[Recorded by Electronic Apparatus]

Tuesday, October 29, 1996

.1605

[English]

The Chairman: Since we have a quorum, we can come to order.

The finance committee is very pleased to continue its pre-budget discussions and to have a distinguished group of participants with us this afternoon dealing with the issue of tax incentives for charities. In particular, one major topic that will be addressed is that concerning the donation of appreciated capital property.

Just before we begin, we have a very distinguished guest in our audience today: Mr. Edvins Parups, the deputy director of the Department of Tax Policy, Ministry of Finance, the Government of Latvia.

Mr. Parups, would you be good enough to be recognized? Thank you for being with us.

Our round-table participants this afternoon are, from the Office of the Lieutenant Governor of Ontario, His Honour Mr. Henry Jackman; from the Ottawa Jewish Community Foundation, Orly Buzclan; from the Canadian Association of Gift Planners, Charlotte Sutherland; from the University of Toronto, President Robert Prichard; from the National Ballet of Canada, Donald Johnson; from Ernst & Young, Satya Poddar; from Apotex Inc., Chairman and Chief Executive Officer Barry Sherman; from the United Way of Canada, Vice-President and Chief Executive Officer Robin Cardozo; from the Hospital for Sick Children, Jim Pitblado; and from Peat Marwick Thorne, Clark Hollands.

We're all very grateful to you for being here. Perhaps, Mr. Johnson, I could ask you to start off and outline briefly your proposal.

Mr. Donald Johnson (Director, National Ballet of Canada): Thank you, Mr. Chairman. First of all, I would like to thank you for the opportunity to participate in this round table discussion.

By way of background, I support the government's program of deficit reduction. I agree that it must be done through spending reductions rather than through tax increases. I recognize that these spending reductions have an impact on the not-for-profit sector in education, health care, social services, and the arts.

.1610

We compliment the government on the initiatives that were taken in the 1996 budget. We recognize that the finance minister said that more needed to be done and would appreciate the opportunity to hear suggestions at this round table discussion.

The initiatives the government took in the last budget were certainly helpful in dealing with the cashflow problems associated with charitable gifts, but they clearly do not go far enough. Now more than ever there's a lot of evidence that more must be done as the government withdraws some of its support from the not-for-profit organizations.

To increase charitable giving from the private sector to offset the effect of the necessary government cutbacks, we have to look at where we can focus our efforts in order to have substantial increases in private sector giving without having a major reduction in the tax revenues to the government. Whatever initiative the government takes must be consistent with deficit reduction, but at the same time you must have a high degree of confidence that your initiative will result in substantial incremental giving. In that regard we really need to focus on a new set of donors. To get that set of donors we need to look no further than south of the border to the United States for the experience they have established over many years.

After looking at many different possible initiatives to increase charitable giving, we concluded there's one change the government could initiate in the Income Tax Act that meets this criterion: major incremental increases in giving without significant tax revenue losses to the government. That one change is that gifts of appreciated capital property be exempt from capital gains taxes, as they are in the United States. I'll just mention two or three examples of what this regime in the United States has resulted in.

As we all know, universities, for example, have huge endowments in the United States: 90% of the endowments in the United States comes from gifts of appreciated capital property. Ninety-five percent of all the giving in the United States comes from 5% of the donors.

The other item relevant to this discussion is that Americans on a per capita basis give almost four times as much to charities as we do in Canada. In my opinion the biggest single reason for the difference in the amount of giving per capita in the U.S. compared with that of our country is this capital gains exemption. The one most dramatic example of this regime in the United States was the gift of $1 billion by the founders of Hewlett-Packard; $600 million went to an endowment for Stanford University. If a Canadian equivalent of the founders of Hewlett-Packard were to give $1 billion of stock with a zero cost base, they would pay $400 million in capital gains taxes, so they wouldn't even consider that.

So we strongly recommend that the government in the upcoming budget implement in the Income Tax Act this change of exempting gifts of appreciated capital property from capital gains taxes.

In conclusion, over the past year I've talked to many people on this subject. A number of people have raised concerns about this recommendation. There's some validity to each of the concerns, but I think they have to be viewed objectively. We have prepared a document for distribution, which I believe very objectively, with good tax counsel advice from Ernst & Young, for example, lays out the basis for the response to these concerns. Each of these concerns is addressed in this submission, and I'm happy to give a copy to each of the members of your committee. We will have a French version of this submission available in the next two or three days.

.1615

The Chairman: Thank you very much, Mr. Johnson.

Your Honour, Mr. Jackman.

Hon. Henry N.R. Jackman (Lieutenant Governor of Ontario): Thank you very much,Mr. Chairman.

I am here as Lieutenant Governor of the Province of Ontario. I should say at the outset that it is probably unusual for a representative of the Queen to appear before a parliamentary committee. I use as a precedent that Roland Michener did appear before the constitutional committee at the time, I think in 1981-82.

I think you are all aware that the constitutional role of a lieutenant governor is pretty slight. You read the Speech from the Throne, you prorogue the legislature, you give royal assent, but what do you do with the rest of your time? I think if you ask anyone who holds a position like mine.... In my case, I go across Ontario to cities and towns that I've perhaps never had the opportunity to have gone to before. You recognize volunteerism, you recognize people who have contributed more to their community.

I used to joke with both Premier Rae and Premier Harris. I mean, they have to go to the bad meetings. I never go to a bad meeting, I always go to good meetings. I see the best in people, I see volunteerism at its best, and this is a great personal experience to me. Having said that and to cut to the quick, I do support what Mr. Johnson says about the relief on the gifts of appreciated property.

People in the province of Ontario, and I'm sure it's the same right across Canada, are a kind and generous people; they are a people who want to give. The tax treatment of financial contributions penalizes giving. Mr. Johnson quoted that in the United States, on a per capita basis, the Americans give four times as much as Canadians do. I think that's a very serious statistic. We pride ourselves in Canada on being a kind, generous, and gentle nation, but you can't say that if you look at just the dollar amounts of our giving.

One of the main reasons is the fact that we tax gifts. In other words, if someone chooses to give appreciated property, he has to pay a tax to give it. Nobody makes the suggestion that it does not enrich anyone; it simply relieves him of paying a tax that he would have to pay if he gave under the present law.

Of course, the fact is that people want to give, people want to volunteer, they do not want to pay taxes. So when it comes to the quick, I can either give and pay a tax or not give and not pay a tax. Too many Canadians are choosing the latter course. They are not giving, they are not paying the tax, the government is not getting any extra revenue, and the universities, the hospitals, the charitable organizations, and the arts organizations, which need the money, are not getting it.

That's the summary, I think, of my pitch. I would like this committee and I would like the Government of Canada to encourage the volunteer spirit and the innate generosity that is within all of us.

Thank you.

The Chairman: Thank you very much, Your Honour.

Robert Prichard.

Mr. J. Robert Prichard (President, University of Toronto): Mr. Chairman, thank you very much. I serve as president of the University of Toronto, where I'm also a professor of law. I was taught law by the chairman of this committee; he taught me tax law, so I hope my submissions will carry particular weight this afternoon.

Mr. Fewchuk (Selkirk - Red River): This is it.

Mrs. Chamberlain (Guelph - Wellington): This is the highlight of your career.

The Chairman: Robert, I appreciate the connection very much, but it's falling on deaf ears because these people know me.

Mr. Prichard: The University of Toronto is the nation's largest university. I speak on behalf of the University of Toronto and our ten primary teaching hospitals that are associated with the university.

.1620

I also am authorized to speak today on behalf of the Association of Universities and Colleges of Canada, which represents the 88 degree-granting colleges and universities across Canada. We have filed a brief from the AUCC over the signature of Bob Giroux, the president, and I speak with the authority of the board of the AUCC in making this submission.

I want to say, simply, that the University of Toronto and the AUCC unequivocally support the proposal that when appreciated capital property is given to charity, it should be exempt from the capital gain that would normally attach to its disposition. We believe this is overwhelmingly the most important tax change that could be made in order to strengthen universities, hospitals and cultural institutions right across Canada.

We believe this change is both important and urgent. It's important for us, as universities, because we are, and I believe reasonably are being asked to be, more self-sufficient. We receive significantly less provincial funding than we did. As you know, the Government of Canada has reduced its transfers in support of post-secondary education. It is therefore incumbent upon us to become increasingly self-sufficient. To do that, we must have vigorous and sustained private-sector support through gifts to the universities.

I want to stress that our universities don't compete with each other. Increasingly, our universities are competing with universities across North America and around the world. We simply have to be able to compete, and compete effectively for them, if we're going to provide opportunities for our young people to get educations that are competitive with the best in the world.

To put it very frankly, with the current regime taxing appreciated capital property when it's given as a gift, we are at a significant disadvantage to the public as well as the private institutions in the United States with which we compete directly. We compete directly with institutions like the University of Michigan, with Berkeley, with UCLA. When we compete with them, we have a very significant disadvantage in that competitive situation. To put it strongly, I don't think it's reasonable to ask us to be much more self-sufficient and independent of public funds and at the same time to put us at such a significant competitive disadvantage in pursuing private support in support of public purposes. That's why it's important.

Why is it urgent? It's urgent because I believe a generation of young Canadians is being put at risk through the duration of the quality of public universities across Canada. We have to work extremely hard and fast to preserve the opportunity for young Canadians.

I have to say to you very frankly that Canada is again suffering another significant period of brain drain. We are losing our best professors to institutions outside Canada. They're going to the United States and to England. They're going, typically, to endowed chairs in the universities, public and private universities, in those jurisdictions.

We're losing a large number of outstanding young Canadians going as students, leaving Canada, because of the limitations on the opportunities available to them. I think it's a matter of national importance that the Government of Canada, not just provincial boards, make a contribution to trying to reverse the brain drain.

We're competing at the University of Toronto not just with other Canadian institutions, we're competing with Ohio State raising $1 billion in public funds, with Berkeley raising $1 billion in funds from gifts. We're competing with Michigan. We're competing with the great public universities, all of which have this tremendous advantage relative to ourselves of not having their donors penalized the way they are in Canada today.

As president of the university, I spend a great deal of my time talking to people about the possibility of their giving support, either to the university or to our hospitals, and making significant gifts. There are probably not many people, not many CEOs, in Canada who spend as much of their time talking to Canadians about the possibility of giving support.

I simply want to say to you that I believe if this change were made, it would significantly alter the behaviour of potential benefactors across Canada. This is supported by the presidents of all the universities across Canada because we believe this, more than anything else the Government of Canada could do, would strengthen our institutions in advancing our work.

.1625

I believe that if you unleash us to compete fully and equally with the American institutions with which we compete, it would make a real difference. As a result, our institutions would be stronger and better able to be self-sufficient, better able to compete, and most importantly better able to give young Canadians the chance they deserve and thereby lay the foundations for growth and prosperity in Canada.

Mr. Chairman, thank you very much for the opportunity to appear. On behalf of all of my colleagues across Canada in the work of our universities and colleges, we strongly urge you to advice the Minister of Finance and the government to make this change.

The Chairman: Thank you, Robert Prichard.

Robin Cardozo, please.

