Donald K. Johnson Remarks on the Next Frontier in Donations of Appreciated Capital Property

Remarks to AFP Fundraising Day Conference in Toronto, May 23, 2012

Introduction

Ladies and gentlemen, I’m delighted to have the opportunity to address such a distinguished group of people representing Canada’s not-for-profit sector. I’m particularly honoured to be joining Ted Garrard, the CEO of Toronto SickKids Hospital Foundation for this session. We all share a common objective – to ensure that our hospitals, universities, social service agencies, arts and cultural organizations and other important charities have the financial resources to deliver their vital services to Canadians across the country.

The Focus of My Remarks

The prime focus of my remarks this morning is to share with you a proposal for the federal government to enable our charitable sector to unlock additional private wealth for public good. It is estimated that this proposal would stimulate an additional $200 million per annum of charitable giving. Each of you in this room, and all of the 7,000 members of the Association of Fundraising Professionals (AFP), can play an important role in helping convince the government to introduce the proposal in the next budget.

Background Information on Our Mission

Before we discuss the specifics of our proposal, I’d like to share with you how this mission began and how we got to where we are today. In 1995, Jim Pitblado was Chair of the National Ballet Company and Chair of the SickKids Hospital. He invited me on the board of the National Ballet Company and I agreed to chair a fundraising campaign to create a new home for the Company in Queen’s Quay in Toronto. While chairing this campaign, I became aware of the fact that at that time, when a donor gave stock to a charity, the donor was deemed to have sold the shares when they were transferred to the charity. The donor was responsible for paying a capital gains tax that offset a significant portion of the benefit of the Charitable Donation Tax Credit. Consequently, virtually no one in Canada gave stock to charities at that time. However, in the United States, gifts of appreciated capital property, which include listed securities, private company shares and real estate, have been exempt from capital gains tax for decades.

Our advocacy campaign began when we assembled a group of prominent leaders representing each area of the charitable sector to appear as witnesses before the House of Commons Standing Committee on Finance in their pre-budget consultation hearings in the fall of 1996. Jim Pitblado, as Chair of SickKids Hospital, represented health care. Rob Prichard as President of the University of Toronto, represented education. Hal Jackman, as Chair of the Ontario Arts Council, represented arts and culture. Robin Cardozo who stood in for Anne Golden as head of United Way of Greater Toronto, represented social services. Finance Minister Paul Martin went half way to the U.S system and cut the capital gains tax in half for gifts of listed securities in his 1997 budget.

I have appeared as a witness before the House Finance Committee in their pre-budget consultation hearings virtually every year since 1996. It was unnecessary to assemble representatives from each area of the charitable sector because I was on the board of the Toronto General & Western Hospital Foundation, the Advisory Board of the Richard Ivey School of Business, Business for the Arts and the Major Individual Giving Cabinet of the United Way. With these volunteer board positions, I could speak on behalf of each area of the charitable sector. In 2006, Finance Minister Jim Flaherty removed the remaining capital gains tax on gifts of listed securities. Every year since then, charities across Canada have received over $1 billion in gifts of stock.

The Next Frontier

Three years ago, the C. D. Howe Institute hosted a conference on “Strengthening Charity Finance in Canada”. I was asked to explore additional tax incentives to encourage charitable donations. After extensive analysis, the conference came to the conclusion that the single, most important next step would be for the government to extend the capital gains tax exemption to include charitable gifts of private company shares and taxable real estate. Taxable real estate includes vacation, industrial, commercial and residential investment properties, but excludes principal residences, which are tax exempt. These measures would be of particular interest to prospective donors who own private company shares in rural areas across Canada. Also most of the donations would be incremental and only a small portion would be substitution for cash gifts. A gift of $10,000 in cash can be paid with $10,000 in public securities, but not real estate or private equity.

Based upon our analysis, this proposal would stimulate approximately $200 million per annum of additional charitable giving. The main concern of the Department of Finance was the potential for valuation abuse because there is not a public market for these assets. The second concern was the fiscal cost to the federal government of these measures, particularly, at a time when they are focusing on reducing the deficit. We propose that the concern about valuation abuse be addressed by the charity being allowed to issue a tax receipt to the donor only when it has received the cash proceeds from the sale of the asset.

There is a provision in the Income Tax Act that enables donors to sell certain, narrowly defined property to fund a donation, and to eliminate tax on disposition, if the cash proceeds are donated within a certain period of time. If the provision was extended to real estate, proceeds from the sale could be divided and used to make a donation and the official receipt would be based on the cash received by the charity. This extension would remove valuation risk and be much simpler for the charity as it would be freed from managing mortgages, the cost of transfer, other liabilities associated with property management and the sale of the real estate.

With the advice of a former tax policy professional from the Department of Finance, we concluded that the fiscal cost to the federal government would be only $50-$65 million per annum

Update on the Status of our Campaign

In his June 2011 Budget, Finance Minister Jim Flaherty announced that he would have the House Finance Committee conduct hearings on “Tax Incentives on Charitable Donations”. The Committee was originally expected to conduct these hearings last fall, but, unfortunately, because of their pre-budget consultation hearings and other priorities, they did not begin the hearings on charitable donations until January this year. The hearings will not be completed until June and the Committee’s report with specific recommendations will not be issued until this summer or fall.

We would be surprised and extremely disappointed if the Committee did not include our proposals in its report. Our proposals are the single, most-important tax measures which the government could introduce in the next budget to encourage a significant increase in charitable donations every year on a sustainable basis. Charities would receive $200 million annual increased funding from the private sector and the fiscal cost to the federal government would be only a quarter to a third of this amount. The proposal is timely because the government is focussed on eliminating the deficit through spending cuts and restraint.

This proposal does not require any change in the principle of the government’s current tax policy on charitable donations, because, as I noted, gifts of listed securities are already exempt from capital gains taxes. It would remove the inequity in the current tax system between donors who give publically listed shares and donors who wish to donate private company shares or real estate. Furthermore, it would level the fundraising playing field between Canada’s not-for-profit sector and its U.S counterparts, with whom we compete for the best and the brightest talent.

How AFP Members can Help Make it Happen

The decision on whether or not to include these measures in the next budget will be made by Finance Minister Jim Flaherty with the support of Prime Minister Stephen Harper. Conservative MPs and Senators also need to be convinced that these measures are not only good public policy, but also good politics. In addition, it would be helpful if the NDP and the Liberals publically stated that they are supportive.

It is important that all Members of Parliament, particularly the Conservative MPs, are aware of our proposals, understand the benefits and communicate their support during caucus meetings during the fall session of Parliament. MPs do listen to voters in their local constituencies. Each of you and all of your board members, can play an important role in helping make this happen by writing a letter, making a phone call or meeting with your local Member of Parliament whether he or she be a Conservative, an NDP or a Liberal. This fall, after parliament resumes, we will contact you and provide you with suggested draft letters which you can personalize and send to your local MP regardless of which party they represent. If all 7,000 members of the AFP participate, it would have a huge impact on all politicians in Ottawa and help ensure that our measures are in the next budget. Together we can make it happen!