FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 12, 1998

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[English]

The Acting Chairman (Mr. Paul Szabo (Mississauga South, Lib.)): Order. The finance committee is considering Bill C-28.

The first witness we have with us this morning is Hoops Harrison, from the Canadian Alliance of Student Associations. Welcome. I think you understand how much time you have. Of course the members will also want to probably ask some questions. Please proceed.

Mr. Hoops Harrison (National Director, Canadian Alliance of Student Associations): Ladies and gentlemen, thank you very much for having me here today. I am here mainly to speak on Bill C-28, but having all of you important people here, I might take the liberty of talking about a few other things.

I'd like to comment on the “Keeping the Balance” document. I wish to thank the committee for the report. I was very much pleased to see the recommendations for debt relief. If they're taken to mean what I think they mean, I think they'll serve students very well. Also, I'd like to thank the committee for recognizing the Canadian Alliance of Student Associations' recommendation for an income-sensitive loan repayment program. Once again it shows that the committee was listening when we were attending.

As I said earlier, I am here to speak to Bill C-28, but I might steal your ear for a moment to comment just once more on the Millennium Fund. If you do have the opportunity to call anyone in the finance department or Minister Paul Martin any time in the next day or so, please reinforce the fact that students need this fund to be needs-based, rather than merit-based. There is a significant lack of needs-based grants for people, at least in the anglophone section of Canadian post-secondary education.

If I can also state one more thing, it's a core rule in the post-secondary education system in Canada to have students on boards of governors or senates. These are the decision-making bodies and institutions that determine academic criteria and service levels, and students sit on both because of proportional representation. Depending on which institution you're at, students pay 17% to 55% of the costs of their education, so they have a seat on the decision-making bodies. This is also good because they're the consumers, and you want to have access to the opinions of the consumers at the decision-making body.

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I would ask the committee to consider that this same rule should be applied to the Millennium Scholarship Endowment Fund. There should be a representative of students on the committee that both determines the fund and oversees it.

About Bill C-32, I went to school out west. I have a bachelor of arts degree. I'm not great with legalities and so forth, so I would like to speak to the intent of the bill rather than the exact legalities. In fact, I might learn a lot from you if I've made some incorrect assumptions on this. By and large I would like to speak to what was intended in this budget speech in 1997 by Mr. Martin, about making all ancillary fees tax-deductible, or at least eligible for a tax credit.

I understand the process that went on in determining Bill C-28 and exactly what fees would be eligible for tax credit. I understand it's quite simple. People thought, well, these are student fees; they are not exactly relevant to an education. There are pancake breakfasts and the sorts of things which perhaps aren't core to the livelihoods of students and their studies.

The draft paper I've circulated to each of you is exactly that, a draft paper. We created this just last week. I didn't want to make it an official paper, because we haven't had time to review it within our organization.

Just last week we had the honour of having the Honourable Paul Martin, Pierre Pettigrew, and Jean Charest, as well as the chair of the HR committee, Reg Alcock, and Charlie Power at our annual Canadian Alliance of Student Associations Ottawa conference. We discussed many things, from this bill here exactly to student debt and so on. We have been rather busy. I don't think there's any spelling mistakes in this, but I'll have to go over a few things with you to make it a little clearer and more to the point on what we mean.

I'm here to witness or petition the committee to consider amending Bill C-28 to include student association fees and student dedicated fees as eligible for a tax credit, like all other mandatory ancillary fees. First some basic facts.

By and large, ancillary fees at institutions are mandatory. Students have no choice whether or not they pay them. They are collected by the institutions, not by the student associations. They are collected by the educational institutions themselves and they are mandatory.

Another fact is that labour union dues are tax-deductible, whereas student union dues are not tax-deductible. The intent of the labour union is to function in much the same way as the student union. However, in this country the ideal of a student union is gradually moving away towards more of a student association or student society role. But still, they function in the same manner but they are not eligible for the same tax deduction.

A student association fee is not a frivolous fee. As the charts and the statements in our document will show, these student association fees or student dedicated fees pay for services, first of all, that are not normally provided by the institution but are very much necessary, and most recently they provide services that until recently the institution itself paid for, but because of government cutbacks the students have had to pool their money in order to provide these services.

I'll go through a few. For instance, there are always safety issues on campuses across the country. By and large, there are no university- or college-provided services outside of campus security which provide “safe walk” programs or other assisted programs for students. Students on almost every institution in Canada provide a safe walk program, where people volunteer their time and on a phone call they escort people off campus to the bus or to the transit or to their homes. It has been shown to be a tremendous service to the community, yet it is paid for wholly by students. Under your bill, this would not be seen as being as valuable to students as say, a co-op placement office would.