Mr. Robin Cardozo (Vice-President and Chief Executive Officer, United Way of Canada): Thank you, Mr. Chairman.

In the next few minutes I will address briefly four points. I'd like to say a few words about United Way of Greater Toronto and what we do. I'd like to paint a picture of the environment our agencies face. I will talk a little about the trends and philanthropy we have been observing at United Way. That will lead directly into addressing the topic of gifts of appreciated property.

United Way of Greater Toronto, the organization I represent, is hoping in 1996 to raise $52 million, about 20% of the total that United Ways across the country hope to raise. United Ways in Canada were actually hoping to raise about $250 million this year.

In Toronto we fund 205 agencies in the human services field and most of them are facing a very uncertain future. A colour bar chart is available for anyone who would like to pick it up that I think paints a very bleak picture. The chart breaks our agencies down by service sector - seniors, youth, assaulted women, and so on - and illustrates quite vividly the vulnerability of their funding.

Taking a conservative view of announced and anticipated government funding cuts, we see at least $50 million in lost revenue to these agencies in the next two years or 13% of their total funding. Many of our agencies will close their doors.

Concurrent with the agency funding cuts, of course, has been the economic restructuring and the cuts to welfare. All those have resulted in more youth unemployment, higher food bank usage, more evictions, more people living on the streets. Agencies reeling with funding reductions are also being forced to cope with increased service demands. I know you've heard much of this before and I apologize if you have, sir, but I think it's important for me to set that context.

Here are some of the trends in philanthropy we have been observing. In United Way's annual campaign we have, touch wood, been holding our own over the last few years with small increases every year in total funds raised. We can never compensate for total government funding reductions, but thanks to the generosity and the community we have been a stable source of funding, albeit a relatively small one as you will see from the chart.

Our analysis of the campaign, however, suggests trends that are not positive for the long-run. Very simply put, fewer donors are giving more. Between 1994 and 1995 the total dollars raised in our campaign in Toronto increased by 3.4%, but the total number of individual donors fell by 4.9%.

In fact, leadership giving, which we define as personal gifts greater than $1,000, has the major success story of the campaign in Toronto. As an aside, I'm very gratified to note that about five of our major donors happen to be in the room today, including our largest single donor.

In the five years from 1990-95 the number of leadership donors to the Toronto campaign has increased from 2,200 to 5,300. More importantly, the percentage of the total campaign raised through leadership gifts has increased in that period from 8.6% to 18%.

What can we deduce from those statistics? While we continue to work at broadening our donor base, we believe leadership giving is the area with the best potential for growth in the future. As Don Johnson has pointed out, people who can afford to give at high levels will likely continue to do so and we believe they need the incentive to do that. Others will likely be more cautious in their giving.

That leads me then to the specific topic we're addressing, gifts of appreciated property. Extraordinary performance is going to be expected of United Way and Centraide, our agencies and the agencies we fund in the next decade.

Working together, we are searching for cost efficiencies. We're searching for agency and program amalgamations, shop and funding priorities, and new measurements of impact. These initiatives will help, but at the end of the day they will be limited if we are unable to attract new sources of funding.

.1630

I believe it is fair to say - and I probably don't need to say this in front of you - that government funding to this sector cannot be expected to increase in the foreseeable future, so that leaves donations. Don Johnson notes in his paper that we believe there is great potential for significant incremental gifts from those who have the ability to give out of their asset base rather than out of income. This shift in giving will only come about with a new incentive, and the most attractive will be the one that exempts from taxation deemed capital gains on charitable gifts.

I would like to say a few words about one of the objections to this proposal, which is that this proposal will help the larger charities only. In our case, that might be true if the United Way was only fundraising for ourselves, but we're not. Many of the United Way's funded agencies have tiny budgets and small staff groups. In Toronto alone, one-quarter of our funded agencies have budgets of less than half a million dollars, and half of our funded agencies have budgets of less than $1 million. So there are a lot of smaller agencies that would benefit through United Way's being able to benefit from this incentive.

There are other proposals on the table. I know you heard many of them this morning, and the United Way of Toronto supports many of those. In the context of what you heard, though, I would like to stress that this particular proposal offers the potential to encourage a new kind of gift and a new level of giving, thereby achieving a major breakthrough in funding for the charitable sector. We understand the government's commitment to eliminating the deficit, but we urge you to reflect on the tremendous benefits to society that could be achieved by exempting gifts of appreciative capital property from capital gains tax.

Thank you.

The Chairman: Thank you very much, Mr. Cardozo.

Mr. Poddar, please.

Mr. Satya Poddar (National Tax Partner, Ernst & Young): Thank you, Mr. Chair. I'm really here more to listen than to speak. Don Johnson has made most of the points that are relevant to the issue.

One thing I can add is that when I was in the Ministry of Finance I was paid to think of ten different reasons why something should not be done. Don Johnson asked me for exactly the same ten reasons, and I gave him the ones that are well documented in his notes. He has therefore tried to respond to those ten reasons.

Any tax provision of this nature has a conflict between tax policy principles and social principles. Most provisions in the tax system have that conflict, not just this one. What has to be emphasized is the social need for a program of this nature. One can always think of x, y or z reasons, technical complexities or the deviation from a good, clean tax system, but the social policies do dictate a deviation from time to time.

In my judgment, if you think this proposal warrants consideration, it is doable. The U.S. has done it. There may be a concern that it leads to abuses, but abuses can be addressed by confining this provision to property that is subject to well-defined values like listed shares, and perhaps by limiting its application to public charities as opposed to all charities. The U.S. provision does have those restrictions on the capital gains exemption.

Thank you.

The Chairman: Thank you very much, Mr. Poddar.

Mr. Pitblado please.

Mr. Jim Pitblado (Chairman, Hospital for Sick Children): I'll try not to be repetitive.

I come from the perspective of a businessman, someone who has been a volunteer for a significant part of my life. I've worked in a number of activities. I do chair the board of the Hospital for Sick Children, as well as that of the National Ballet. I've done fund-raising for those organizations, the United Way, and more others than I would like to count at this time.

I think there is a very simple issue before us. It's a public policy issue and, as Satya said, it can be complicated only by the ingenuity of the human mind to develop reasons why something should not be done. It can also be complicated equally by those who can find the solutions for those criticisms.

.1635

If we start by asking ourselves two fundamental questions - first, do we want to encourage Canadians to be more generous and more philanthropic or don't we, and second, do we want to put ourselves in a position of competitive disadvantage with the United States or don't we? - and if the answer is that we want to encourage Canadian citizens and corporations to be more generous, to make more donations to charitable causes, and if we want to put ourselves on a level playing field with our brethren to the south, then to me it's a very simple decision to remove a punitive tax on people who give things away to others.

In the last number of years there has been a great deal of wealth created in this country in terms of the market value of property. That wealth is a great untapped source for hospitals, universities, community service agencies and the arts, but in so many of those cases that wealth is in the form of property, not cash. In order to unlock that property and move it from non-productive to productive hands, the simple removal of the capital gains tax on gifts of appreciated property would in my view free up hundreds of millions of dollars. Individual Canadians would make a decision as to where they wanted to invest that.

All agencies today need one thing, endowment funds to give them a safety blanket in the future, whether it's United Way or the University of Toronto or the National Ballet or right across this country. These funds in the United States came almost entirely from gifts of appreciated property.

So I believe we would free up significant new funds that would flow to the areas that are most in need, to establish stronger endowments, to provide for the future and to put us in a better competitive position to compete in attracting the human capital we need in educational institutions, hospitals and arts organizations.

The Chairman: Thank you, Mr. Pitblado.

Charlotte Sutherland, please.

Ms Charlotte Sutherland (President, Canadian Association of Gift Planners): Thank you, Mr. Chairman. I appreciate the opportunity to speak to the committee on behalf of the Canadian Association of Gift Planners.

At this morning's meeting I asked that the proposal that had been submitted for consideration prior to the March 1996 budget be reintroduced for consideration in the next budget. That proposal was for a capital gains exemption for gifts of appreciated property.

CAGP took this position based on in-depth consultation with our members over the past seven months and on discussions with finance department officials. Because many of the members of the committee were here this morning, I won't go through the comments I made, but suffice it to say, CAGP believes strongly in this recommendation, and feels it is the most beneficial tax incentive set for our member organizations. We do have more than 600 members from coast to coast, representing a broad number of charities, from very large institutions to small community groups.

Thank you.

The Chairman: Thank you, Ms Sutherland.

Mr. Hollands, please.

Mr. Clark Hollands (Partner, Peat Marwick Thorne): Thank you, Mr. Chairman. I'm here representing perhaps the other side of the spectrum. My main involvement is that I represent two very successful entrepreneurs. Each of these clients has a very substantial, very active, private foundation. One of them provides major facilities in the education area and the other provides major facilities in health and death care support, the social field.

.1640

I simply indicate that a provision like this would clearly be instrumental in doing two things from their perspective. First, it would cause them to give very serious consideration to moving more of their existing wealth into their foundations than would otherwise be the case, because there would be reasons and benefits for their doing so, and there would not be the tax cost associated with dealing with those transfers.

Second - and this is perhaps as important as the other one - it would greatly accelerate the point in time when those assets moved into these foundations and became actively used in providing social benefits to the society. In a lot of respects, that's an aspect of this provision that I think will have greater social benefits to the country than some of the other benefits it may have - that is, accelerating the point in time at which otherwise passive assets are contributed into active foundations performing valuable social functions in our society.

I know this would happen because I would be involved in advising them to make it happen. I know they would have a clear interest in making sure we took advantage of these types of provisions.

So in terms of speaking about the likelihood that a provision like this would be effective, I have a very high degree of confidence it would be effective. On their behalf, I know it would be well supported.

Thank you.

The Chairman: Thank you, Mr. Hollands.

Mr. Barry Sherman, please.

Mr. Barry Sherman (Chairman and Chief Executive Officer, Apotex Inc.): Mr. Chairman, thank you for the opportunity to appear. I'm here to address you on an issue somewhat different from that of the other speakers. It's not unusual for me, I guess, to be taking a somewhat different point of view. Before I begin, I would like to add my support to what you've already heard.

There is no doubt that our universities and other non-profit institutions are in dire need of larger donations and larger endowments. Unless the capital gains exemption is brought about, that's just not going to happen. So I do think the ability of the essential needs to be fulfilled is in a large measure dependent on whether or not the capital gains exemption is instituted, and I think it should happen.

I'm here in the capacity of both president of the Apotex Foundation and chairman of Apotex Inc. The issue I'd like to address here is the continuing ability of foundations to lend money back to donors, or corporations related to donors, the so-called loan-back issue. I would like to explain it by telling you briefly about the history of Apotex and the Apotex Foundation, how they've grown in parallel and how this has been enabled by the possibility of loan-backs.

Apotex Inc. was incorporated in 1974, just a little over 20 years ago, and has grown very rapidly to be Canada's largest pharmaceutical company. We contribute, I think, to the Canadian economy in a lot of ways that are very important.

