Finance Committee on Oct. 3rd, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 75th meeting of the Standing Committee on Finance. Our orders of the day, pursuant to Standing Order 108(2), are to continue our study of tax incentives for charitable donations.

I want to thank our four witnesses for joining us for this panel discussion today.

First of all, from the Canadian Bar Association, we have Mr. Peter Broder, the chair of the charities and not-for-profit law section. Welcome.

From Carleton University, we have associate professor and research associate in the School of Public Policy and Administration, Mr. Calum Carmichael.

From GIV3, we have the chairman, Mr. John Hallward. Welcome to the committee.

Our fourth organization is Philanthropic Foundations Canada. We have Mr. J. Alexander Houston, chair.

You have about five minutes for an opening presentation to the committee, and then we'll have questions from members.

We'll start with Mr. Broder and proceed down the line.

[Peter Broder, Chair, Charities and Not-for-Profit Law Section, Canadian Bar Association]

Thank you, Mr. Chair and honourable members. Good afternoon.

My name is Peter Broder, and I am chair of the Canadian Bar Association's national charities and not-for-profit law section. On behalf of the CBA I want to thank you for the invitation to appear before the committee today to discuss our submission on tax incentives for charitable donations and to answer any of your questions. We hope to be of assistance.

The CBA is a national association that represents 37,000 lawyers, judges, notaries, law professors, and law students from across Canada. The CBA's primary objectives include improvement in the law and in the administration of justice.

The CBA's submission, which you have received, was prepared by members of the national charities and not-for-profit law section. The members of our section both advise on donation matters and deal with the broader regulatory framework to which groups with whom we work are subject.

In that context, while supporting the need for additional tax measures to encourage donations, we would urge the committee to consider the importance of fostering donations within a balanced and equitable regulatory system. For new and existing private contributions to be leveraged to the maximum extent possible, it is key that resources not be diverted to meeting unnecessarily onerous regulatory requirements. In this regard, the section endorses the technical changes proposed by our colleagues in the wills and estates section and referenced in our brief. These changes will clarify and simplify the law with respect to certain donations arising from wills or made pursuant to the terms of a trust.

We also support revisiting several overly broad measures put in place in recent years that have led to needlessly complex regulation. As an example, we would point to the constraints put on certain inter-charity transfers when the receipted revenue disbursement quota was removed. We believe that these measures are unduly restrictive and could preclude certain transfers between charities without there being a sound public policy basis for doing so.

While we acknowledge the policy interest in avoiding inter-charity transfers that are intended to circumvent annual spending obligations imposed on all charities, in our view the legislation also potentially captures numerous legitimate transactions. Specifically, as currently worded the provision might be applicable to the transfer of an endowment from one charity to another or to a decision by a charity to set aside funds to create an internal endowment. Though the Canada Revenue Agency has the discretion to permit these types of transfers, the result effectively is uncertainty rather than facilitation of bona fide transactions. Such rules curtail the efficiency with which charities can operate, and this means that resources, whether existing or new, triggered by donation incentives can't be put to their best use.

Other examples of excessive regulation and possible improvements are cited in our brief.

More generally, we urge narrowing of income tax provisions so they are limited to achieving clearly articulated and well-defined tax policy objectives to free funds now devoted to coping with red tape to be used directly on charitable work.

Turning to the question of specific donation incentives, in 2009 the charities and not-for-profit law section of the Canadian Bar Association endorsed the stretch credit put forward by Imagine Canada, and we reiterate our support for that proposal today. We see this as an innovative measure that has the potential to grow the donor pool in a way that has not been accomplished by other changes made in this area over the past decade or so. Targeted at all donors who increase their giving, the stretch would see the federal credit available to individual tax filers boosted by approximately 10% on new donations.

We also believe there is merit in other measures that have been proposed, such as more favourable treatment of gifts of real estate or private stock, which are likely to increase overall donations by diversifying the tax-incentivized vehicles available for giving.

In our view, however, the stubborn pattern of stagnation in the percentage of tax filers claiming credits for donations represents a significant problem and a long-term threat that needs to be creatively addressed. Absent a major enhancement to the generosity of the deductions or credits, the stretch credit proposal seems most likely to change this dynamic.

