, the limits of tax support for donations, and finally, three factors for evaluating a good charitable tax incentive.

I want to start by saying that we have quite possibly the most generous tax system for the support of charitable donations in the world. There are three elements to this.

The tax credit, as has been mentioned by a number of witnesses, is very little understood, but it is very generous. Even at the first $200 tier, it is a pure offset that donors, as taxpayers, get back in tax savings, even at the 15% rate. In B.C., if you have $65,000 in income you're paying 20% in tax, and you get a combined rate of 20% back on the first $200. Then it jumps to 43%. It's unlike the U.S. system, where you never go beyond your tax rate; it's a deduction system. So we already have a significantly more generous system than the U.S.

We have contribution limits, which are how much you can give and claim against your net annual income each year. We have the highest limits in the world. It's 75% of income during life and 100% at death. At death, you can eliminate taxes by giving enough to charity. This is unique in the world.

We also have extra incentives for donations of capital property. This is a regime that has developed over a number of years and has focused on gifts of public securities. It's been immensely important and has brought significant new dollars into the system. They are additional generous incentives.

We've been working at expanding this system over a number of years, particularly since the mid-nineties, and we are at the point where we have a very rich system. What more can we do?

I want to comment a little bit on the limits of tax incentives. We tend to look at taxes in Canada as the sole lever for donations. They are not. Donations are not primarily a tax transaction. We have to look at the role of altruism. A gift is something that's freely given without consideration. You are impoverished by giving a gift. You give it because you want to help society. If we inflate the tax system too much, one of the things that happens is that we diminish the role of altruism and philanthropy.

The other thing is donor motivation. As you heard last week from Professor Paul Reed, there are two types of tax incentive that help with certain types of donations and are less helpful with others. At the lower end, tax is a very low motivation. Most people don't know the tax incentives. Let's look at the transaction. If your ten-year-old niece asks you for a donation because she's doing an event, do you calculate the tax benefits? Heck, no.

The median gift is $260. Most people don't think about the tax benefits at all. As a matter of fact, Alberta increased their tax credit amount to 50%, which is much higher than anywhere else in Canada. Their giving did not go up more than B.C.'s. Manitoba still has a higher rate of participation.

Where it does help is with gifts of assets, and this has been an important part of the system. So there are three factors we would look at. First, I think if we look at any incentive we have to make sure that the government is protected. Is more money coming into the system for the amount invested? Second, is there an incentive to the donor but not an unreasonable incentive? Third, are charities protected?

Picking up on Mr. Aptowitzer's comments, if we have incentives we have to make sure that charities can handle things like private company shares as well as taxable real estate. So I'm in support of all three proposals, but we have to look at the framework around them.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll hear from Mr. Alexander next.

[Craig Alexander, Senior Vice-President and Chief Economist, TD Bank Financial Group]

Thank you very much for the opportunity to talk to you today.

I think this is a very opportune time for the committee to be thinking about tax incentives for charitable giving. The simple reality is that demand on charities has been increasing in recent years but the financial capacity has not. Make no mistake, the Canadian economy has performed remarkably well through the recent financial crisis, recession, and recovery—better than most nations—supported by a very sensible monetary and fiscal policy. But at the end of the day, the recovery hasn't lifted all boats equally. The national unemployment rate today stands at 7.6%. It was 5.9% before the recession. There are 367,000 more unemployed than before the recession, and that makes a total of 1.4 million Canadians.

Labour force participation has dropped by a full percentage point, signalling that there are many Canadians who have given up looking for gainful employment. The average duration of unemployment has increased significantly. The number of people unemployed for more than 27 weeks has gone from 130,000 to 270,000. If you don't like economic numbers, which are stale and dry, you can look at the more salient social numbers that will show that provincial social assistance numbers are way up. Use of food banks has not declined to where it was before the recession.

Unfortunately, I hate to say that the prospects for economic growth in the near term are likely to be very modest. There is going to continue to be a lot of demand on charities to provide support.

On the other hand, on the fiscal side, the environment is challenging. Charities get more than 50% of their financing from governments, but governments in Canada at all levels are turning their attention to deficit fighting and fiscal rebalancing. This is absolutely the right thing to do. It is responsible fiscal policy, but it raises the possibility of reduced transfers to the charitable sector.