We currently have well over 2,000 employees. We occupy more than one million square feet of space. We produce in Canada, independently, virtually everything we sell. We have a world mandate for everything we sell. We export to over 100 countries over 40% of what we produce. We pay income tax in Canada and we're one of Canada's largest research spenders. So what we have been able to build at Apotex is I think one of the jewels of Canadian industry.

In parallel, we have built the Apotex Foundation. It also was incorporated about 20 years ago. When we started we set out on a policy of donating, every year, to the Apotex Foundation 20% of the income of Apotex Inc. as well as 20% of any personal income I, any members of my family or any related corporation earned. That of course was the maximum that was allowed to be donated and deducted for tax purposes.

As a result of those donations and the accumulated income that is permitted to be accumulated, the Apotex Foundation now has a capital of approximately $100 million. Our hope is to continue to build that in years ahead to be one of the largest foundations in the country with, we hope, a capital of $1 billion or more within the next 10 to 20 years.

.1645

The Apotex Foundation has made tens of millions of dollars of donations to important Canadian institutions, including the University of Toronto, the United Way very many others. These donations have supported medical research, education, health care and general community welfare, so they have been very important to a lot of people.

Now the parallel growth of Apotex Inc. and the Apotex Foundation has not been accidental or coincidental. It has been enabled and made possible by the fact that our income tax legislation does permit non-arm's-length investments to be made by charitable foundations, provided that certain rules are followed. The Apotex Foundation has made large investments by way of loans to the Apotex group of companies, and has thereby derived investment income used to support donations. Thus the foundation's growth has been driven on the one hand by the success of Apotex and the Apotex group of companies, and Apotex in turn has been provided with investment funds to enable its growth by loan-backs from the Apotex Foundation. The Apotex group of companies and the Apotex Foundation have thus been able to grow synergistically to achieve the dual objectives of industrial growth and growth of a charitable foundation.

The issue of loan-backs has been addressed specifically by Parliament and parliamentary committees. Specifically, in 1982 the Senate Standing Committee on Banking, Trade and Commerce held hearings on proposed changes to the tax legislation in relation to philanthropy. The committee reviewed this issue and gave implicit approval to such investments as long as a market rate of return was derived. This is, of course, the method we have used to build Apotex and the Apotex Foundation synergistically.

The reason we're here today - what's motivated my appearance - is that recently Revenue Canada, without any apparent authority and quite precipitously, has begun to take the position that a loan-back by a foundation to a donor, or to a party related to a donor, will make that donation to the foundation not deductible for tax purposes. Indeed, they're endeavouring to assert that position retroactively, and if they prevail that will have very serious implications for Apotex Inc. and our entire group of companies.

There are two issues that flow from what has happened. First, is it desirable for the policy to continue whereby a foundation can lend money to a donor or a party related to a donor? I assert that the answer to that question is that it is appropriate policy.

Obviously, it is necessary to have incentives for philanthropy - that's what we're here to discuss - and one such incentive is the ability of a foundation to lend money back to or invest in, at appropriate yields, a growing business that has provided those donations. I believe it's wise public policy because it enables the simultaneous achievement of two objectives, namely the building of a foundation and the building of an industrial enterprise.

The other issue is that the rules governing tax deductibility must be clear and certain. It's highly inappropriate for a taxpayer to be following all of the rules and then be confronted with Revenue Canada saying we are going to assess you a very large amount unless you agree to do certain things, notwithstanding that you followed all the rules and have had no advance warning.

We're put in a position where we know that if we don't negotiate a settlement of some type and if we're assessed we believe we'll ultimately prevail, because the law almost certainly is on our side. On the other hand, if we're assessed, we face the enormous damage of having to pay that assessment before we can even get into court to appeal it.

It's important not only to have the appropriate rules to encourage philanthropy, including the deductibility of appreciated capital property and loan-back provisions, it's also important that the rules be clear and certain so that a person can be sure when he gives a donation that the tax deductibility of that donation will be allowed and won't be challenged some years subsequently on the basis of somebody's new interpretation of rules and the retroactive application of that new interpretation.

.1650

So those are the two issues I'm here to address. Mr. David Nathanson, my tax adviser, is here in case there are any technical questions that might be beyond me. I certainly appreciate the chance to be here to present my point of view, and I believe the issues of maintaining the ability for a foundation to lend back money under appropriate rules is important for encouraging philanthropy and industrial growth. I believe it's all the more important that whatever rules are established, they be clear and certain so that a person is not in a position of making a donation without knowing whether or not that will in fact be tax deductible. Thank you very much.

The Chairman: Thank you, Mr. Sherman.

Lastly, Orly Buzclan is executive director of the Ottawa Jewish Community foundation.

Ms Orly Buzclan (Executive Director, Ottawa Jewish Community Foundation): Thank you, Mr. Chairman. I am standing in for my colleague Robert Kleinman, who is the executive director of the Jewish Community Foundation of Greater Montreal. Bobby was unable to attend and sends his regrets.

Both the Montreal and the Ottawa Jewish Community Foundations are crucial fundraising arms, primarily of endowed dollars, that assist in the financing of social, educational, health and related services. I will say that the changes made to date are very positive. As a fund raiser, the increase from the 20% allowable limit to 50% and the 100% allowable limit on bequests is significant. The tax treatments of bequests in particular comes as a relief to many donors, especially the older ones who are happy to be able to meet their needs and to act philanthropically, at the same time preserving some of the assets in their estate.

As fundraisers for these charitable organizations, any positive changes or legislative support to meet the social needs of the communities is very welcome. To enlist and encourage donations from the private sector will only help alleviate the cutbacks that we face.

Thank you.

The Chairman: Thank you, Ms Buzclan.

We have not had a tremendous amount of controversy around the table this afternoon. I can anticipate some of the testimony that we might hear. I had asked in advance that Department of Finance officials prepare for us some figures on what might happen under this so that members of Parliament could have the opportunity to study it in greater depth.

I understand that the Department of Finance officials are here. I'd like to ask them, if they feel like it, to come to the table and perhaps respond to some of our questions, as well as those of other people.

I'm very grateful that you happen to be here, Lucy Brickman and Louis Lévesque from the Department of Finance. I don't know how you'd like to proceed, but you certainly heard the presentations on appreciated capital property. It seems to be reasonably popular among our witnesses today, but I think it is important that we understand the fiscal ramifications of this, in terms of how it will change the law, how it will impact on taxpayers, and how it might impact on the fiscal situation.

.1655

Mr. Louis Lévesque (Department of Finance): I think obviously it's not our role to engage in a policy discussion of whether it's good or bad to do, but I think it would be nice to put some figures on the table to get some people's reaction.

As most people know, the current system provides more or less some kind of partnership at fifty-fifty cost between governments and donors once you exceed the threshold of $200 in donations. It varies by province. It varies again for the first $200 donation, but obviously when we're talking donations of large capital property you're above that threshold.

The current regime provides for a 50% level of tax assistance. Certainly when we look at things in the Department of Finance, as people have put it, an exemption on capital gains - and I don't think anybody would deny this - has the potential to increase donations. People have mentioned numbers in the area of hundreds of millions of dollars. When you calculate the additional value provided by the capital gains exemption, the tax assistance, then you can get pretty immediately into a debate on numbers. But it all depends upon particular circumstances like what the person would have done had it not been for the exemption and those kinds of things.

For somebody who would have been in the position to give in this particular year a property that basically has no cost base, given the 75% inclusion rate you're talking about the tax assistance level going from around 50% to about 91%. There has been a lot of debate about the experience in the U.S. Figures from the U.S. show that typically you're talking of an average cost base of about 40%, and under that kind of scenario then you're talking more about a 75% level of assistance.

Frankly, what these numbers show is really the ramifications in terms of the fiscal costs. You have incremental donations but you have very high cost quotes for governments. From the fiscal tax policy perspective it's certainly a big concern. I'd like to get some comments back from people in terms of that. I'm sure I'm triggering some reaction.

The Chairman: Your Honour, Mr. Jackman.

Mr. Jackman: The assumption you are making is that if you give under Mr. Johnson's proposal, the government will give a tax credit they would not give if they gave under the present system. That's the whole premise of what you're saying. What we are saying is that if you put yourself in the position of the donor, the donor doesn't have to give. That's exactly what is happening now. They are not giving because you are taxing us if we give. That's what you're doing. The alternative is not to give, and as a result you see universities and hospitals in the United States with endowments of hundreds and hundreds of millions of dollars. I think 80% or 90% of the endowment money taken by universities and hospitals is because of gifts of appreciated property. Hospitals and universities in this country do not get it because you and your department want to tax charitable giving. That's what you're doing.

Mr. Lévesque: Maybe we can go through an example simply to understand what happens in terms of when you give. Let's say you have a property that has no value -

Mr. Jackman: Excuse me, why don't you focus on the alternatives. The alternatives are giving it under Mr. Johnson's proposal or not giving it at all. Those are the two alternatives. The alternative is not giving it under the present rule. They won't give under the present rule. That's our point.

The Chairman: Do you want to respond to that, Mr. Lévesque?

.1700

Mr. Lévesque: I would say that different people have different opportunities. You have taxpayers who do have, for example, shares in mutual funds for which granting an exemption for capital gains would allow them a decision to switch between donations of cash and donations of property.

In that particular case, you could end up with additional fiscal costs and no donations. You have people who would not give otherwise, but who would give with this measure, and eventually we would collect capital gains tax on other people and the costs would be lower. But you are still talking of costs between 52% and 91%, and depending on the U.S. experience, an average of 60% to 70%.

The Chairman: Mr. Duhamel.

Mr. Duhamel (St. Boniface): I would like a clarification. Could we put some numbers on the table? For example, if one were to give x, what would it cost under current circumstances and what would be the yield under the proposal? That would help me, because I am having a lot of difficulty focusing on what it is we're saying right now. I perhaps have not made large enough donations.

Mr. Lévesque: I don't know to what extent the paper we've prepared was distributed, but let's go to an example.

You have an asset of $100 that was acquired at no cost.

Mr. Duhamel: Let's talk about $100,000, okay.

Mr. Lévesque: $100,000.

Mrs. Chamberlain: Yes, a $100,000 property.

The Chairman: That's because we in Parliament are big spenders.

Mrs. Chamberlain: Where do you get a property for $100?

Mr. Lévesque: Okay, $100,000.

If you decide to give that property currently, and let's say the property has no cost in terms of cost base, it was acquired at no cost or little cost and it increased in value tremendously, there's a rule that comes into play that's called the deemed disposition, and you are basically taxed on your capital gains.

That is, if the value of the asset is $100,000, you're taxed on $75,000; that's the inclusion rate. You give $100,000 of assets and you get tax credits that are totally upsetting that liability - a tax credit of 52% of the $100,000. In terms of the tax assistance you're getting on your donation, you're getting 52% of $100,000 and that 52% helps pay, from a cash perspective, the tax liability you have on the capital gains.

You're getting 52%, and at any point in time you cannot face a cashflow cost arising from the donation. That was one of the things the budget measure in 1996 fixed, the situation where somebody could have been giving, but because of the 20% limit on the credits in the year of donation, they could be facing with that realization of the capital gains on the one hand, at let's say $39,000 of capital gains tax, but could not claim credits in that year for the entire amount because they were limited to 20%, let's say $20,000, on the capital of a charitable credit and would face a tax liability. Let's say it was a building, and they didn't have any cash to pay that tax liability; they could be facing that kind of disincentive to give.

