Archived Tax Expenditures and Evaluations 2002 : 5

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Special Federal Tax Assistance for Charitable Donations of Publicly Traded Securities

Executive Summary

Background

This report summarizes the results of the measure that provides special income tax assistance for donations of publicly traded securities to public charities. Under this measure, which was introduced on a temporary basis in 1997, individuals and corporations donating publicly traded securities to public charities include in income for tax purposes only one-half the amount of capital gains realized on the donation that they would include for other capital gains. This measure was to be continued only if it was found effective in both increasing donations and distributing the additional donations fairly among charities. The measure was made permanent in 2001. This report is based on donations of publicly traded securities claimed on income tax returns during the first four years of the measure, that is, 1997 to 2000.

Impact of the Measure

Donations of Publicly Traded Securities Have Increased Substantially

Gifts of publicly traded securities grew almost threefold between 1997 and 2000. The growth in donations of securities was much more rapid than the increase in total donations over this period.

Gifts of Securities Have Benefited a Broad Range of Charities

The data indicate that donations of securities from 1997 to 2000 benefited charities that are widely distributed in terms of size, sector and type (that is, charitable organization or public foundation). However, the main beneficiaries were larger charities, charities in the education sector and public foundations.

Cost

Under an assumption that all donations of publicly traded securities arose as a result of the half inclusion rate measure, the annual cost of the measure to the federal government in forgone revenue grew from $26 million in 1997 to $73 million in 2000.

Data Limitations

This report is based on data for donations by individuals for the period 1997 to 2000; data on donations by corporations are not included. Unfortunately, data on donations of securities prior to 1997 are not available. For this study it was not possible to isolate the influence of the half inclusion rate measure on donations from that of other relevant factors, including other policy changes to encourage charitable giving. As well, the results presented here were undoubtedly influenced positively by the evolution of financial markets during the 1997-2000 period.

Introduction

On October 12, 2001, the federal government announced its intention to recommend to Parliament that the reduced capital gains inclusion rate for eligible gifts of publicly traded securities to public charities be made permanent.1 Legislation reflecting that recommendation (contained in Bill C-49, An Act to implement certain provisions of the budget tabled in Parliament on December 10, 2001) was enacted by Parliament in March 2002. This measure was introduced in the 1997 budget for a period of five years, and was to be continued only if it was found effective in both increasing donations and distributing the additional donations fairly among charities. This report reviews the experience with this tax incentive.

The Half Inclusion Rate Measure

In the 1990s the Government introduced a series of tax measures to encourage Canadians to increase donations to charities (Appendix 1). One of the most notable of these was the half inclusion rate measure for donations of publicly traded securities. Under this measure, individuals and corporations donating publicly traded securities to public charities include in income for tax purposes only one-half the amount of capital gains realized on the donation that they would include for other capital gains. The charitable donations credit already provided a significant tax incentive for all donations including cash, and is generous both in relation to other credits in the Canadian tax system and in relation to the treatment of cash donations in the United States. However, a number of observers from the charitable sector noted that there were fewer large transfers of financial capital in Canada. It was observed that donations of publicly traded securities were treated more generously in the United States, and that enhanced tax assistance in Canada for this type of donation would likely have the largest impact on overall donations to charities.

The effect of the half inclusion rate measure on the amount of tax assistance for donations of publicly traded securities is illustrated in Table 1. Donations of publicly traded securities, like donations of cash, are eligible for a non-refundable charitable donations tax credit (or, for corporations, a tax deduction). In the example, it is assumed that the top federal-provincial tax credit rate is 46%, so that on a $100 donation the value of this credit is $46. Since the 1997 budget individuals and corporations donating publicly traded securities to public charities include in income for tax purposes, with respect to any capital gains on those securities, only one-half of the amount included for other capital gains. Under the assumptions used in the table, this results in an additional tax saving of $7 when a $100 gift is made in the form of securities rather than cash.