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As well, in some institutions, like the University of Alberta, the financial aid office, which provides bursaries and also assistance on how people can access loans and funding, is a joint venture by the students' union and the university students services. Only the university services side of this function would be considered tax deductible according to your bill, whereas we can see that with rising debt this is a fundamental necessity these days.

Some of the more direct student services—such as housing registries and exam registries, a student handbook, used book stores, and even some campus recreational activities—are covered by some institutions and some are covered by student associations. That's going to be my first point.

According to this bill, it will be dependent on the institution itself and not the fee itself. You'll be determining what fees are eligible just by what's going on at the institution, and not per fee. I say this because at some institutions they pay fully for a certain service, so it will be tax deductible, but at another institution it will be wholly run by the student association, and so that service at the other student association will not be tax deductible.

If I haven't made myself clear, I'm a little bit distracted. I'm sorry, I'll go over it again.

Also, other fees that perhaps might not be considered educational very much impact the university life or the college life. There is a university experience that goes on during an education, and much of what a student association does goes along with assisting that, such as orientation or tutoring. These sorts of things are very important and fundamental in educational life, as well as more social things, like a women's centre or a lesbian-gay bisexual centre. These are not funded by the institutions but the students themselves have to pay for them, and the fact that they wouldn't be tax deductible might in some people's interpretation mean that the government doesn't value them as much as perhaps a computer lab.

Many of the examples are included in the charts at the back. I don't think I need to go along much further.

The basic line from students, what I'm asking, is that, as long as the fee is mandatory at an institution, it should be given the same interpretation as any other fee, because you cannot make a value judgment simply because the university or the student association provides it. The draft paper shows that there's a discrepancy between who's paying for what across Canada.

Lastly, the only fees that I would say perhaps should not be considered tax deductible, just for conflict of interest purposes, would be fees that perhaps pay for my representation here. There are sometimes debt separate levies for my organization, and I certainly wouldn't be willing to compromise that that should not be considered tax deductible, just because it would sort of be in a hand in pocket fashion.

With that, I think it's a fairly straightforward request and I think it's very rational and reasonable.

I very much welcome your questions.

The Vice-Chair (Ms. Paddy Torsney (Burlington, Lib.)): Thank you very much, Mr. Harrison, and I apologize for the delay in my arrival.

Mr. Ritz, do you have questions?

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): I have just a couple of comments, actually.

You had spoken earlier about the Millennium Fund. That's really not in Bill C-28.

Mr. Hoops Harrison: Yes, I know.

Mr. Gerry Ritz: You're saying that it should be targeted more on a needs basis than scholastically.

Mr. Hoops Harrison: That's correct.

Mr. Gerry Ritz: Okay. I can't argue with you on that point.

You were talking about Bill C-28 covering the income sensitivity on loan repayment.

Mr. Hoops Harrison: No, I was referring to the “Keeping the Balance” document, which the committee—

Mr. Gerry Ritz: You'd like to see that included.

Mr. Hoops Harrison: I would just like to thank the committee for that recommendation. I thought it was a sound one and a good one, and it recognized CASA's contribution. That says to me and the students across the country that the committee is listening to students.

Mr. Gerry Ritz: Okay. Yes.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Ritz.

[Translation]

Mr. Perron.

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): I have no questions, madam Chair.

The Vice-Chair (Ms. Paddy Torsney): You have no questions.

[English]

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): First of all I want to thank Mr. Harrison for taking some time to present to us today.

This whole issue, in particular the student debt crisis that exists in Canada, is one that I believe concerns all of us very gravely. There has been a 280% growth in student debt. At the same time, there has been only a 110% growth in tuition fees. So there has been a disproportionate growth in the debt.

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You have a bachelor of arts degree, you say. Were there any economics courses in there?

Mr. Hoops Harrison: Yes, at entry level.

Mr. Scott Brison: I was going to seek some advice here, or at least confirmation.

There is a significant link between high taxes and high unemployment. When I look at the disproportionate growth in student debt versus tuition, I believe a lot of that is because of the fact that students are competing with a lot of people who have already graduated for the same jobs as traditionally used to be student based. Would you agree with that?

Mr. Hoops Harrison: Yes, I would.

Mr. Scott Brison: Would you agree with the assertion that an issue of the general unemployment rate is affecting the growth of student debt?

Mr. Hoops Harrison: Yes, I very much would agree with that.

Mr. Scott Brison: Given that high taxes are linked to high unemployment, would you see potential in tax reduction as one means by which we could address in a holistic way the student debt issue?

Mr. Hoops Harrison: I would agree with your second point. I cannot confirm with anything I've studied that high taxes lead to high unemployment. It was quite a few years ago when I took my introductory-level course, and it wasn't my major.