The budget removed that because you can always claim the tax credit for the full amount of $100,000 in the year of donation. In fact, you are shielding other income from tax with those tax credits.

What is proposed is to basically say that the $75,000 you include, resulting in about $39,000, should not be there in the first place. If that is the case, basically the tax assistance on that donation then becomes both the 52% we give currently on the full $100,000 and that exemption on capital gains. In the case where somebody was to give in any case, that could 91%.

In some other cases, if you have a lower tax base, a higher cost base -

The Chairman: No, just stick to the zero cost base, a gain of $100,000. Let's keep everything simple.

Mr. Lévesque: If somebody were to give in that year something with no cost base, the tax cost to the government is 91%. People can argue that this is not a realistic case, but there's a blend of cases.

People can give within 10 years, 20 years, or 30 years. The further in the future you're talking about, it all depends on what happens with the capital value of the asset. Obviously if the asset depreciates, the tax value of the assistance can still go up. If the asset appreciates, it can go down. But generally you're talking about numbers between 52% and 91%.

.1705

Mr. Duhamel: Clearly, Mr. Chairman, if the proposal being suggested were instituted, more would be given. Do we have any...?

Mr. Discepola (Vaudreuil): At what cost?

Mr. Duhamel: No, no. That's not the question I'm asking.

Mrs. Brushett (Cumberland - Colchester): More gifts.

Mr. Duhamel: I'm asking whether we have any evidence that more would be given, or whether it is all hypothetical.

The Chairman: I think we should allow Mr. Johnson to expand on that, because you've given us a little bit of thought, Don, in the last couple of years.

Mr. Johnson: I have just a couple of things.

First of all, I believe this 91% case is a hypothetical extreme, because the assumption is that the donor is going to sell the asset, pay the capital gains tax, and give, but as His Honour pointed out, the donor's alternative is to do nothing. In that major example in the United States, the billion-dollar gift by the founders of Hewlett-Packard, I can assure you that if you had asked Mr. Hewlett andMr. Packard whether they would have given a billion dollars of stock if they had to pay $400 million in capital gains tax, their answer would be no. They would just sit on their stock.

The government is not giving up that 40% of the value of the property in forgone capital gains tax until that donor dies. You know the math better than I do, but the life expectancy of a male in Canada at age 60, which I assume is when most people are wealthiest, is another 20 years; for a female, it's another 25 years. So what the government is forgoing is the ultimate forgone capital gains tax, the discounted present value of that today.

Now, if you use a 7% or 8% discount factor over 20 or 25 years, discounted back to the present value today, I can assure you it is a minuscule portion of that 40% that you are adding to the 52%. It's a totally misleading example, in my view. It is atypical. So I disagree very strongly with the characterization that the government is contributing 91%. It's not. The 52%, the same as it would be for a cash gift, and the discounted present value of what the government would give up when that donor passes away, assuming that he doesn't do a spousal roll-over to his young wife -

Mrs. Chamberlain: Or young husband.

Mr. Johnson: - and assuming that he hasn't done an estate freeze....

I think that value is a misleading example. It's a combination of the 52% and the discounted present value of the ultimate forgone capital gains tax, because the donor's alternative is to do nothing. He doesn't give now because he's going to be hit with a capital gains tax. That's one point.

The second point, with respect to what was done in the budget - and I did compliment the finance department for doing what it did in the budget, because that issue of bumping the annual limit to 50% and again bumping it for gifts of appreciated capital property effectively to 100% does deal with a cashflow problem. You can use your tax credits to offset the capital gains tax that you have triggered at the time of the gift. However, what you didn't say is you're using up those tax credits. You're using up, I'd say, about three-quarters of the tax credits to offset the capital gains tax, which means the donor is left with only one-quarter of the tax credits to apply against other income. In the United States the donor is left with 100% of his tax credits to apply against other income.

It does solve a cashflow problem, but the barrier to giving is still there, because you're using up most of your tax credits to offset the capital gains tax and you have very little left to apply to the 52%.

The Chairman: Rob Prichard, and then we'll go to members.

Mr. Prichard: Thank you, Chairman. I'm grateful to the colleagues from the Department of Finance for exposing the concerns, because I think if this is going to work, it's going to have to come through common understanding of the problem.

It's right, I think, to calculate even the hypothetical tax cost, which is one way of looking at it. That's an understandable way of looking at it if you work in Finance and you're asked by the chairman of the committee to think of it from that perspective. I guess the way I look at it is the gift cost.

.1710

I spend my time talking to donors and asking them to contemplate making great acts of trust and commitment to different causes. The critical thing I think to understand is they do have the choice to do nothing. It's their money. It's their wealth. It's their family's wealth. They have the choice to do nothing.

Under the proposal we make, it still requires a strong philanthropic commitment to make the gift. This isn't somehow that they are getting some advantage. The question is how much it costs them to give it away,. But it is still a real cost.

Even in the hypothetical example, it still costs real money to give away let's say $10 million on those numbers. It's still a real cost to that individual. He or she is worse off in terms of personal wealth, having made the gift, but the charity that received it is dramatically better off.

There's no proposal here that somehow lets people do a finagle and leave themselves better off at the end of it. This requires transferring their wealth to charity, leaving them poorer. The only question is poorer by how much.

So just from the donor's point of view, this still requires gifts. Yes, of course, as Mr. Duhamel says, it will lead to more gifts. That's the purpose. That's what motivates our being here. That's what's so urgently needed if we're to be more self-sufficient and more competitive with institutions across North America. Yes, more gifts.

Number three, I want to emphasize the timing question because I know you keep saying, well, when you die, you have to pay. Particularly with the economy we now have where wealth is often created quite quickly, particularly in the high technology fields, information, in the mining industry, there's very rapid wealth accumulation.

There's a radical difference between talking to someone at the age of 40 about giving and their tax costs then and their planning against their potential death. The discount in terms of time is so huge that the prospect of taxes, the deemed disposition at death, when mitigated by time, when mitigated by family planning, when mitigated by spousal roll-overs, when mitigated by all the things that cause people not to worry too much about that, brings it back to today, how much it costs a person to give it away.

The reality for someone who has a significant appreciation, the notion of having that deemed disposition, I say it to you from personal experience, because I speak to these people - it's a big part of my job to speak to these people - it's simply not on for the vast majority of people to contemplate incurring that deemed disposition to make the gift, as compared to waiting 30, 40, 50 years before it will come home.

Part of my concern, Mr. Chairman, is that you're not hearing from the vast majority of people who might give. You have Barry Sherman here, talking. Well, if the world was made up of Barry Shermans, we wouldn't be here testifying. The trouble is there's only one Barry Sherman in all of Ontario that I'm aware of, who's the largest donor to United Way, who gives $6 million to our teaching hospital, $4 million to the university, $1 million to our theatre. This man singlehandedly does more than hundreds of thousands of people.

You've got the Lieutenant Governor, his honour. You only have to go through greater Toronto and look what he and his family have done over three generations in Toronto. It's unbelievable what they have done, incredible generosity. These are the wrong guys though. These are people who give despite the tremendous disincentives to giving.

We're talking about broadening the base so Canadians at large give at levels comparable to the United States and allow our public institutions to compete. That's what we're talking about. We're not talking about Barry Sherman and his honour the Lieutenant Governor, who are unbelievably generous in support of our community. They're telling you that they also spend their time talking to people trying to get them to follow their example, and with the current punitive regime in place we can't do it. That's the relief we need.

[Translation]

The Chairman: Mr. René Laurin do you have something to add?

Mr. Laurin (Joliette): Yes, Mr. Chairman. I would like one of the witnesses to explain how we could protect the interests of the charity organizations which need donations while allowing the government to get its share of taxes.

Is there not a method that would allow both parties to get their fair share? Very often, we have the feeling that donations end up being paid by the other taxpayers or by the government. Indeed, if most of the donation you make is tax deductible, that is so much tax that does not go into the government coffers.

.1715

Ultimately, it is not the individual or the company that makes the donation but the government and even all the taxpayers together, since there is a tax loss. I would like to hear your comments about this.

[English]

Mr. Prichard: Again, I think the assumption behind the question, and I say it with great respect, is wrong, because these are on the whole taxes that will not be paid. So it isn't that other taxpayers are providing it. These are people who will be making gifts. If they don't get this tax treatment, those gifts simply won't be made and no tax is payable. They can defer that tax for 10, 20, 30, 40, 50 years.

So the cost, and this is our difference with our colleagues from the Department of Finance, is the discount that we believe applies, because of the passage of time when people will simply hold, and takes away the bite you're concerned about of asking other taxpayers in effect to subsidize the gift I might make in this circumstance.

The second thing, of course, is this is only to public charities. One can take a sharp line between government on the one hand and public charities on the other. I don't find that line as compelling because I work in a public institution and lead a public institution. Whether the funds come to the public institution through the state or come to the public institution through gifts, both are for very much public purposes.

I don't have a sense of diversion to a private purpose. I don't consider a gift to the University of Toronto for private or personal purposes. I view that as for public purposes, to a publicly regulated institution, working in the public interest.

[Translation]

Mr. Laurin: Would you be satisfied if we were to change the tax system so that individuals would be better off making donations before death and before another moment that would be established by legislation?

One of the major roles of governments is to redistribute wealth. So, the government could pass legislation to encourage people to give their wealth instead of keeping it until their death, and that would be beneficial to charity organizations.

I have the feeling that you are looking for some method to benefit from the benefactors' generosity. It seems that you want the government to continue ensuring your survival through those donations while finding a way to keep wealthy people from paying more taxes like any other taxpayers.

Tell me if I am mistaken.

[English]

Mr. Pitblado: I think that's really the basis of your question. That is exactly what we are proposing, that these gifts be made in people's lifetimes rather than 20 or 30 years from now. I think this proposal goes exactly to the question you posed and in effect would accomplish what you asked.

[Translation]

Mr. Laurin: I would like to know your reaction.

As far as the taxation of inheritances is concerned, there was in the past different provisions among the provinces. I believe that has know disappeared.

We could perhaps suggest reducing the tax burden of individuals who make donations before dying, which would be for them an incentive to make such donations, and you could therefore benefit from them earlier. Of course, people would still have to pay their share of taxes.

Is that what you are looking for?

The Chairman: I do not believe that would be a solution. I think that the tax outcome would still be the same, whether the donation is made before or after the death of the person.

Mr. Laurin: Perhaps. I would still like to underline that what we are looking for is for wealthy people to pay their share of taxes because we would not want them to be able to avoid paying their share by making a generous donation or by using some other taxation trickery.

.1720

It seems to me that we could ask the government to find a method that would allow wealthy people to pay reasonable taxes while not penalising you.

[English]

Mr. Prichard: I think Mr. Laurin raises an important question on tax policy - that is, the role of wealth taxes in a tax system. I don't think that's the issue we're here to give evidence on, but I will say, three years ago we did convene a symposium at the University of Toronto, supported by some benefactors. We brought together the world's leading authorities on wealth taxes - how they work, how they don't work and what their effects are in exactly the ways you described.

