Ladies and gentlemen of the Parliament of Canada, distinguished members of the Standing Committee on Finance, Ms. Gilliland, Ms. Lafrance, thank you for this invitation.
I have been invited to participate in the pre-budget consultations on how to improve Canada's taxation system. I am going to limit myself to two proposals that I feel are the most important.
The first deals with private charitable foundations. I know that you have in your iPads a table on private charitable foundations. Could you please refer to it, because it briefly sums up what I am going to tell you about private charitable foundations.
The table shows the example of a private charitable foundation whose founder makes an initial donation of $100 million. In the first year, the founder receives a tax credit of $50 million. I am talking simply about private charitable foundations. For the foundation's entire life, there is taxable income, but it is not taxed because of its status. If you make a donation of $100 million, you can estimate the income to be about $5 million annually.
Under current rules, the tax system requires a private foundation to spend only $3.5 million annually on charitable purposes, that is, 3.5% of the capital after expenses. In real life, the amount is often well under 3.5%. In our example, we will say $3.5 million.
I would like to use the table to draw your attention to the fact that the tax deal that Canadian taxpayers have with private foundations does not serve Canadians well. We just have to look at the initial tax saving, $50 million in this case. If a foundation pays no tax on a hypothetical income of $5 million and it spends only $3.5 million per year, it could take for ever for the deal to benefit Canadians. Canadians gain nothing from a system like that. This is the most important point, given that we are looking for money to balance the country's books.
With private foundations, the deal is clearly a bad one for the country's coffers. If you have followed the table, you can see that easily. Private charitable foundations are also an affront to democracy. Why? Because the law allows the deal since foundations are allowed to last for ever. For reasons beyond me, major founders want to have perpetual foundations. Perpetual foundations are an affront to democracy because, over time, they become more powerful than international organizations or governments elected to take care of public matters. The best example of this I can give is the Bill and Melinda Gates Foundation in the United States. It has assets of up to $33 billion, while the World Health Organization's assets are only $1.5 billion.
I would like to bring up one more quick point. There is a fear that competition over taxation between countries and companies may become destructive. There is the also the danger of what is called “the race to the bottom”. I have been looking at that issue for a number of years. I conducted a research project for Harvard University on how to adapt our tax systems to globalization.
I feel that the best way to help my country prepare for the looming threat of the race to the bottom is to organize a major conference that I am calling the TAXCoop Conference. That is what we are doing in Quebec at the moment.
In the context of the pre-budget consultations, I would like to propose working with the Canadian government to organize a conference like that. The Government of Canada still has a good reputation on taxes internationally and I would be proud to be able to contribute.