On behalf of the CBA, thank you again for the opportunity to appear before the committee today. We commend all of you for your efforts with respect to this extremely worthwhile initiative, and are happy to answer any questions you may have.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Broder.

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

[Professor Calum Carmichael, Associate Professor, Research Associate, School of Public Policy and Administration, Carleton Centre for Community Innovation, Carleton University]

Thank you very much, Mr. Chair.

Let me thank the members of the committee for their patience, their attention, and their conscientiousness in this hearing. I'm delighted to appear before you.

Let me indicate that I am a research associate at the Carleton Centre for Community Innovation, but I don't speak for the centre. I'm also on faculty at the School of Public Policy and Administration, but as well I don't speak for the school. What I do speak for is someone who, for the past few years, has looked at the international treatment of charitable contributions, primarily among OECD countries but also including some developing countries. So my interests are how Canada situates itself among other countries that similarly provide forms of tax incentives for charitable contributions.

Let me say, first of all, although I might change the presentation of my brief that I prepared six months ago, the content really represents my ideas, and those ideas still are based on the sense that the Government of Canada has the responsibility to allocate tax revenues to purposes that best serve the needs of its citizens. This responsibility extends to the revenues that the government foregoes in providing tax incentives, whether by credits or deductions on charitable contributions.

Now, the organizations that receive those contributions are diverse in terms of the purposes they pursue, the activities they perform, and the populations they serve. The government should consider this diversity when deciding where its foregone tax dollars should go. And it should differentiate the tax incentives to provide a higher credit or deduction for contributions to organizations that attend to the most pressing needs. Indeed, as I suggest, different countries provide examples of how this could be done.

My brief summarizes an example of such an initiative. I call it a “charity+” program, that would provide a higher credit, say, 40%, for a capped quantity of contributions to organizations that address the basic needs—housing, food, and health—of persons in low income. This would be similar to what exists in France. It would be similar to what a number of American states have introduced—Arizona, Michigan. It would parallel as well certain aspects of the way Portugal will encourage charitable contributions. So there are a range of countries that provide precedence for this.

But such a program, I suggest, could enable the government to direct more of its foregone revenues to an area of ongoing human, social, and economic need. I suggest it would surpass a stretch tax credit in achieving the very goals for which the latter has been promoted, and I itemize those on the last page of my brief.

Although my comments are not directed to criticize the stretch tax credit but rather to endorse the notion of a differentiation of the charitable sector, nevertheless, I think to support the stretch tax credit would be a missed opportunity if the goal is to engage Canadians and create an ongoing incentive to affiliate with the charitable sector.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll hear from Mr. Hallward, please.

[John Hallward, Chairman, Hallmont Foundation, GIV3]

Thank you, Mr. Chairman.

My name is John Hallward, and my day job is president of global innovation for a division of Ipsos.

I want to start with a personal story that kind of summarizes what I'm here for and the other function that I represent.

This started back when I was 21 years old, when my granny sent me some money. The note said “Happy birthday. Here's some money, and it's not for you. Your goal is to pick five charities, give away the money to those five charities, and write a report back to your grandparents.” They did this for all 24 grandchildren. This was their way of training, teaching, and introducing all their grandchildren to the responsibility and the role of giving.

That brings me to today. I learned my lesson well at the age of 21. More recently, I started a foundation and a concept called GIV3, which is the proposal for today. To summarize it best as possible, it's ParticipAction for giving.

You've heard about the tax stretch credits and granting of private equities in real estate. Ours is a different idea; it's a complement. It's a program that would work with those initiatives, but in particular it's to promote and encourage all Canadians to be more philanthropic, to teach them and to start by leadership, etc.

If you take a look at the differences in giving in Canada, we already have differences by provinces, by social demographic classes, and by those who are religious or less religious. We have these differences despite all having the same tax system. Our belief, then, is that it's not just the tax policy that changes or influences what people give.