I would very pleased to provide the chairman of the committee and Mr. Laurin with copies of the book published following that. These were leading authorities from not just home but also abroad on the very questions you raised.

I personally wouldn't want to give evidence on the question, because I'm not an expert on it.

The Chairman: Ms Sutherland.

Ms Sutherland: There's one point we often tend to forget, that when these assets come to the charities in our communities they begin to work in those communities and come back into the economy. That is a difference we tend to overlook. Rather than the individual holding these assets they are coming back and working in our communities.

The Chairman: Mr. Jackman.

Mr. Jackman: Partially on your point, but on other points too, we have gotten into this trap.... We have a capital gains tax in Canada. That's generally accepted. In the example you mentioned, the $100,000, let's say for the sake of argument the capital gains tax is 40%. If you have property that's worth $100,000 and you give it away - you give it to charity; it's gone - the donor doesn't have the property any more but he has to pay $40,000.

Now, if the gain was his, he would be quite happy. It would be quite acceptable to him to pay a 40% tax on the capital gain, because he got the benefit of the gain. But psychologically, in the donor's mind, when he's given the property away, when he's given the shares away, the $100,000 is gone, and if there's any gain, the charity gets it. He then wonders to himself why he has to pay the tax.

I can tell you, from my experience as Lieutenant Governor I've never met a volunteer who hasn't really felt good about volunteering. I've never met anyone who has given money to a university or hospital who hasn't felt good about his charitable giving. Having said that - and no disrespect to the government - I have never met anyone who felt good about paying more tax.

So we're trapped in this psychological barrier. There's a generosity of spirit that wants to give, but the donor says, the heck with you - I'm being generous and they're coming and taxing me for a gain I'm not getting but giving away.

The Chairman: Merci, Mr. Laurin. Mr. Grubel, please.

Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chair.

I just wanted to remind you that Bob Fogel, a Nobel laureate in economics, has written a study showing that in the United States, one of the great transitions that has taken place has been that all the fortune that used to be made in the nineteenth century in the United States through the exportation of natural resources, the monopoly on technology, the Forbes and Rockefellers and all those people.... By their transfer of all the wealth they had made to universities, what has taken place in the United States is a wholesale transformation of wealth based on natural resources into human capital, which is a source of wealth today.

But with all due respect, Mr. Prichard and Mr. Johnson, there is a flaw in the argument about the present value of today's forgone tax payment into the future, because in between now, when I would have given it, it would have also grown at 6% or 10%. It then has to be discounted back at 10% so that it is exactly equal to the value. However, I accept His Honour's psychological reason. I think that's very good.

.1725

Mr. Johnson: I'd like to respond to that point about the flaw in using a discount factor. When the donor gives the asset - stock, let's say - the charity receives the stock. The charity sells that stock on the stock exchange. Someone else buys the stock the charity has sold. That person may have the stock for six months or a week or a year or three years. But that person who purchased the stock from the charity sells the stock and pays the capital gains tax.

If the donor had not given the stock to the charity and the charity had not sold the stock into the market, that buyer would not have bought the stock and then subsequently paid a capital gains tax if the stock appreciates, as you're saying would happen.

Mr. Grubel: I think Satya will have to explain that to me afterwards.

Mr. Johnson: He's already explained it to me.

Some hon. members: Oh, oh.

Mr. Grubel: He always sees angles I don't see, and I'm always ready to learn.

When a person buys this appreciated stock from the charity, his price, on the basis of which he will pay a capital gains tax in the future, is the price at which he buys it from the charity.

Mr. Johnson: Correct. If the stock appreciates....

Mr. Grubel: That's a different thing.

Mr. Johnson: You're assuming that the stock appreciates, right?

Mr. Grubel: Yes.

Mr. Johnson: Okay. The investor buys the stock from a charity at $10 a share. The stock goes to $20 a share. That donor sells the stock. He's just an investor. He sells the stock at $20. He pays a capital gains tax on that $10 capital gain. So the government's getting tax they would not otherwise have received. If you hadn't exempted the gain from capital gains tax in the first place, the donor would never have given the stock to the charity and the charity wouldn't have sold the stock to the investor, and the investor wouldn't have experienced a capital gain and paid the government the capital gains tax.

Mr. Grubel: I should have known Satya was right.

Some hon. members: Oh, oh.

Mr. Johnson: I learned that a year ago. Satya has pre-cleared each of our submissions.

Some hon. members: Oh, oh.

Mr. Prichard: Unlike Don, I wouldn't have the courage to debate this matter with you but for the confidence Satya's given us.

Mr. Grubel: That is very good. Nevertheless, I think it would be useful to have studies on the history of behaviour of rich people in Canada before the capital gains tax in comparison with behaviour in other countries. I think that would help settle this issue.

Whichever way it comes out, and whether this argument is right or not, I personally believe there's really an ideological issue here. I personally welcome any time we can in some way persuade the government to lower taxes. Government is too big, and the less taxes they have the less they will spend.

Second, I believe by this kind of process we will essentially empower again the people to use the money for purposes they see fit. That is better in the long run for the interests of society than it is if it's all administered by bureaucrats through the politicians. I think money spent by the people themselves through this method is in the end better for society than it being taken away and indirectly passed on.

Mr. Johnson: So we can assume you're in favour of the proposal.

Mr. Grubel: I am in favour of the proposal. I was was just trying to understand.

Mr. Johnson: Good.

Mr. Prichard: A third reason you might add in terms of the effects - without commenting on your first two - is the other great advantage of greater private benefaction to public institutions, that it leads to an additional dimension, and I think valuable dimension, of accountability. It gives those donors an active interest in the institution, its management and its trusteeship. It creates a broader group of people to whom the institution is accountable. I think that strengthens the performance. It brings the institutions closer to the communities in which they work and live when benefactors have an interest.

Again, including your two points, it really does change the behaviour of institutions. Instead of getting their money all from government, as was the case of public universities 25 years ago, I think having to reach out to communities to gain greater support strengthens the performance of those institutions over time.

Mr. Grubel: It does make it different, though. If, for example, all the money were given to institutions that in the end feed back benefits only to the wealthy again, you would get one kind of outcome. If, on the other hand, as I would expect, you would also create benefits for institutions that specifically address the needs of the poor, then I believe the outcome would possibly be more beneficial because of the reasons you have mentioned, and the psychological reasons His Honour brought up.

.1730

The Chairman: Thank you very much, Mr. Grubel. Mr. St. Denis, please.

Mr. St. Denis (Algoma): Thank you, Mr. Chairman.

First of all, let me say thank you to all of you for being here. I find these round tables most stimulating. I think the nub of the issue, for me anyway, is really understanding this, since we have a deficit to deal with, and a debt after that, and the finance minister faces the challenge of making sure things add up at the end of the day.

Mr. Johnson raised the issue of the costs now versus the present value of the costs to the taxpayer of giving later on. So I'm not sure I really understand it, but I wonder if we could review that just a little more.

If a particular taxpayer today had decided to give the gift of $100,000 to a given charity under current laws, but instead died today, and his estate took the same consequential action to give money to a certain charity, I'm assuming the revenue to the government would be the same, whether it's voluntarily done and I keep living or whether I die today.

So assuming there are no tax changes in the next 25 years, and I died 25 years from now, to me the issue of whether those shares were sold by the charity to another person, who then paid taxes on the gain from today on, versus the donor in my example who continues to live for 25 years.... Does a gain on those shares....?

To me, the present value question.... I don't understand why we would be discounting it, whether those shares are held by a third party, having bought them from the charity, or whether they're still owned by somebody who's made the decision not to give because the laws are the way they are now.

The Chairman: Maybe, Satya Poddar, you could take us through this just very briefly -

Mr. St. Denis: And the $100,000.

The Chairman: - simply using our example of an individual donating today, as opposed to -

Mr. St. Denis: Twenty-five years.

The Chairman: - dying in 25 years.

Mr. Poddar: Take your example. Suppose the capital gain as of today is $100,000, and in the absence of any gift, the capital gain would have grown to, say, $175,000

The Chairman: No. Just assume no growth right now.

Mr. St. Denis: No, for the next 25 years.

Mr. Poddar: For the next 25 years?

Mr. St. Denis: Yes. For my question I would need it to grow.

The Chairman: Okay.

Mr. Poddar: Now, when you give a gift today, the question arises, what will happen to this $75,000 future gain?

Now, what the Department of Finance is assuming is that when you give an exemption for the $100,000 gain, that $75,000 growth will also become tax-free. Now that becomes tax-free only if the charity sits on the stock, and realizes the capital gain not only of the $100,000, but also of the $75,000.

But the U.S. experience is that when the stock is given to the charity, most of the charities want to convert it into cash. So the growth of $75,000 always become taxable. So under the U.S. proposal, by giving the gift today, you are only giving up tax on the $100,000, because the $75,000 will become taxable since the charity will convert the stock into cash.

Now Finance is right if you assume that the charity will sit on the stock, and not utilize it for charitable purposes. But if they want to use the money for charity, they have to cash it out, and the U.S. experience is that virtually all charities cash out all the stock that is given. So that's where the difference is.

If you assume that the future $75,000 accrues inside the charity, then you don't have to discount, because you're losing tax not on $100,000, but on $175,000. The discount and everything else washes everything out, and the true cost is the present value of the tax on $100,000.

But if you assume that the $75,000 will go in the taxable pocket, because the charity will sell the stock to a taxable person, then you're really talking about collecting tax on $100,000 today, as opposed to the time of death. So the value of the tax on $100,000 is much lower.

.1735

Mr. St. Denis: But if the donor in my example kept the $100,000 in shares, it grew to $175,000, and he died 25 years from now, there is tax on the full -

Mr. Poddar: But in both cases you collect the tax on $75,000 anyway.

Mr. St. Denis: Yes, okay.

Mr. Poddar: So the question is really on the first $100,000 of capital gains.

Mr. St. Denis: What would happen in this scenario is.... Let's just say there are $20 billion of assets out there that might move. We're going to move those assets to the present. Instead of being given in the future, we're bringing all this capital to the present. And we won't hurt the charities 20 years from now, because that money.... We're assuming that this is an endless conveyer belt of growth of assets, and that we're simply moving this endless conveyer belt to the present by 25 years.

Mr. Poddar: No. The assumption in revenue costing is that in the absence of this proposal, the money will stay in the private pocket completely, even at death. If giving this incentive forces or encourages individuals to give it to their charity, you are really giving up the tax today that you would have otherwise collected in 25 years' time. Only that tax is not on the $175,000, but on $100,000, because even if you go with the proposal, you still collect the tax on $75,000. That charity will convert the stock into cash, and the government will be collecting tax on the $75,000.

So this proposal really amounts to giving an inducement to the individuals by forgoing the tax they would have paid at the time of death, or who knows if if the spousal roll-over is used in another 25, 30 or 40 years' time.

Mr. St. Denis: So there could be a cost, let's say, of $200 million to the government in a given year, plus what the provinces share in the...?

