I just finished reading an excellent paper entitled Cross-Border Philanthropy – A U.S. Perspective by Eric Zolt.   It both provides a good summary of the rationale for donation tax incentives but also raises questions of whether the US system is too heavily slanted in favour of some wealthy donors.  He also looks at international philanthropy from the US and questions whether international and domestic charity should be treated similarly. While some of the issues are different in the US, there is also a lot of similarity with Canada.

 

Here is the abstract:

Abstract

Americans lead the world in supporting charitable activities (both in the U.S. and abroad). For foreign charitable activities, two key questions arise:

1. Should tax benefits support charitable activities outside the U.S.?
2. Should the U.S. tax system treat contributions to foreign charities differently from contributions to domestic charities?

U.S. tax law imposes remarkably low barriers to cross-border philanthropy. Contributions to U.S. charities are deductible even if all charitable activity takes place outside the U.S. Nominally, direct contributions to foreign charities are generally not deductible for income tax purposes. Practically, donors can easily work around this restriction (at relatively low costs and complexity) by transmuting non-deductible contributions to foreign charities into deductible contributions to domestic charities.

The hard question is normative: what should the law be? This chapter provides a framework for examining the desirability of the current regime and the different factors policy-makers may find useful in considering options to either reduce or increase barriers to cross-border philanthropy.

Keywords: charitable contributions, tax-exempt organizations, philanthropy, cross-border charitable giving, tax reform

 

Mr Zolt notes:

 

“Because the beneficiaries of tax subsidies vary greatly by income level, tax subsidies are going disproportionately to charities supported by the wealthy rather than charities favored by those at the bottom and middle of the income distribution. For all charitable giving, no more than one-third of the contributions are made to organizations that assist the poor. In contrast, for donors with income greater than $1 million, the share going to organizations that assist the poor is no more than one-fifth of total contributions.”

Zolt has an interesting chart on page 23 showing which quintile benefits from charitable donations:

“Given how the current U.S. tax regime “matches” charitable contributions, it is not surprising that the top quintile captures almost all of the tax benefits, with over half going to the top 1%. ”

 

 

As some are proposing dramatic changes to the regulation of foreign activities from Canada it will increase the debate around how and whether those activities should receive preferential tax treatment.  Should all 252 categories of charities receive the exact same treatment?  Should grants to the over 200 countries around the world all be treated the same?

It will also raise the issue of whether the regulation should primarily be under the Income Tax Act or rather through anti-money laundering and terrorist financing as at least one lawyer has suggested.   As we read about more scandals involving large charities doing foreign activities, it also raises the spectre of whether we need an ombudsperson or other oversight mechanism specifically formulated to monitor charities operating outside of Canada.  I guess the alternative is we can just allow the charities that allow their employees or agents or contractors to abuse people to continue doing so and hope that the police in foreign countries will be able to do something about it.