Table 1
Tax Assistance for Charitable Donations by Individuals of Cash
Compared to Donations of Publicly Traded Securities (Numerical Example)


Type of donation
  Cash Publicly traded securities donated to public charities

Fair market value of donation $100 $100
Top marginal tax ratea 46% 46%
A Value of charitable donations credit $46 $46
Typical cost base of securityb $40
Capital gain on security $60
Capital gains tax if sold but not donatedc $14
B Tax saved due to half inclusion rate $7
Total tax assistance (A+B) $46 $53
Cost of donation to donor $54 $47

a Assumes a typical combined federal-provincial tax rate; rates vary by province.
b Represents the cost at which the security was acquired, including all costs associated with the acquisition. The $40 amount is illustrative only.
c As the capital gains inclusion rate is now 50%, with a top marginal tax rate of 46% the effective capital gains tax rate on cashed securities is 23%.

Data Available

This assessment of the half inclusion rate measure is based on data on gifts of publicly traded securities obtained by the Canada Customs and Revenue Agency (CCRA) from income tax returns for 1997 to 2000. Data used in the analysis were those available as of August 2001. These data have the significant advantage of relying on actual donations claimed for tax purposes. However, several limitations must be noted.

Due to the lack of data on corporate donors, this report focuses only on donations by individual taxpayers. As well, donations made during the period but carried forward beyond tax year 2000 have not been included in the analysis;2 similarly, donations pledged but not made and claimed are also not included. Comparisons could not be made with the level of securities donated prior to introduction of the measure, as data on gifts of securities were not collected prior to 1997. Finally, data available for tax year 2000 also include donations of ecologically sensitive land, which since 2000 have benefited from the reduced inclusion rate for capital gains.3

Impact of the Measure

Donations of Publicly Traded Securities Have Increased Substantially

Between 1997 and 2000 the value of publicly traded securities donated to eligible registered charities nearly tripled – rising from $69.1 million to $200.3 million. Over this period the number of donors of securities rose nearly five times from 500 to almost 2,400.

As shown in Table 2, the growth in gifts of securities was much faster than the growth in total donations. While publicly traded securities make up a small proportion of total gifts to charities, their share of total donations is estimated to have more than doubled (rising from 1.6% to 3.9%) between 1997 and 2000.

Table 2
Gifts of Publicly Traded Securities in Relation to Total Gifts


Tax year Total gifts
Gifts of publicly traded securities to public charities
Securities as % of total donations
Amount Growth Amount Growth

($ millions) (%) ($ millions) (%) (%)
1997 $4,316 $69.1 1.6
1998 $4,753 10.1 $83.3 20.6 1.8
1999 $4,946 4.1 $135.7 62.9 2.7
2000a $5,076 2.6 $200.3 47.6 3.9
Cumulative 18 190

a Total receipted donations are estimated by the Department of Finance’s T1 tax simulation model using sample T1 income tax data provided by the CCRA. The 2000 figure is a projection.
Gifts of Securities Have Benefited a Broad Range of Charities

Donations of publicly traded securities have benefited a wide variety of charities. Beneficiaries included organizations of various sizes, in different sectors and regions, and with different charitable designations.

Distribution by Size of Charity

Charities of all sizes have benefited from donations of publicly traded securities (Table 3). However, large and medium-sized charities received a larger share of donations of securities than their share of total receipted gifts in 1997 (the only year for which detailed information on receipted gifts is available).

Nevertheless, total donations of securities going to small and micro charities combined increased significantly between 1997 and 2000. This is partly because, over this period, the value of the average gift of securities to small and micro charities increased. The average value of gifts of securities to micro charities rose from $18,000 in 1997 to $34,000 in 2000.

Table 3
Gifts of Publicly Traded Securities by Size of Charity


Distribution (%)
Gifts of securities to public charities
All charities, 1997a
Size of charityb 1997 1998 1999 2000 Four-year average Total receipted gifts Number of charities

Large 56.4 51.7 67.6 30.4 48.8 36.0 1.5
Medium 29.2 27.9 14.5 50.5 32.7 28.4 6.6
Small 11.1 15.7 7.2 15.7 12.3 27.8 30.4
Micro 3.3 4.6 10.7 3.4 6.1 7.8 61.5
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Numbers may not add to 100% due to rounding.
a From the T3010 tax return, which all charities are required to file with the CCRA (the Registered Charity Information Return).
b The size of a charity is measured in this report by the dollar value of its total receipts in 1997, the last year for which detailed tax return data are available. Size classification by total receipts is as follows: large charities, $10 million and over; medium-sized charities, $1 million to $10 million; small charities, $100,000 to $1 million; and micro charities, less than $100,000.