If you take a look at reasons why we're observing in Canada some declining trends in philanthropy, there are many causes: a little bit of a move away from religiosity, a little bit more movement to the self-centred “me, me, me”, and different values of different generations of Canadians. If you look at all those causes, it begs to consider more than one solution.

As I said, if we all have the same tax system yet certain communities give far more than others, then it can't be just the tax system.

In addition to any other considerations of tax policy changes—and we support all of them because they're all a step in the right direction—we propose the idea of creating a program, an umbrella program, to help promote philanthropy, just as ParticipAction is an umbrella program for the promotion of health and exercise in Canada.

So that's the concept of GIV3. We propose one group, one business unit, one brand, one budget, and one steering committee, like ParticipAction, because it's easier to coordinate partnerships and working with others, whereas having a bunch of different organizations trying to partner together has problems of who owns the intellectual property, different budgets, different mission statements, different boards, etc. Like ParticipAction, it's one working with many to accomplish an umbrella benefit of public health. We want to do the same for philanthropy in Canada.

Our proposal or request is for $5 million a year, with declining amounts over time, to allow us to start, to act as start-up in partnership with the government, to then allow us to move towards and solidify our support from corporations and foundations.

Corporations and foundations are very risk-averse. They want to know that GIV3 is viable, well founded, well funded, and long term. Once they see that, they've been very supportive and encouraging. I mean, a rising tide floats all ships: the more we give, the more all of our communities benefit, the more it allows the government to focus its energy on other things, such as job creation.

We do want to partner with all three sectors, but we need to start. That's why we've come to the government, to help start that ball rolling, asking for $5 million and then to wean down as we go, over time.

We believe the $5 million is a very small investment. We're talking about a $1 billion payoff—if you look at the numbers—if you can get Canadians back to where they were six or seven years ago. We're down $2 billion in private citizens' donations just in the last five or six years. So we're talking about a $2-billion return on a very small amount of money invested.

We like to see GIV3 almost as a conduit of communication, in addition to tax stretch credits and other things. We need to have those mentors, leaders, teachers, etc., like my grandmother was to me. We need to be bringing this out, talking about it in public, reminding Canadians of their responsibilities, and allowing them to immerse themselves in their communities to help.

That's what we're all about. We hope you agree. We hope to have a partnership so that we can work together and start the ball rolling.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hallward.

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

[J. Alexander Houston, Chair, Philanthropic Foundations Canada]

Thank you very much.

Honourable chair, honourable members, my name is Sandy Houston. I am the chair of Philanthropic Foundations Canada. I'm delighted to have this opportunity to speak with you this afternoon.

PFC represents Canadian charitable foundations and grant-makers across the country. Collectively our members have about $7.5 billion in charitable assets, and in 2010 distributed about $307 million into communities across the country in support of all types of charitable activities.

In the brief we filed with you in January of this year, we made two recommendations to enhance the access of Canadian charities to money that will enable them to grow and increase their effectiveness. Neither of these recommendations is about tax incentives for charitable giving. While we certainly think tax incentives are important, we also think there are other routes to encourage the provision of more capital into the charitable sector, notably through loans and social investments.

We support the recommendation made by Imagine Canada for the stretch tax credit to increase new giving. We also support the recommendation that the government examine the possibility of extending the capital gains tax exemption to such assets as private securities and land.

But we know that many Canadian charities draw more heavily on their own revenue-generating activities than they do on charitable donations, and we believe, as does the Task Force on Social Finance, that social finance offers an unprecedented opportunity for Canada’s charities to open up new sources of financing at a time when they're under a great deal of stress and when their funding ties them into very short timeframes and inhibits their ability to innovate, expand, and sustain themselves.

Therefore, our fundamental recommendation to the committee is to pursue an examination of regulatory options that will foster more access to philanthropic capital by charities.

In a business, innovation or growth is frequently financed through a loan or an investment, but in a charitable context there are far fewer financing options. Operating capital is attained year to year from a range of funding sources—typically fees, gifts, or grants—investment capital is practically non-existent, and capital accumulation is discouraged by federal regulation.