At the same time, it is surprising to many Canadians, when you ask them what percentage of their revenues charities receive from donations and gifts, that the answer is less than 20% of their revenues come from those sources. Obviously there is scope here for increased generosity on the part of Canadians. In 2010 the number of donors was below that of the level of donors in 2006. In terms of actual donations, from 2007 to 2010 donations were down 4.6%. When you strip off inflation to reflect what has happened to the purchasing power of those donations, in actual fact it's a decline of 14.2%. As already mentioned, in terms of taxpayers, only 23% of taxpayers are claiming on their income tax forms that they are actually making donations. That's down from 30% in 1990.

There is a body of research debating exactly how much impact changes to tax credits have in terms of boosting donations. For example, the national survey of giving, volunteering, and participating highlighted that only 11% of Canadians reported that they donated for the purpose of getting the tax credit. However, at the same time, the survey showed that one in three people indicated that they would give more if the tax credit were more generous, and 45% of top donors—who were actually responsible for more than 80% of donations—said they would give more if there were increased tax incentives.

I am an economist, I am not a tax expert. I understand that there are three policies the committee may be considering right now. That involves gifts of real estate, gifts of private company shares, and a stretch tax credit.

In my opinion, I would advocate for the gifts of real estate and private company shares simply because it makes an awful lot of sense to put them on the same basis as donations of public company shares. This is just a consistency issue. I would flag that there is some concern by groups about the fact that if we have the same tax treatment for real estate, it will raise the issue about the taxable treatment for ecologically sensitive land, because all of a sudden that advantage will disappear. I don't think this should be used as an argument not to widen the scope to all real estate, but it may be that consideration should be given as to what other incentive might be used to try to encourage the donation of ecologically sensitive land to things like land trusts.

In terms of the stretch tax credit, I have to be honest, in principle I like the idea of encouraging people to give more, but I think administratively it could be difficult to put the stretch target in place. Again, much like earlier comments, I would endorse the idea of eliminating the minimum $200, or the first incremental tax treatment for the $200. I suspect that fiscally it's too expensive at the moment.

So the question becomes that while the stretch tax credit is difficult to implement and might not be ideal, it may provide an incentive for increased giving at a time when other options are limited.

Sorry for running over my time.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Alexander.

We'll begin members' questions with Mr. Chisholm for a five-minute round.

[Robert Chisholm, NDP, Dartmouth—Cole Harbour, NS]

Thank you very much.

Thanks to all of you for taking time to come here today and participate in our deliberations.

I'll start things off, but as we go through, each one of our members will be addressing different aspects of this. And once I've asked my questions, somebody might need to correct some of the things I say. We'll be coming at all of you in different ways.

It is a vexing issue, of course, how to strike the right balance in terms of perhaps encouraging: how much value is there in that, what can the government afford, how can it prevent abuse, how to best use tax dollars and tax measures, and so on. They're interesting questions. Certainly your presentations have been helpful.

I want to focus on a couple of points. One question is to Mr. Aptowitzer. I think there's some merit to the suggestion of provincial-federal coordination or a commission. I understand the provincial jurisdiction for regulation, but I'm sure you can appreciate the fact that the Supreme Court has recently said the federal government cannot set up its own national registry for securities.

I think there's merit to what you say because it is a matter of trust in many ways, and the provinces do have the role to play in their operations in monitoring charities.

Realistically, what do you think the possibilities are that we're going to get very far down that road of combining the provincial and federal responsibilities with respect to charities?

[Adam Aptowitzer]

First of all, I recognize and I think you're bang on when you say there's a certain symmetry between the charity issue and the securities regulator issue. I think the difference is between a federal regulator and a national regulator. A national regulator involving all the provinces, which by the Constitution have the jurisdiction to engage in regulation, is using their powers to regulate. The actual technical stuff can get worked through. The involvement of the provinces in that council is necessary to overcome some of the objections of the Supreme Court. I think you're right on when you say that involving the provinces is the answer rather than the question. So I think that's the way to go.

[Robert Chisholm, NDP, Dartmouth—Cole Harbour, NS]

So then it's just a question of bringing the provinces together, getting them to agree.

[Adam Aptowitzer]

That's right, and in fairness--

[Robert Chisholm, NDP, Dartmouth—Cole Harbour, NS]

I'm sorry I laughed.

[Adam Aptowitzer]

Yes, it sounds funny, but--

[Robert Chisholm, NDP, Dartmouth—Cole Harbour, NS]

No, it's difficult, not funny, that's all. That's my point.