Mr. Poddar: That $200 million is a very large cost number for the federal government. I don't think that even in the best of assumptions you get anything more than $100 million. The number we tried to put together on this is somewhere in the range of $25 million to $65 million.

Mr. St. Denis: Plus the provinces, whatever the provinces -

Mr. Poddar: Plus the provinces.

Mr. St. Denis: Okay.

Mr. Pitblado: Couldn't I take the other side of that, that even in the worst case the Department of Finance has proposed, if we gave this property away, the government would get $7 per hundred today? So even in the very worst case, by giving something away today that wouldn't be dealt with for 25 years, the government is getting, in the worst case, $7 today, in best case, $52, $48 or $50 today.

So the government will get money today that they wouldn't otherwise get until death by making the charitable contribution. So you can look at it as the glass is half-full or half-empty.

The Chairman: Monsieur Lévesque.

Mr. Lévesque: I have a couple of comments. Regarding what Satya said, I would agree that if you assume that people would not have given, and they are giving to somebody who is another taxable entity, this is a correct representation. But even with discount rates, you're still facing significant numbers way above the normal or average 52% for 10, 20, or 30 years. Eventually, in 50 years' time, you're getting closer to 50%, but you're still in the 70% range for 10 or 15 years.

The second thing is that you can give things to non-taxable entities that they would use forever, be it land or buildings, so there are no capital gains, like eventually we lose the $75,000 altogether in the future. I agree that the U.S. experience is not the majority of cases, but still the cost remains significant.

The notion of discounting was mentioned. I mean, these assets appreciate. Then you can be facing somewhat higher costs if you're going into non-taxable entities.

My final comment is that I'm not quite sure if I understand the last comment that was made. In the current system, if somebody gives $100,000.... Let's go back to that example. At $75,000 capital gains, it implies a tax liability of about $39,000 or $40,000 in capital gains tax, but at the same time that person claims $52,000 of charitable credit donations.

.1740

So in terms of the fiscal situation, there is an immediate, at least in the current regime, $13,000 out of $100,000. The government cannot be better off in terms of.... If people give more, obviously there is more cost to governments.

Mr. Prichard: Speaking of the cost, I respect it because I respect the public servant's role, but I think it's so important to keep the benefit on the table simultaneously. In every single case, unless you believe government activities are more valuable than charitable activities, not a position I think many people in this room believe, the benefit is always significantly larger than the cost, even in the worst-case scenario.

So the public activity, not government-dictated activity but public activity - that is, activity that qualifies for charitable donation status.... The hundreds of thousands of students across Canada, the millions of people supported by the United Way - the public benefit in every single case is in excess of the public cost. Your job is to count up the fisc, and I understand that, but every time you hear the word ``cost'', please think about the benefit forgone if we don't incur this cost.

The benefit forgone to the people of Canada, to the students, to the poor people, the old and the people who need health care - the benefits forgone exceed the costs incurred, even on the most conservative assumptions that can be made.

The Chairman: Don Johnson.

Mr. Johnson: I agree with those comments. And the comment I would make in response to yours, Louis, is that we're not denying there are some incremental costs associated with implementing the capital gains exemption. The 52% is there for cash or for appreciated property. The government is incurring some incremental cost as a result of the forgone capital gains tax. That's a given. But the real issue here, and that's what we're all focusing on, is what can the government... Everybody agrees there's a need for more private sector giving to offset the impact of the necessary government spending reductions. I think most people agree that deficit reduction is what this country needs.

The question then becomes, what can the government do that is consistent with deficit reduction that will encourage major incremental giving, but without having a major impact on your tax revenues? As Jim Pitblado was saying, the only thing the government can realistically do is access this new category of donors who aren't giving now because they incur the capital gains tax if they give their assets. It's the only thing.

Look at all the proposals. They've been studied to death over the past several months. This is the one thing that can be done. So as Mr. Prichard says, it's a question of weighing the costs and the benefits. Sure there is a modest cost to your tax revenues, but what are the benefits? The benefits are huge.

If you take the United States experience, which is what we can go by, 11% of all the charitable giving in the United States comes from gifts of appreciated capital property. If we replicate the U.S. experience in Canada through this capital gains exemption, if 11% of the charitable giving in Canada is from appreciated capital property gifts, that would be somewhere between $400 million and $500 million a year.

I don't have any numbers as to how much of charitable giving in Canada currently is from gifts of appreciated capital property, but I suspect it's minuscule for the very reason we are talking about. So a large portion of the $400 million to $500 million of giving would be incremental. So there's the benefit to the universities, hospitals, welfare organizations and the arts, but what's the cost? The cost is based upon work Satya has done, and I have great respect for Satya's knowledge on this subject. He spent I think 15 years in the Department of Finance, so he comes by his knowledge very honourably.

.1745

The cost is $25 million, $65 million, even $100 million. I think his number was $25 million to $65 million. Let's compare the incremental $400 million to $500 million in contributions that go to our not-for-profit organizations against what the government is giving up in lost tax revenues. The benefits far outweigh the costs. It is that simple. That's the bottom line.

The Chairman: Thank you.

I have on my list Ms Whelan, Mr. Campbell, Mr. Laurin and Ms Chamberlain.

Ms Whelan (Essex - Windsor): Thank you, Mr. Peterson.

I have a philosophical question, I guess. We've talked a lot about the United States and what goes on in the United States, but we've glossed over what happens at the point of death in both Canada and the United States.

I come from a border community. There are a lot of articles in the American papers and magazines about death taxes in the United States. In Canada we have capital gains taxes upon death, but from my reading, death taxes in the United States are substantially more than the taxes you face in Canada upon death.

Correct me if I'm wrong, but there's a incentive in the United States to give before death, obviously for a lot of reasons. One reason is the tax on death. I'm not supposing that anyone here is suggesting that we change our system on death taxes in Canada.

Mr. Prichard: The Lieutenant Governor is our philosopher on the team. I don't know if he is in the position to respond.

Mr. Jackman: I'm not familiar with the death tax rate in the United States.

Mr. Johnson: Yes, I think they do have an additional incentive to give before dying in the United States. They do have state taxes, or death duties, whatever it's called. I believe it's around 55% or 56%.

We in Canada have deemed disposition on that, so in our case our provinces pay capital gains tax, and in their case it's death duties. They do have an additional reason to give, but I don't think the difference between deemed disposition on death...or if we take this extreme case of the zero cost base, someone dies with assets of zero cost base, 40% of the value of that deceased person's assets goes to the government in the form of capital gains taxes. In the United States, if that same person dies 56% goes to the government.

I don't think it's that material in the donor's decision about giving, between Canada and the U.S., if we implement this capital gains exemption here. It's between 40% and 56% 30 years from now - whatever.

Mr. Prichard: That's all correct, except I believe it leaves out the basic exemption. About $600,000 is exempt in the U.S., which means for a very large swath of taxpayers the comparison cuts the other way.

Your point, though, is one we perhaps should have more discussion with Satya about to see if we can send a supplementary letter on the point.

The Chairman: I think it would be very useful to compare the systems as organic wholes.

Mr. Prichard: You raise an important point.

Ms Whelan: I think we're talking today about taxpayers who are largely over that $600,000 exemption. I don't think we're talking about that group within there. We're talking about gifts of $400 million. These are substantial gifts. That's where I think we need to look at it. We make these comparisons with the United States, and I think it's important to understand the entire ramifications.

Mr. Prichard: I think you're right. We should take note and pursue it for the large-amount taxpayer at death.

We also need to take account of, with Satya's help - and maybe we could get some help from our sister institutions in the United States - tax planning devices available in both jurisdictions to put off that moment. My suspicion would be that in this same category you're speaking about there is a range of devices designed to defer or avoid those taxes, which need to be taken account of on a comparative basis before we can get a good fix on the comparison.

So I think we should simply take note of your question and offer to come back if we can produce some more information on your point.

Ms Whelan: Thank you.

Mr. Sherman: It might help if we could guarantee a long life to all donors.

Some hon. members: Oh, oh.

The Chairman: Barry, that will be your job.

Mr. Johnson: Everything for a price, Barry.

.1750

The Chairman: Mr. Campbell.

Mr. Campbell (St. Paul's): Thank you.

If I may, the example you look at might be the same Hewlett-Packard gift and what the impact would have been on their death as opposed to giving it the way they did. But I don't want to be cruel.

Mr. Chairman, a number of us around this table who have been members of this committee for three years now have been looking forward to the day when we'd have the kind of discussion we've been having today. As our guests will know, this committee under your leadership has been very active on this particular issue. I think we can take some credit for having an impact on last year's budget and continuing in the efforts we promised the sector we would undertake. It's a real credit to your leadership in this area.

I want to welcome you today, you who represent the best of Canadian business, public service, charitable giving and service. The discussion has been extremely interesting. I want to put a couple of things on the record. There may or may not be a question in here.

I don't want anybody to read the record here and get the impression from this discussion that the only motivation for giving is the tax treatment of those gifts. If that were the case, it would be hard to explain, as I look at Mr. Prichard here, the extraordinary gifts the University of Toronto has received in the last year in the absence of this particular provision. There are many motivations for giving, and it's hard to know exactly what people will do in response to the tax laws at any given point in time.

As I listened to this discussion about death and taxes I was thinking there was a reason, when I practised law before getting elected, I never wanted to be an estate lawyer. It was partly that I could never contemplate anyone else's death, let alone my own, and partly that I could never do the math on discounted values.

But I think we'll agree, at least this much, that it may not be $91 on every $100 but it's something north of $52. I think I heard an acknowledgement to that effect from Mr. Johnson earlier on.

We really don't know what that is. Some of you have said, look, the alternative is to sit on the stock and take it to the grave with you or do whatever else one can do on death with the stock. Equally, the alternative may be to sell it the next day. We don't know that. It's unclear. But it is useful to look at the questions we've been looking at.

I want to make the point, Mr. Chairman, that clearly the issue is really coming down to whether it is good public policy - or good deficit control policy, to pick up on the compliment we got for our efforts in reducing the deficit - to give more than $52 on $100 in tax assistance to support or encourage discretionary giving.

You've urged us - particularly Mr. Prichard, in a very passionate statement - to look at the benefit side. Senior civil servants with us today remind us always of the cost side. The challenge for this committee, and ultimately for the government, is to decide whether the cost is worth it. That's really the question, whether it is good public policy to do that. That's what we have to grapple with.

The U.S. comparison is an interesting one. It's instructive. We often hear U.S. comparisons here. People say we should look at tax rates in the U.S. because one might invest there as opposed to here. But out there are there donors who are going to give in the U.S. versus giving in Canada, or are we just looking at it for another experience? I don't imagine it's because the potential donors you're talking to have that option or that choice, although we ought to hear if they do.

Mr. Chairman, that was a bunch of disparate thoughts and observations. There wasn't really a question in there, but I invite any comment on anything I've said.

The Chairman: I'm sure you'll provoke a lot of comment, Mr. Campbell.

Mr. Prichard: There was a comment on giving to our universities. It is gratifying, and that's why I tried to pay tribute to Dr. Sherman and to His Honour.