Distribution by Sector

Charities in all sectors have received donations of securities. Over 1997 to 2000 charities in the education sector received the largest portion of such gifts (43%), followed by charities in the welfare (25%) and health (13%) sectors. As Table 4 shows, the education sector’s share of donations of securities was far above its share of total receipted gifts.

Table 4
Gifts of Publicly Traded Securities by Charitable Sector


Distribution (%)
Gifts of securities to public charities
All charities, 1997
Sectora 1997 1998 1999 2000 Four-year average Total receipted gifts Number of charities

Benefits to the community 6.8 7.3 4.4 6.8 6.0 5.8 15.9
Education 42.2 42.0 65.0 25.4 42.9 15.8 17.0
Health 8.5 22.0 15.5 9.3 13.2 12.4 7.6
Religion 11.9 12.8 6.8 16.2 12.1 45.4 38.7
Welfare 30.5 15.2 8.4 41.9 25.4 19.7 18.6
Other 0.1 0.7 0.0 0.5 0.3 0.9 2.2
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Numbers may not add to 100% due to rounding.
a The "benefits to the community" sector includes charities such as community foundations and art galleries, while the welfare sector includes organizations that provide assistance to economically disadvantaged people.

Distribution by Designation of Recipient Charity

Both charitable organizations and public foundations received gifts of publicly traded securities over the four-year period. However, although public foundations received 15% of total donations in 1997, they received almost 60% of the value of donations of securities (see Table 5).

Public foundations and charitable organizations are similarly distributed in terms of size and sector, so these factors cannot account for the greater donations of securities to public foundations. The data also suggest that the size of donations made only a small contribution to the results: the average value of listed securities donated to public foundations was $47,400, while that to charitable organizations was $43,300.

Table 5
Gifts of Publicly Traded Securities by Designation of Charity


Distribution (%)
Gifts of securities to public charities
All charities, 1997
Designation 1997 1998 1999 2000 Four-year average Total receipted gifts Number of charities

Public foundations 56.0 51.0 65.7 54.0 57.8 15.0 5.6
Charitable organizations 44.0 49.0 34.3 46.0 42.2 85.0 94.4
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Overall Tax Assistance for Donations of Securities Compared to U.S. Treatment

The half inclusion rate measure effectively makes overall tax assistance for donations to public charities of listed securities in Canada roughly similar to what is available in the United States. This point is illustrated in Table 6.

In comparing the U.S. and Canadian systems, it is necessary to take into account a number of differences in the tax structure in the two countries. In the U.S. the federal government applies different inclusion rates to capital gains depending on the length of the holding period and the type of asset. In the U.S. gains on assets held for one year or less are treated as regular income. If the asset is held for more than one year, the capital gains inclusion rate is reduced to zero on donations of publicly listed securities. However, what matters for donors and charities is the total level of tax assistance on donations. Taking into account the charitable donations credit (in the U.S., a deduction) and other relevant factors such as net income limits and clawbacks on tax assistance, the Canadian and U.S. regimes produce roughly similar results.

Table 6
Tax Treatment of Gifts of Securities to Public Charities
in Canada and the U.S.


Canada (2001) U.S. (2001)b U.S. (2006)b

Fair market value of donation $100 $100 $100
Top marginal tax ratea 46% 44% 40%
A Value of donations tax credit/deduction $46 $44 $40
Typical cost base of security $40 $40 $40
B Capital gains on security $60 $60 $60
Maximum statutory capital gains inclusion rate 50% 100% 100%
C Effective capital gains tax ratec 23% 25% 23%
Capital gains tax if sold but not donated (= B x C) $14 $15e $14e
D Additional tax assistance for gifts of securities $7d $15f $14f
Total tax assistance (A+D) $53 $59 $54
Possible constraints on claiming tax assistance:
  Net income limit  (typical) 75% 30% 30%
  Clawback of charitable
  deduction or credit
None 3% of income over $133,000 U.S., up to 80% of deduction Clawback begins to phase out

