The “Gift” that Gives
The Globe has chosen Don Johnson â€œNation Builder of the Yearâ€ for his long campaign to waive capital gains tax on charitable contributions of shares.
This has, reportedly, resulted in a flood of donations by Canada’s most wealthy families to deserving, and not so deserving, charities. Many of us would count gifts to business schools and conservative think tanks â€“ recent recipients of large gifts – among the latter.
According to the story, Department of Finance officials had long opposed the change as costly and questionable in terms of the increased ability of donors to effectively direct large tax expenditure subsidies to their favourite personal causes. But repeated political lobbying by Don Johnson eventually resulted in Paul Martin cutting the capital gains tax by 50% on assets donated to a registered charity, bumped up to 100% by Jim Flaherty in the 2006 Budget.
The breathlessly admiring Globe story by Andrew Willis fails to inform readers of the very large tax expenditure subsidy involved in major donations of assets to charities by the wealthy.
Consider a $1 Million donation of shares, on which the owner would be otherwise liable to capital gains tax.
Even before the change, charitable donations generally qualified for a tax credit of up to 50%, representing the top combined federal-provincial tax rate on the amount . So a $1 million gift really costs the donor only $500,000 in after-tax terms.
Assume that the donor gives shares worth $1 million which would have triggered a $500,000 capital gain. That gain would have resulted in a tax bill of about $125,000 , assuming a top tax rate of about 50% on the 50% of the capital gain which has to be reported as income. Waiving the capital gains tax means that the $1 Million â€œdonationâ€ really costs the donor only $375,000 when all the tax breaks are added up. The taxpayers kick-in close to $2 of every $3 of those headline-grabbing large donations.
Some would argue that it is better to have the wealthy donate their assets than to have them locked up. But the fact that capital gains tax has to be paid when assets are transferred, or at death, means that subsidies to donations are ultimately quite costly.
I fail to see why those in the position to donate large sums to charitable causes should be able to steer so much foregone tax revenue to their favourite causes.