On the investment side, federal and provincial laws allow only investments prudently made with a secure expectation of return. Federal regulators have ruled that even passive investments in limited partnership structures by private foundations are not permitted, because under the rules of partnership law, these investments could mean that the foundation is engaged in running a business, something that's prohibited under the Income Tax Act.

This attempt to maintain a strict dividing line between charity and business has meant that in practice, private funders remain confined to a funding paradigm focused almost entirely on grants. The implication of this is that it has not encouraged the full deployment of the approximately $39 billion or more that is held in foundation endowments. Charities benefit from the 3.5% to 5% of the endowment moneys disbursed annually by foundations, but typically don't access the other 95% of those assets held in the endowments.

We suggest that the federal government consider adopting a regulatory framework that encourages more philanthropic investment. We were really pleased to see this summer that the CRA has taken a significant step forward in this regard with the release of its new guidance on community economic development. In that guidance there is more latitude now for program-related investments. That's a really positive step, and we applaud it.

What we now urge the committee and the government to do is consider examining other regulatory options, specifically: reviewing the CRA's position on investments in limited partnership structures, qualifying specific social investment projects as qualified donees, and continuing to clarify CRA's guidance on the relationship between mission-based investments and business activities.

We urge the committee to recommend to the government that it reconsider its current interpretation of limited partnerships, which are currently barred to private foundations. We suggest that this rule merits reconsideration in the case where such an investment can be demonstrated to further a charitable purpose. The government has already recognized the principle that a private foundation can enter into an investment-like vehicle, such as a PRI, with a commercial entity as long as it furthers a charitable purpose. Consequently, we think it's logical to apply this principle to the situation of a limited partnership with certain conditions related to charitable purposes.

The regulatory changes we're suggesting would not incur a fiscal cost to the government but would promote greater access to capital for growth, through either debt or equity instruments, for the community sector in Canada.

Thank you for your attention. I welcome any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions with Ms. Nash, please, for five minutes.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, witnesses, for being here today and for making your recommendations, which of course are much more detailed than you have time to present here at the committee.

I want to begin by putting on the record that there are many people who donate but who are not recognized financially—who donate their time. I come from a community in which we have a huge volunteer base. People even of very modest means help out regularly and really support the community, for doing which they get no tax credit or recognition whatsoever. Certainly some of them don't make enough money to get a tax credit, but even those who do.... There are lots of ways to donate. Time is one way, and obviously money is another way.

I wanted to get that on the record, because I think it is an important factor that we haven't spent much time looking at throughout our deliberations. Of course, we are looking at the whole issue of fostering more charitable giving.

We have heard a different kind of idea from Mr. Carmichael. In terms of your “charity+” program, you mentioned that some other countries steer additional funding or encourage additional funding by giving a greater tax credit to some specific areas of greater need.

I have two questions on that.

Can you elaborate, describing what some of the specifics are in those programs and saying where you think the best model is?

Secondly, you talk about increasing the tax credit to 40%. Have you done any modelling, or have you crunched any numbers about what impact that would have upon our overall fiscal situation? Is it something you expect would have a large take-up or that would not have that big an impact?

Thank you.

[Prof. Calum Carmichael]

I would like to be on the record, too, Ms. Nash, to commend those Canadians who give of their time. Indeed, the imputed value of labour to the third sector is about 11.2% of total revenues, whereas the value of contributions is only 8.4%. So in terms of the actual impact even to finance the value of labour, volunteers exceed contributors of cash. I join you in your commending those who have done that.

You have asked about different models. Here, first of all, would I personally endorse a charity+? Yes, I would. But my sense is that it's the responsibility of the Government of Canada to decide what area of the charitable sector is really most important to Canadians, and so I don't want to presume that my views are necessarily those of the Government of Canada.

Indeed, different governments have chosen different sectors. Brazil, for example, perhaps mindful of the FIFA competition in 2014 and the Olympics in 2016, features sports. Corporations that give to sports activities receive a far higher deduction than if they give elsewhere.

