The bad economic times, the war in Iraq and increasingly worsening socio-economic situation in the US is having some Democrats and Republicans wonder whether the structure and tax incentives for the charitable sector is working. Will Canada follow the lead and ask tough questions?
Recently an article appeared in the US Chronicle of Philanthropy entitled “Paying It Forward — and Back - Nonprofit leaders worry as Congress rethinks tax breaks for donors and other charity policies” at http://philanthropy.com/free/articles/v20/i22/22000601.htm It is worth reading. It seems that some in the US are becoming quite critical of the charitable sector. One Democratic congressman notes that the tax break costs the treasury about $44 billion per year and - one congressman described it as one of “the least accountable tax breaks,” and he was concerned that we have no idea who is giving and who is getting and whether the poor and uninsured and the most disadvantaged are really benefitting. When economies go into recession (about the time that charities are needed most) governments have less revenue from taxes, face the possibility of deficit and they are looking to reduce “revenue loss” from tax incentives (ie reduce what are called tax expenditures).
The article discusses “hoarding” funds. Does Harvard really need a $35 billion dollar endowment? Obviously you can expect if you interview the people managing those funds the answer is yes, but what about students paying high tuition costs while a university gets to boast that it has a large endowment. While US private foundations must spend 5% per year (we only require 3.5% per year), it appears that public foundations in the US don’t have to spend anything.
This is not really a partisan issue. Senator Grassley a republican recently stated:
“The cost of [charitable] deductions is borne by other taxpayers, the majority of whom are not able to take deductions for their contributions. It’s fair to look at what benefits charities provide in return for the preferential tax treatment they and their donors receive.”
The articles states: “Some studies show that the poor do indeed get short shrift when it comes to charitable giving.” Looking at about 8000 donations over 1 million dollars it appears that 44% went to universities,16% to health, 12% to arts and 5% to social services. I guess this explains why when I was in New York recently the Museum of Modern Art (MOMA) was fabulous and there were homeless people everywhere.
There is a chart showing how different income levels tend to donate to different sectors. For example “67% of gifts from households with incomes of less than $100,000 go to religious causes.”
The US has the same problem that we have here. Small amounts of benefit for the average donor of $200-$500 per year. Lots of benefits for the major donor taking advantage of private foundations, gifts of marketable securities etc. With all the scams and abusive charitable tax schemes many donors are making donations that are only costing them perhaps 20 cents on the dollar. Some are making money off their donations. This has to stop. It is not a partisan issue - you should not make money off a donation. A donation should cost you something substantial.
The article discusses how in Europe some donations to charities, for example those that benefit the poor get a greater tax incentive than other donations. In fact in many countries you do not get any tax benefit for a donation. A non-profit may be tax exempt which is a big plus, but the policy question is do you add on an additional tax incentive to encourage people to give? Personally I don’t have a problem with tax breaks - but we are sinking right now - close to deficit - and if I have a choice between money being cut from schools, hospitals, dealing with homelessness or international development - I would prefer that some of the more generous tax breaks be curtailed. I understand that CRA is auditing about 75,000 taxpayers for their donation receipts from abusive tax schemes - the amount is almost $5 billion dollars. Yes that is not a typo. $5 billion dollars. Forget illegal drugs or cigarette or gun smuggling, it appears that the real money is to be made in abusive charitable donation schemes.
CRA has been playing cat and mouse with abusive tax shelter schemes and charitable gifting arrangements and their harem of well paid lawyers and accountants. I understand that CRA over the years has been given greater resources but this is a war, not a skirmish. A small number of people are really turning charity and philanthropy - two wonderful things - into a pit of mud. I recently thought of a solution. Finance should amend the Income Tax Act to provide that if your charitable donation receipt is denied that you have to pay a 500% fine based on the ostensible value of the receipt. Forget about paying the amount of foregone taxes, interest and a penalty. Lets have a little tax simplification. If you donate $10,000 and get a $50,000 receipt through various complicated and underhanded means - then when it is dissallowed you pay $250,000! You don’t have to work out principal, interests and penalties. I think this will solve the problem once and for all. In addition all the money raised by this tax should be used for some noble cause - like supporting real charities or our troops or the environment.
I think that many in the charitable sector realize that healthy growth every year in receiptable income and grants and contributions is not inevitable. The amount of donations can fall. Governments can cut back at the worst time - right in the middle of a recession. Donors can become fatigued. We have to work hard to make sure that the abuses are curtailed.
To answer my question will Canada follow the US lead? I don’t know. I am not sure that legislators in Canada really care that much about charities. After all it is only $112 billion dollars or about 10% of the economy! It employs about 2 million people and volunteers clock about two billion volunteer hours per year. They cannot even get a rather silly recognition of “National Philanthropy Day” passed in Canada. If legislators care they will start looking into what is happening with the charity sector in Canada and start thinking about dealing with abuses that are undermining the sector.
Do I need to state that the above is my personal opinion and not necessarily those of my firm or any of the many organizations that I belong to!!
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.