a

Assumes a typical federal-provincial tax rate, with a typical U.S. state tax rate of 5%. U.S. state tax rates on capital gains range from 0 to 12%. Note that the figures for 2001 differ from those published in the 1997 budget due to recent reductions in tax rates in Canada and the U.S.
b Reflects the Economic Growth and Tax Relief Reconciliation Act of 2001.
c The effective capital gains tax rate is equal to the top marginal tax rate times the statutory capital gains inclusion rate. The U.S. has a separate capital gains tax rate regime – gains on assets held for one year or less are treated as regular income, while gains on assets held for more than one year are subject to a 20% rate, and in 2006, an 18% rate if held for five years or more. There is no tax assistance on capital gains arising from donations of short-term assets.
d Only 50% of the usual capital gains are included in income for capital gains arising from donations of publicly listed securities.
e In the U.S. tax assistance for donations of short-term assets would be 44% in 2001 and 40% in 2006.
f Capital gains on business assets held for one year or less and non-business assets held for less than three years are taxed like ordinary income.

As noted in Table 6, the typical value of the charitable donations credit or deduction is similar in Canada and the U.S. (46% vs. 44%). When current capital gains rates are taken into account, the level of tax assistance differs by about 6 points (53% in Canada, 59% in the U.S.). However, claims in respect of relatively large donations may be constrained by annual income limits, which may require donors to carry forward a portion of their tax assistance to a future year. In Canada this limit is usually 75%, whereas in the U.S. it is typically only 30% of income. In addition, the charitable deduction in the U.S. is reduced by 3% of "adjusted gross income" (income from most sources minus certain deductions), up to a limit of 80% of the value of the deduction, when the donor has adjusted gross income over $133,000 U.S. Canada has no such reduction in tax assistance. The overall effect of these constraints is to reduce the effective rate of tax assistance for larger donations in the U.S. All things considered, therefore, tax assistance for donations of listed securities to public charities is roughly similar in Canada and the U.S.

Cost

The tax expenditure cost to the federal government of the half inclusion rate measure has two components: the revenue forgone as a result of the reduced inclusion rate and the increased cost of the charitable donations credit from any increase in donations that result from the measure. As indicated in Table 7, if all donations of listed securities came about as a result of the 1997 budget measure, and if in the absence of the measure the securities would have been sold instead of donated, then the cost of the measure rose from $26 million in 1997 to $73 million in 2000. If, on the other hand, these donations – whether in cash or shares – would have been made in the absence of the measure, the total cost rose from $6 million to $15 million over the same period. Actual costs would be between these two ends of the spectrum.

These figures do not include the cost to provincial governments, which have similar credits for charitable donations. On average, for every dollar of federal assistance, there would be almost $0.50 of provincial assistance. In 2000, for example, the combined federal-provincial cost, at the high end of the spectrum, would be about $105 million.

Table 7
Tax Expenditure Cost of the Half Inclusion Rate Measure


Component of cost 1997 1998 1999 2000 Total

($ millions)
Reduction in tax on capital gains 6 6 13 15 40
Increased use of the charitable donations credita 20 24 39 58 141
Total cost 26 30 52 73 181

a Assumes all donations of listed securities came about as a result of the 1997 budget measure.

It should be noted that, consistent with the standard methodology and presentation, only the cost directly attributable to the reduced inclusion of capital gains by the donor is shown separately in the annual tax expenditure tables (Part 1 of this publication). The total cost of the measure is the sum of that amount and the amount that represents the increased use of the charitable donations credit that resulted from new donations.

Assessment and Conclusion

This report reviews the experience with the capital gains half inclusion rate measure that was introduced in the 1997 budget. At that time the Government stated its intention to continue the measure in five years only if it was effective in increasing donations and distributing the additional donations fairly among charities.

Available data indicate that there has indeed been significant growth in the value of gifts of publicly traded securities. From 1997 to 2000 donations of securities almost tripled, a significantly faster rate of growth than that of other types of donations. These gifts benefited charities that are widely distributed in terms of size, sector and charitable designation – a finding that is consistent with the results of a study commissioned by the voluntary sector.4  Larger charities, charities in the education sector and public foundations benefited proportionately more.

With available data and the relatively short time period the measure has been in place, it was not possible to isolate the influence of the half inclusion rate measure from that of other factors that may have affected donations of securities over 1997 to 2000. Strong economic conditions and positive financial market performances over this period may have stimulated more donations, and larger donations, than could be expected over an entire economic and market cycle. Nevertheless, donations may increase somewhat as the measure becomes better known to potential donors, and smaller charities market it more actively.

