Topics: What's New from the Charities Directorate of CRA, Canadian Charity Law, Receipting by Canadian Registered Charities, Planned Giving and Canadian Charities, Canadian Charity Statistics, CharityData.ca
The Department of Finance has released the 2018 Report on Federal Tax Expenditures. The document is over 300 pages and discusses the financial costs of certain Canadian tax measures including donation tax incentives. These costs are referred to as "tax expenditures". On page 287 there is an extensive discussion of the tax assistance for publicly listed securities or marketable securities under the heading "Evaluation of the Non-Taxation of Capital Gains on Donations of Publicly Listed Securities". Anyone interested in the topic of donating appreciable marketable security to charities will find the discussion interesting.
The tax subsidy for donating appreciated marketable securities has been significant - not only does the donor get the normal significant tax credit for donating to a charity but they also they have the complete elimination of any capital gain on the increase in value of the shares. The Finance report includes the history of the measure and the effectiveness, equity and efficiency of that measure. The Finance findings are that it probably increases donations to the charity sector, but it is hard to say if people would have donated cash instead but are just giving marketable securities because they get a greater tax benefit. "Very few studies have considered this issue, but a U.S. study by Eaton and Milkman (2004) concluded that there is a substantial elasticity of substitution between cash and noncash gifts among donors, i.e., that donors will adjust the type of gift made according to the relative after-tax price. If donors simply substitute donations of securities for cash donations while maintaining a constant amount of contributions, this would result in a higher tax expenditure, and would not increase the aggregate level of donations."
The report notes that with individuals "between 2001 and 2015, gifts of securities grew from 1.9% to 6.7% as a share of claimed donations." So over that period a greater amount of the share of claimed donations were gifts of marketable securities. Keep in mind that only about only about 9B of individual donations and 3B of corporate donations are claimed even though charities issued receipts around $16B. So about $4B of donation receipts by Canadians are not even claimed. Needless to say, people who donate marketable securities will always be claiming their donation!
"Between 2001 and 2015, donations of securities totalled $6.06 billion." This is from individuals and seems quite impressive, however, to give some context the charity sector over that 15 year period had revenue of $2.6 Trillion, much of which comes from government funding. If the sector had used as much energy to push for more government funds as opposed to these incentives I am going to guess the sector would have received about $100B - 200B more in funding over that 15 year period. That is not in the report and yes I made that calculation on a post-it note which was thrown away and I cannot find it!
The number of repeat and new donors who give listed marketable securities is small. About 3500 repeat donors and 1500 new donors per year. So about 5000 donors per year (out of 5.6m donors in total) receive benefits from these special tax incentives for donating marketable securities.
The report notes "Meanwhile, repeat donors who first donated in 2006 or later typically increase their gifts of securities at the expense of other forms of contributions." From the report, it is not clear whether the additional cost of the tax incentive even equals the additional funds received by charities with the significant substitution effect. Part of the problem is also that the cost of provincial tax deductions is not included in the analysis.
It also appears that corporations use this incentive far more than wealthy individuals to reduce their taxes. Corporations over the 15 year period gave $6.43B. So corporations gave more marketable securities and seeing as corporations give a lot less than individuals the utilization of the marketable securities is much greater. But if you have 100,000 corporations making donations in a year it is only about 6000 donating marketable securities in a year. Corporations with revenue over $10m per year received 71% of the exempted capital gains.
I love the footnote "It should be noted, however, that the negative values in the final row of Table 8 are largely driven by a single donor. If this observation were omitted, the mean change in the gain on PLS donations would turn positive, and the mean change in overall donations and other donations would be closer to zero." So yes if you took out 1 or 2 or 5 donors the numbers would look very different!
I am pleased that Finance "Excludes donations made as part of a tax shelter arrangement". Now if we can only get Stats Canada to do that.
Finance is reluctant to say that the beneficiary transfers go to reduce income inequality. "This paper does not consider the wealth transfer effects of the donated funds, including impacts on overall income and wealth distributions. These effects are a source of important debate in the literature on charitable donations. Reduced capital gains taxation on PLS could have an inequality-reducing impact if it results in: (a) increased donations, and (b) donations that are well-targeted towards lower-income individuals. In Section 3.2, some evidence of the first criterion being met was presented. The second criterion, however, is difficult to measure using available charitable return data. A major reason for this, as discussed in Section 3.4 below, is the majority (and perhaps upwards of 90% in some years) of donations of PLS pass through foundations. Unfortunately, data are not readily available on the extent to which funds disbursed by foundations tangibly benefit low-income households. For this reason, it would be difficult to estimate wealth transfers from high-income to low-income individuals by tracing the path of donations of PLS." Clearly these donations are not well targetted toward lower income individuals - in fact the opposite is probably true.
It is quite clear that the vast majority of marketable security donors are over 65 and in terms of donated securities have incomes over $1m in that year. "In fact, 62.3% of the value was accounted for by individuals with taxable income exceeding $1,000,000." according to the report. It is 58% male and 41% female donors using this method and the value is 68% male and 32% female. I guess there is no gender parity when it comes to this particular incentive. Justin what are you going to do about it.
Now enough talking about the donors. Which charities received these gifts? It is not so clear-cut because the information on gift in kind receipted donations by charities in the T3010 Registered Charity Information Return is not broken down by each category but charities select which types of gift in kind they received and the total value of gift in kinds in a year. See Schedule 5 of the T3010 and as you can see my our Blumbergs Canadian Charity Sector Snapshot (not cited in the Finance report!) receipting for marketable securities is a common form of receipted gift in kind.
We do know "In 2015, approximately two-thirds of the value of these gifts was received by charities with annual revenue exceeding $10 million. Moreover, the median donation received by charities of this size was eight times larger than the overall median. By comparison, charities with revenue no greater than $250,000 received roughly 1% of the value of gifts of PLS." If you are interested in funding the core charity sector (non-university, non-hospitals etc) and smaller charities this incentive may do little.
The report notes "To summarize, the results presented show that the associated tax assistance has benefited a narrow subset of taxpayers, whether individual or corporate, and that the donated securities are largely directed to charities with high annual revenue." According to the estimates between 63-80% of the funds are going to public and private foundations (which make up 12% of charities) and an even smaller subset of them is really benefitting. However, as the report notes it is hard to then disaggregate what happens once it hits those foundations.
Another concern is that much of the money goes to foundations who largely sit on the funds - it may take decades or longer for it to get to operating charities. "Apart from the fiscal cost, another efficiency consideration is in respect of the supply chain linking donations to their ultimate beneficiaries. A supply chain will be less efficient where there are more intermediary steps before funds arrive at the program delivery destination. As demonstrated in the latter part of this section, this is a salient concern because it is foundations—which operate differently from charitable organizations—that ultimately receive most donations of PLS."
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.