France and Arizona, for example, are the jurisdictions that I think are most closely related to what I see as attending to people of low income. Arizona was the first of several American states to introduce this; it did it in the 1980s. There, organizations that provide services to people below the poverty level self-identify, and their names are posted on the website of the government, much like those of organizations that were eligible for matched credits or relief following the tsunami or the east African famine of last year. There, those organizations are identified, and individuals who contribute up to $200 to them receive 100% tax credit for those organizations; it's a complete write-off. It's capped, so that these are privileged, but they're not robbers. The validity of the rest of the charitable sector is still there.

The same thing happens in France. There, it is for organizations that provide basic food and services to people of low income. The standard tax credit is 66%, but if you give up to €500 to an organization that provides basic food and services to people of low income, you get 75% as a tax credit. So 29% doesn't seem...fair enough; there's a provincial tax credit that comes as well—

I'm sorry, am I over?

[The Chair, Conservative, James Rajotte]

You are just about over right now, yes.

[Prof. Calum Carmichael]

I'm sorry; I didn't realize.

I'm happy to talk about my own study, but in terms of numbers, in terms of impact, this is something I have not done directly, and indeed there is no firm answer.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

Thank you to all the witnesses for attending today and giving evidence.

I noticed from the Canadian Bar Association's submission that they are suggesting this is a very worthwhile accomplishment, and indeed you mentioned that greater tax efficiency and fairness is a great goal to move towards. I think that is very true.

My questions relate primarily to your comments in your submission regarding some of the things, but first of all, do you think that as parliamentarians and as bureaucrats we have an obligation, some type of fiduciary obligation, to get this right? Obviously a tax deduction is a great advantage for corporations and individuals to have, and we certainly are carriers of the Canadian people's obligations to make sure that things are done properly. Is that fair to say?

[Peter Broder]

Yes, but taking into account that the donation portion, taken as a whole, is actually relatively modest, as Mr. Houston was mentioning, in terms of what comes from earned income and from....

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Absolutely, but either way you look at it, it's a very....

I look at it personally as a fiduciary obligation, because obviously I have an obligation to the people of Canada to make sure that I don't give a tax deduction to anybody who doesn't deserve it. Is that fair to say?

Everybody is nodding their head in agreement.

So this is a very important thing that we do, and so the checks and safeties that we do during this time are very important as well.

Wouldn't you agree with that, Mr. Broder?

[Peter Broder]

Yes.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Okay. That's why I was surprised to see that you mentioned that excess regulation and some of those things are administratively unworkable. And I notice that you came up with six technical amendments, but do you believe that they're administratively unworkable at the present time?

[Peter Broder]

What happens is that oftentimes the legislation is drafted in very broad terms, and we rely a lot on the Canada Revenue Agency to exercise its discretion, which prevents organizations oftentimes.... If they don't have access to legal advice, they may just not undertake the transaction, or it may be risky for them to undertake the transaction.

There are certainly legitimate tax policy reasons why many of those regulations are in place, but the challenge is to draw those narrowly, so that they don't preclude—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Of course, for a lawyer, you're subject to the due diligence that is necessary and giving proper advice to people and picking board members, making sure they're not nefarious characters and things like that. It's difficult for lawyers to give advice on what-ifs and what possible things can take place. Is that fair to say?

[Peter Broder]

That's correct, yes.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

That's probably the reason why the CBA has taken the position, because it's very difficult to give advice from time to time relating to things that you don't know and you don't want to go and do the due diligence on yourself.

[Peter Broder]

I think the challenge is around the breadth in terms of some of the measures.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

That's fair. Thank you very much.

I have two minutes left and I want to talk briefly about how we get larger donors to donate more money. The reason I say this is that I have seen the shrinkage, as everybody has, and I've been interested to see that there is a lot of money still out there—a lot of money in corporations, which obviously belongs to shareholders and the directors and people who own the companies.

How do we get those people to donate more? There is a small percentage of people who donate a large amount. Are there any suggestions today on how we can get those people to release the cash in ways that are not negative for the government but would be advantageous for the people who received it? Do you see any particular type of tax treatment that would release the floodgates of those people who already give?

Mr. Hallward, please.