An additional factor complicating an assessment of the success of the measure was the impact of other recent tax changes affecting charities, including changes to net income limits and the rules regarding donations of ecologically sensitive land. Furthermore, given the short time period and the absence of data on donations of securities prior to 1997, it is difficult to assess the extent to which individuals who would otherwise have made cash donations may have switched to donations of listed securities.

The introduction of the half inclusion rate measure was prompted, in part, by comparison of the Canadian approach with the U.S. tax system. Since 1997 the reduction of the income inclusion rate for capital gains in Canada has resulted in overall tax assistance that is roughly similar to that in the U.S. for donations to public charities of publicly listed securities held for more than one year.

The Government has stated its intention to continue to work with the charitable sector to determine whether there is an appropriate and cost-effective basis for broadening this measure beyond its current application.


Appendix 1 – Tax Assistance for Charities and Public Institutions

1994

1995

1996

1997

1998

2000

2001


Appendix 2 – Tax Assistance to Registered Charities

The federal government provides tax assistance to registered charities through three vehicles: the charitable donations credit/deduction, their tax-exempt status and partial rebates of the GST. The immediate benefits that charities derive from these three forms of tax assistance are an increased ability to attract donations, no requirement to pay tax on the proceeds from related business activities, and lower operating costs.

From 1994 to 2001 the federal government introduced a number of measures that increased direct and indirect tax assistance to registered charities. For example, in 1994 it lowered the threshold at which charitable donations begin to earn the 29% tax credit from $250 to $200. In 1996 it increased the net income limit for donations from 20% to 50%, and then to 75% in 1997.5 In 2001 it made permanent the measure studied in this paper, which provides additional tax assistance to eligible gifts of publicly traded securities (for an exhaustive list of measures, see Appendix 1).

The chart below shows the evolving cost of federal tax assistance to registered charities, as measured by federal tax expenditures. Tax expenditures represent the value of tax revenues forgone, due to preferential treatment given to certain taxpayers, to achieve a variety of economic and social objectives.

Charitable Tax Expenditures – Personal and Corporate

($ millions)

Charitable Tax Expenditures – Personal and Corporate - taxexp02_5-1e.gif (7,541 bytes)

Note: These data underestimate total tax expenditures related to charities, primarily because they exclude the effect of tax exempt status, for which no data are available.
Source: Tax Expenditures and Evaluations.

The most significant of these measures is the charitable donations credit available to individuals. Individuals receive a non-refundable federal tax credit of 16%6 on donations up to $200 and 29% on donations in excess of $200, up to a maximum tax credit base of 75%7 of their net income. As a result, the credit for donations in excess of $200 amounts to a deduction for taxpayers in the highest tax bracket, and a "super-deduction" for all remaining donors. In addition, donors can carry forward their donations for up to five years, subject to the net income limit. Corporations receive a deduction for all donations to registered charities – including gifts of publicly traded securities – with other tax provisions that parallel those for individual donors.


1 Public charities include charitable organizations and public foundations. A charitable organization primarily carries on its own charitable activities. While a public foundation may carry on some of its own charitable activities, it gives more than half of its annual income to other qualified donees, usually other registered charities. [Return]

2 Donations may be carried forward for up to five years if the donor has insufficient taxable income in the year of the donation to fully take advantage of the charitable donations credit in that year. [Return]

3 Although the exact value of such donations in the preliminary 2000 data is not available, it is known to be less than 2% of the total for 2000 shown in Table 2. Accordingly, the remainder of the analysis does not distinguish the two components. [Return]

4 Deloitte & Touche, Survey of Gifts of Publicly Listed Securities (August 2000). [Return]

5 Donations to Crown charities were not subject to a net income limit until 1997, at which time the 75% limit was extended to these organizations as well. The changes in the net income limit were introduced to level the playing field between all registered charities. [Return]

6

The October 2000 Economic Statement and Budget Update reduced the lowest marginal tax rate on individuals from 17% to 16%. Consistent with this change, the first tier of the charitable donations credit was also reduced from 17% to 16%. [Return]

7

The income limit is increased by 25% of the recapture of the capital cost allowance arising on a gift of depreciable capital property as well as any taxable capital gains arising on donations of capital property. For individuals, the limit increases to 100% of net income in the year of death and the year preceding death. [Return]

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