Like every two or three weeks for some time, the mega-donation of a super-rich person to a charitable foundation still makes headlines.
The problem is that most of these foundations are not good business for public finances or for the causes they support. It’s mathematical: they don’t give enough to compensate, within a reasonable time, for the tax breaks offered to donors (reduction equal to about 50% of the donation) and to foundations (tax holiday in perpetuity).
Take the fictitious case of a Canadian who, in January 2023, gives $10 million to his foundation dedicated to the fight against global warming. By 2030, this will have made it possible to devote 3 million dollars to the environmental cause, while the tax gifts, for himself and his foundation, will have totaled 6 million. By 2050, the charitable contribution will have been $6.5 million with $7.5 million in tax giveaways.
Under the Canadian tax system, environmental philanthropy is therefore not even desirable because it ends up diverting money from the cause, instead of bringing it the additional resources it needs to meet the important deadlines of 2030. and 2050.
But why don’t foundations want to pay more? It’s simple, for perpetuity: they refuse to eat away at their capital in order to be able to keep it forever. They therefore support a cause, but limit the amount of donations to the return on capital.
In Canada and the United States, the sums thus kept in perpetuity in charitable foundations in 2022, public and private, total an estimated sum of nearly 2,000 billion dollars. To give an idea of size, the sums accumulated in all the tax havens of the planet would be 5000
to 10 trillion dollars.
Tax gifts
Tax havens have existed for over 100 years. Charitable foundations too. Until the First World War, no major foundation had been created in Canada and it was not until 1918 that the Massey Foundation came into being. Tax havens and their users attract our criticism, while foundations and their founders enjoy our admiration. However, considering all this wealth accumulated sheltered from tax by foundations and the generous tax gifts they provide to their donors, many of these organizations are much more akin to what could be called tax havens. national than to charities.
In Quebec, it’s worse than elsewhere. Unlike the federal government, which limits the donation deduction to 75% of the donor’s income, no limit is imposed.
Here, a wealthy person can therefore decide to turn his back on Quebec tax by deciding to set up such a haven of charity. The system of charitable foundations thus enters into direct competition with State funding. Nothing less.
The year 2023 will not mark the end of these kinds of charity havens. On the contrary, they are constantly increasing in popularity and wealth. Over the past 100 years, there have been very few major interventions in the taxation of these organizations. In 1976, as part of broader tax reform stemming from the Royal Commission on Taxation (Carter Commission), the requirement for the foundation to allocate at least 5% of its assets annually to charities and charitable activities was introduced in the income tax law. This charitable obligation was then reduced to 4.5%, then to 3.5%, and now it has just been increased again to 5% in the last federal budget.
But 5% is still not enough. This figure comes from studies done in 2020 and 2021 when interest rates were much lower and people were not suffocating under inflation and the threat of a recession. This rate obviously needs to be revised upwards again, but very few Canadians are asking for it. It will come.