However, the stark reality, Barry, is that despite the relatively substantial giving to the University of Toronto it is not competitive with the institutions we need to compete with. So relative to zero, yes, it's substantial, but relative -

Mr. Campbell: But are all those institutions the U.S. ones? As a donor, you've talked to them.

.1755

Mr. Prichard: Yes. We are competing for our faculty and our students not just in Canada but in North America, just as Mr. Pitblado, in leading the Hospital for Sick Children, is competing for physicians, scientists and clinicians from around the globe. And giving to his hospital, just like giving to the University of Toronto, has to be competitive with the best.

You had the privilege - and I applaud you for it - of attending great universities in both Canada and the United States. We have to compete with those universities and provide young Canadians with the opportunity here, because most of them, unlike you and me, don't have the opportunity to go elsewhere to study. We have to be able to say that we are competitive with the best opportunities for young people anywhere. We can't do it if we're not competitive, and we're not competitive in this.

So you're pointing to the success of the University of Toronto - and I appreciate the compliment to the university - but the harsh reality is that despite the tremendous increases, giving is at one-third the level of giving to the institution that's only 250 miles from the University of Toronto, another great public university, the University of Michigan. We can't compete at one-third. We have to compete head-to-head.

You say it's hard to know what people will do, given the multiple motivations for giving. The effect of the change we're proposing would be to increase giving. We can guess as to what the exact level of giving will be, but I don't think there should be any ambiguity in anybody's mind about the fact that there will be more giving. And the value of that giving, the benefit, will clearly exceed the cost. Whether it succeeds by enough is a fair question.

Here's my last point. The minister you work most closely with, Mr. Martin, always speaks of leverage. I'm talking about leveraging private sector resources to compliment public sector resources. I'm talking about partnership. This is what this is about. We're asking you to give us the tools to gain the leverage to ask private citizens of Canada, private citizens of substantial means, to share their means with public institutions for public purposes.

That has been the language of the government. That has been the language of deficit reduction as to how we're going to preserve our strengths as we go forward. Even as we restrain government expenditure, we will do it through leverage. We come forward proposing leverage of the only kind we know to increase the release of private wealth to public purposes. That's why we feel so strongly about it.

The Chairman: Thanks, Mr. Prichard. Mr. Pitblado.

Mr. Pitblado: I think the right framework has been posed. I believe passionately that it is a public policy issue. We can drive ourselves to distraction with old math, new math, examples of this and that, trying to work out discount rates, trying to figure out longevity tables and trying to figure out people's behaviour patterns.

It's a public policy issue. Governments across this country today have said they have to do less. I think most of us here would support that. The private sector has to be encouraged to do more. And I think one of the ways in which they can be encouraged to do more is to remove disincentive. And this is a significant disincentive. It's anti-competitive as well, because it undermines our position vis-à-vis the United States in so many of these crucial areas.

On a public policy basis, as I said in my opening statement, I think it's simple. That doesn't mean the solution is simple, but in my mind the issue is relatively simple to grapple with. It's a big picture, I think. It's cost-benefit analysis. Like anything else, if something proves to be too costly it can be shut down, hopefully not retroactively. But it can be shut down. That will encourage more private sector philanthropy. It will encourage a level playing field. I think those are public policy issues that make a great deal of sense.

The Chairman: Thank you. Mr. Sherman.

Mr. Sherman: It seems to me that the issue is how you encourage more giving at relatively little cost. It's true that it already costs the government 52¢ on the dollar when donations are given.

One alternative that one might consider to get more donations is to increase the level of tax credits, but I think you will find that it really wouldn't make a difference. If you gave a tax credit of 60¢ on the dollar, 70¢ on the dollar or 80¢ on the dollar, you wouldn't get that much leverage unless you made it 100¢ on the dollar, which obviously is impossible. It seems to me that increasing the level of deductibility for cash gifts is not going to get much bang for the buck for the government.

.1800

But to me this does appear to be a way to encourge very much larger gifts at a relatively lower cost. It seems to me if the objective is to get more donations given at relatively little increased cost to the government, this is the answer.

The Chairman: Thank you very much for a very articulate presentation on the issues.

Ms Campbell. Oh... Ms Chamberlain.

Mrs. Chamberlain: Good grief!

Some hon. members: Oh, oh!

Mr. Prichard: It's a Liberal-red blazer.

The Chairman: That was very stupid of me.

Mrs. Chamberlain: First of all, I want to say I agree 100% with what you've presented.

I'm a new member on the finance committee, so bear with me through my analogy. I tend to be like Mr. Sherman. I tend to come at things sometimes from a bit of a different direction.

I do agree that what you've outlined is a deterrent to giving. I don't think there's any question about it when somebody wants to bequeath property and ends up having to pay, for example, $40,000 to the government on a $100,000 piece of property. I agree with you when you say that if we could take that deterrent away people would give more. I agree 100% with what you've said.

Now here's where we kind of part company to a degree. Obviously the government right now feels - let's focus on Mr. Lévesque in our finance department - that we don't want to give up that money because we have a deficit and we have a real problem. We don't know what we're going to do, so we don't want to give up that money.

You talked about how most gifts are cashed out anyway, properties or stocks or whatever you might get. If it's cashed out, it obviously goes back into the economy and is workable again. That seems like a positive thing. Tell me, is there any possibility of looking at this? Can the laws be changed in any way?

You won't like this because this is a proposition that would be fifty-fifty, but I think it would be an improvement. If somebody said you could have property now and the person didn't have to pay that capital gains... if the organization had to pay the capital gains.... The deal would be that over a certain period of time - two years or whatever is deemed appropriate - that asset would have to be cashed out.

So if a Toronto hospital got a piece of property for $100,000 that was worth that and deemed that, your pay-out eventually would be $40,000 within whatever period would be deemed possible, two years, three years or whatever it would be. Is there any merit in looking at that? The government would still realize the dollars it feels it needs. Gift-giving would increase because the deterrent you've spoken about would be taken away, and the asset would be put back into the economy.

Mr. Jackman: You're transferring the tax burden from the donor to the charity.

Mrs. Chamberlain: Yes, I am.

Mr. Jackman: I suspect that -

Mrs. Chamberlain: But you're transferring it to the government.

Mr. Jackman: No.

Mrs. Chamberlain: Yes.

Mr. Jackman: If somebody gives $100,000 in cash, it comes off as income and the government effectively pays 54%. You can look at it this way: his taxable income goes down by $100,000 and he pays no tax on that amount. The government, as you say, pays 54%. If, on the other hand, I give $100,000 in shares, I would get the 54%. The finance department also says there's another 40% that you get, but the donor does not get it. You are withdrawing a penalty that he would otherwise pay. I keep saying that if you are giving the shares away, you have not realized any gain at all. The charity has the gain. Why should the donor pay?

If I give $100,000 in cash, I don't have to pay any capital gains tax on the $100,000. I don't have to pay any tax. If I give shares, I have to pay tax. From the donor's point of view, you are treating gifts of appreciated property worse than gifts of cash. There's inequality.

I do not think people should be taxed on their charitable spirit. And that's why I say, forgetting all the numbers, that this is a philosophical point. It's a matter of principle. People will not give if they're going to have to pay a 40% tax on their generosity.

.1805

Mrs. Chamberlain: With due respect, I agree with you. I agree with what you're saying.

Mr. Jackman: The problem with what you suggested is that I do not think it would be politically acceptable to put the tax on the charity. That's just my opinion, and it's not for me to say, but I don't think those of us who represent charities would necessarily support that.

Mr. Prichard: There is precedent, though, if I have it right, for a version of what you say in cases of appreciating art works that are given if they are resold within five years. A tax liability does attach to the institution. Your earlier comments are extraordinarily welcome, and your raising this I don't think is outside the box, because there is a provision where. That's to deal with abuses, where you say one thing is forever and then it turns out it's for less than five years.

The concern I would have is this. The benefactor comes to the Hospital for Sick Children and gives $2 million to create an endowed chair in pediatric neurosurgery. In the circumstances you're posing the hospital would also be liable for $800,000 of taxes. The reality is that means the hospital won't have the $2 million to put in the endowment for the chair. So in the discussion with the benefactor, the fact that it's going to be paid by the institution rather than by the benefactor might mitigate slightly the psychological effects His Honour was speaking about, but I don't think it would fool many people for very long.

We keep circling back to our view - I certainly don't mean it to be critical of government in any sense - that these are public purposes. The experience of an institution such as the University of Toronto is that what the taxpayers are doing for our institution through the Government of Ontario is going down every year, markedly. So already a withdrawal of public support is taking place as the government deals with its fiscal situation.

That instrument remains in the hands of government. The Government of Canada continues to control the levers of its expenditure directly, just as the provincial government does. If in their judgment over time they need to reduce expenditures, they do, and they will continue to do so, taking account of the full landscape.

So I think the reality is that deficit management will come through expenditure control rather than from charities beginning to pay taxes in lieu of benefactors paying taxes. I think it will come much more directly, with the government determining what it can afford from time to time, both federally and provincially. That's a reality we don't necessarily welcome, but it's a reality we accept and we live with, because of democracy. Rather than getting a complicated feedback scheme, it's better just for government to do directly what it will do in terms of funding and give us the tools to do what we can do in terms of private benefaction... and keep these special rules, such as a tax-back, as you're suggesting, for cases of abuse or major changes in intention, as in the case of the art example, where we already have the provision you speak of in place to take account of a change in circumstances.

The Chairman: Ms Brushett.

Mrs. Brushett: I do thank you for coming this afternoon. It has certainly been very interesting. It's something I've been involved with for several years now, particularly the comparison with the American experience and the regulations that are applied there.

However, when we look at the American experience, we haven't seen an alleviation in social welfare or in more access to education. Their problems in health care are certainly magnified and we can't see where that great charitable exemption has really benefited the populace at large.

As we look here in Canada, if we were to move into the exemption for appreciated capital property, then I guess a number somewhere greater than a 52% exemption but perhaps somewhere between 70% and 91%.... We've had Canadians come before us here at this round table and before the finance committee repeatedly, year after year, earning maybe $10,000, living on $10,000 a year, still giving to their churches and giving their donations very generously, very compassionately. We're looking at that lower end of the spectrum and still see very willing givers in this country. Yet here today, we have the other end of the spectrum - a small percentage of very wealthy Canadians who would ask for a 91% tax exemption. How could we sell to the public the philosophy of offering this kind of incentive to a very small portion of the population? Wouldn't that be a very difficult sell out there at this time?

.1810

Mr. Johnson: I think the government would be applauded for taking this initiative because it's very consistent with the federal government's policies of deficit reduction and no change in taxes. Things have to come from spending cuts.

We're concerned that our vital not-for-profit organizations are suffering. Many of them are facing a crisis because of the necessary cutback in government spending, and we are taking this initiative to unlock a completely new set of donors to give to our vital institutions and offset the impact of the government cutbacks.

Mrs. Brushett: Do you have any idea of the number of donors you're speaking of? You talk about one - Dr. Sherman in Ontario. How many donors would there be in this country in this class of wealth that you speak of?

Mr. Johnson: I believe this would have -

Mr. Pitblado: It would be related to the size of the institution. We happen to represent one of the large institutions, so our budgets are large, the requirements are large, our funding is large, and our donations are large.

When you look across the total society, we see a mix of institutions and providers, from small to large. This doesn't discriminate. In my view, donors from all sizes of incomes and tax brackets would be encouraged. Even in dealing with smaller donations to smaller institutions, it still would have the same impact and the same effect on a relative basis. I would say it isn't just going to be confined to a handful of people.

Mrs. Brushett: In the United States, as you say, less than 5% of the population are these types of donors. How many in Canada might be? We're talking of a very minimal number of Canadians.

Mr. Prichard: In terms of the large gifts, I think that figure of 5% is fair, but that's focusing on who would give the money. Your question began with the alleviaton of challenges - the question of beneficiary. You spoke of the American experience not being encouraging in this respect. Let me just take my cause, higher education, as an example.

It is the case that the United States has higher rates of participation and higher levels of quality in post-secondary education than we have been able to achieve in Canada. In terms of beneficiaries - and your colleague made this point earlier - the effect of this investment in human capital and the development of intellectual capital, in innovation and ideas, has been a huge instrument of economic opportunity -

Mrs. Brushett: I must interject here. In sitting on some boards with universities, I have been told that Canada is still very competitive in terms of the cost of education in this country when compared to the United States.

Mr. Prichard: On the cost of education, absolutely, yes.

Mrs. Brushett: It really doesn't benefit the students.

Mr. Prichard: I'm talking about the quality and the levels of participation. The levels of access are higher in the United States than in Canada; the percentage of people who attend post-secondary education is higher. The reality is being suffered from Victoria to Memorial, and the reality is that we are increasingly uncompetitive and are suffering an accelerating brain drain in Canada of the kind that we suffered 35 years ago. In my view, nothing could be more damaging to the future of young people in Canada than to permit this to continue.

Mrs. Brushett: To go back to my final point, what percentage of Canadians would be contributing, would be donors, at this level of wealth?

Mr. Pitblado: I can't tell you that number. I can tell you that at the Hospital for Sick Children we send out 150,000 tax receipts each year.

Mrs. Brushett: Yes, I agree, but many of them could be -

Mr. Pitblado: That's to individuals and companies. I can't tell you what percentage of those donors would give gifts of appreciated property if you made this change to the tax stream. I would say it would obviously be a relatively small number. Is it 50? Is it 500? Is it 1,000? I don't know.

.1815

Mrs. Brushett: I think the point is that probably everyone in this room is giving to our hospitals generously, to our churches, to our 4-H Clubs, and the list goes on and on. But when you talk about appreciated capital property, this is a whole new category of endowments and so forth, and I wonder just what the percentage of people would be. I think it would be very -

Mr. Prichard: One thing I can say about campaigns, be they for hospitals or for art galleries or for theatres or for universities, is that in a campaign - and our colleague Charlotte Sutherland is the expert on this - the general rule is that 10% of the donors will give 90% of the funds needed to complete the campaign. So it is the case that to achieve the public purpose, whether it's higher education or the hospital, requires a concentration of effort by those most able to give. So, yes, the majority of funds will come from those most able to give, but the beneficiary of those funds will be Canadians at large.

Mrs. Brushett: Well, I guess you've finally referred to this untapped resource of wealth. The point is what percentage of Canadians that consists of, as opposed to the millions who are giving daily in their smaller donations under the 17% and 29% taxable income exemptions.

Thank you, Mr. Chairman. That's fine.

The Chairman: Thank you, Mrs. Brushett.

[Translation]

Mr. Laurin.

Mr. Laurin: This debate is extremely interesting but I believe that we have now reached an impasse.

Members of Parliament, whether from the government or from the Opposition benches, are not trying to penalise organizations which benefit at the present time from those donations of corporations or of wealthy individuals. What we want most of all is to make sure that all forms of earned income be taxed appropriately.

Mr. Pitblado stated that he sends 100,000 tax receipts per year, and I am quite convinced that he needs that money. However, if all those who made donations had paid their fair share of taxes to the government, perhaps his hospital or some other organizations, such as Mr. Prichard's university, would not need those donations any more because the government would have had the money required to finance their activities.

In the end, we live in a system where you are obliged to come to the defence of those individuals who do not pay their taxes, or who do not pay them in full, because you are in a way the beneficiaries of that. You benefit from the system.

If I win a car tomorrow morning with some lottery ticket, I will get the car but I will have to pay the sales tax and the GST on top of that. I will have to pay both taxes. Therefore, I will receive a gift that is not fully free. If I win a $20,000 car, I will have to pay 15% taxes so, in order to receive some $20,000 car, I will have to pay $3,000 cash to the government.

Why would it not be the same when a charity organization receives property or shares through a donation? If I give you tomorrow morning a donation of $100,000 worth of shares that only cost me $20,000 a few years ago, it is obvious that I will not want to pay taxes on the $80,000 difference. Why would it not be the same for you? Since you are the one receiving the donation and the $80,000 increase in value of the shares, why should you not have to pay the tax that would have been paid by the owner of the shares if he had just sold them on the market?

That would seem to me to be fair and reasonable. Otherwise, you end up allowing for some income to change location and ownership without being taxed. Moreover, one has to recognize that the donor does not act purely because he is generous but rather because he has some financial advantage in it, since it is less costly for him to make the donation than to pay taxes to the government.

Therefore, the difference or the tax loss incurred by the government has to be paid by someone else, which means by small taxpayers who pay their income tax through a TP4 or a T4. Those are the people who end up paying the difference.

.1820

We, on the Opposition benches, believe that all citizens, whether they be individuals or corporations, should be taxed in the same manner. Everyone has to pay his fair share of taxes.

I don't see why such a system would penalise you. However, I would agree with getting rid of the competition. If the taxation system allows a businessman or a corporation to deduct only 50% of the cost of a business meal, while giving you a 75% tax relief for a donation, you will get an advantage.

So, instead of buying baseball tickets, hockey tickets or business dinners, our businessman is going to make donations to charity organizations such as hospitals and universities. But when everyone is put on a level playing field by the tax system, that is to say when everybody gets the same tax relief for any type of eligible expenditure, I believe that the corporation will prefer giving $100,000 to some charity organization because that donation will be very visible, and that will be advantageous to the corporation.

Therefore, it seems to me that it should be quite possible to find some method that would allow the government to get its fair share of taxes without you being penalised in any way.

The Chairman: Who would like to answer Mr. Laurin?

[English]

Mr. Johnson: I'm not sure this is a direct response, but just a couple of things.

First, I understand the finance department's concern about any loss of potential tax revenues, because that's their job.

Second, to follow up on what Barry Sherman said about cash gifts, people can give either cash or assets. People are giving cash gifts to the maximum extent of their ability and their interest, and no one is denying that. Everybody is giving as much as they can afford to give and are interested in giving. So changing the tax treatment of cash gifts is not going to get us anywhere in terms of material incremental donations and it's going to cost the government a fortune in lost tax revenues. That's a non-starter, in general terms.

So we have two choices: the status quo, which means do nothing.... If we do nothing, what's going to happen to our leading universities, hospitals, arts organizations, and social service organizations? What's going to happen as a result of the government cutbacks? They are going to deteriorate.

The status quo is not acceptable. So what can we do that deals with the concern about lost tax revenues but results in major incremental giving? One thing can be done: the capital gains exemption. There will be gifts of assets and the government would be applauded for. Everybody across the country benefits. Millions of people benefit: universities, people who use hospitals, arts organizations, etc.

The Chairman: Mr. Grubel gets the last word.

Mr. Grubel: I have a thought experiment I would like to share with you. I believe it embodies the essence of your proposal. Consider a world in which charities have fulfilled certain needs with respect to higher education and charity for the poor but the government has stepped in and topped this up to such an extent as to get the optimum welfare in that ideal society I've just described.

Now consider the change you're suggesting has been introduced. The government loses revenue, but at the same time the private charities are meeting some of the needs the government now no longer has to meet. In other words, you would get a shift of meeting the responsibility in the higher education sector and in the charity sector directly by individuals donating in this way and the government can move out by the full amount of that money. Therefore while it loses revenue, it will also lose the obligation to pay.

That is what I would prefer: a country with that kind of pattern, as you proposed, rather the one we have at the moment.

The Chairman: Are any of our witnesses in disagreement? All in favour?

Mr. Campbell: I just want to clarify if Mr. Grubel was suggesting that there be further government cutbacks, dollar for dollar. Was that what he was suggesting?

The Chairman: Except to health.

.1825

Mr. Grubel: Abstract from the current fiscal crisis. If we did this the government would lose revenue, but it would also lose the obligation to meet some of the needs of the needy people, an obligation that is then taken over by the private sector.

Mr. Prichard: But the reality is that's not the world Canada faces. The world Canada faces at present is substantial withdrawal by government, federally and provincially, from the provision of terribly important public services, and the men and women... not myself; I'm paid to do my job. The other people who appear with me are volunteers who give their life, give their time, give their energy, give their money, to try to do the best by Canada. We're simply saying please unleash Canadians who are prepared to volunteer in this way to make up the difference at a time that's very difficult for Canada in preserving a distinctive kind of Canada. I think that's a reasonable plea from people who give their lives, give their money, give their sweat, toil, blood, and tears.

The Chairman: Mr. Lévesque, Ms Brickman, before we close off, would you like to add anything?

Ms Lucy Brickman (Department of Finance): No.

The Chairman: I'm sorry, we have to cut this off.

When I look across the table, I see people who represent education, the arts, health. I see people who are philanthropists, who are involved in volunteerism. It is probably the one string to our bows we have left as we have withdrawn from government funding of so many things, out of necessity. You have come to us today with a very concrete suggestion, a suggestion Don Johnson has really been spearheading for a long, long time.

This is the second time you've appeared before us, Mr. Johnson. Last year I guess we got a bit closer to the goal, but not all the way, and you have come back. You've done further studies for us and we've asked the Department of Finance to participate in this.

Just a couple of thoughts that have come out of today's hearings.... I think it would be useful if we could work together to reconstruct the U.S. system as a whole and place it on top of the Canadian so we can have some more just comparisons. It might be impossible, but we should at least try.

One thing that struck me was that people were wondering whether there would actually be an increase in giving with these tax incentives. Well, if there is no increase in giving it will certainly not have any tax cost attached to it.

On the issue of crown status, would this put us closer to those charities which do enjoy crown status today, where there is a 100% government contribution for the gift that is made? Of course there is a totally other solution which has not been touched on today, and that of course is that we work to clone people such as His Honour and Barry Sherman.

Barry, I think that's your next R and D project.

Mr. Sherman: I'm working on it.

The Chairman: I would like to suggest we probably have some more work to do. I know the Department of Finance would be happy to work with whomever you might designate from your group to look further at this, to see if there are models we can agree on, if there are ways we can work this out so there can be some consensus so we're not arguing about the wrong things.

In conclusion, I would like to thank you not only for being with us today but for the incredibly important role each one of you sitting across from us plays in the lives of all Canadians. Thank you very much.

The meeting is adjourned.

Return to Committee Home Page