I can say that incentives for students, such as tax measures, and moreover the ability for them to defer their tax credit to the point at which they are making a significant amount of income and can actually apply it against it, make a significant difference. That will very much make a difference in student debt.

Mr. Scott Brison: On the brain drain issue, just in your own circle of acquaintances, are you seeing a lot of examples of young Canadians going to the U.S.?

Mr. Hoops Harrison: Not even the U.S. I was speaking to a gentleman last night, the treasurer for CASA, and he has been hired to go to South America. I was flipping through some old Maclean's magazines related to brain drain, but also the lack of what employers in the country need in graduates. Nortel hires one-quarter of all the graduates in its industry sector in Canada, yet they still can't find the people they need. They have to hire out of country.

So there is a brain drain of the best people in Canada going out of country, whether for higher-paying jobs or it is more tailored to exactly what they want to do, but there is also a significant influx of people coming into the country who simply have educational skills Canada cannot compete with. That is a very large concern for our organization.

Mr. Scott Brison: Recently I was given a statistic that the average student debt after a four-year undergraduate program in the U.S. is now $18,000 Canadian, and for a Canadian program, or for a young Canadian, it's $25,000 Canadian. The cost of education in Canada has increased significantly in relation to that for our largest trading partner. Of course the student debt load has increased significantly. How do you think that will affect our competitiveness as a global partner in the knowledge-based economy as we enter the 21st century?

Mr. Hoops Harrison: First, the fact that the American debt load is less than the Canadian debt load is probably unbelievable to most people, because of the high tuitions in the United States. When you look more in depth at that problem, you see it is because the federal government is very much involved in a needs-based granting process. They are called Pell Grants. Pell Grants worth $2 billion a year go to students in the United States. If Canada were to implement a similar system, it would require $700 million in grants...which is what we are pushing for the Millennium Fund to be more like.

As for our competitiveness in the global economy, I hear from the human resources department that we take pride in the fact that we have more educated people per capita than any other industrial country. We also contribute more funding for education per capita in Canada. And it's true. However, I think there needs to be a targeting in two areas.

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One is to ensure that all people, regardless of their affluence level, have that education. Right now we're seeing a significant split. Even in the United States, where you see that there aren't any social mechanisms in place to ensure that there is an equalling-out process, you still see the federal government involved in a needs-based granting program so that, regardless of their affluence level, they have access to these grants to get a college education. For those of you who watched the State of the Union Address, it very much focused on education as being very important for the upcoming generation.

Second, we very much need to reconsider our education. I'm certainly not an advocate for linking our education system wholly with industry or with what businesses want. As an arts graduate, I think it would be heresy for me to claim that. But I do think we need to re-evaluate our system in a format where we need to have national standards both for quality and accessibility, where we need to take into consideration how our post-secondary education system links with our secondary and primary education systems.

As an example, we're offering university 101 courses in first year now, rather than teaching people first-year education. They have to have a transition from high school to university just to get up to date, just so there's a level playing field, whereas if we wanted to make the most of our money it would be going right into higher education learning. But now there's a transition period.

So if all the stakeholders got together and said “This is the kind of system we want and we know what we have to do to be competitive” and then implemented that system, I don't think it would infringe on anyone's jurisdictions. All it would result in is a sound system.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you for your presentation.

I want just to clarify something. Your presentation was requesting that we consider making, basically, student association fees a deduction in the Income Tax Act. Your presentation says “deduction”. Are you absolutely sure that's what you want?

Mr. Hoops Harrison: No, eligible for the tax credit, the same as all the other ancillary fees. Basically what I'm asking for is section 26.... Well, I'm not even sure of how to refer to this bill—26.1, section 118.

Mr. Paul Szabo: “CASA recommends that all ancillary fees that provide non-academic services be made tax deductible for students”. That's right in your conclusion.

Mr. Hoops Harrison: That's why it's a draft. Sorry.

Ms. Karen Redman (Kitchener Centre, Lib.): It's spelled right.

Mr. Hoops Harrison: Eligible for the same consideration that the other ancillary fees are eligible for, which I believe is the tax credit. I'm very sorry for that.

Mr. Paul Szabo: Okay. There's a big difference. You probably know that if it's a deduction you have to have income in order to get the benefit from it. Whenever any calculations are done to show how much I paid for my university, you never see here how much we assume that a student should have made during their university career from whatever form. It never gives any contribution credit, as it were, to funding the education, and nothing from the parents. It's always my tuition and all this other stuff, and they all add up, plus my cost of living, etc., and it's $50,000 for your credit.

Okay, I understand now that you're asking for a credit.

Mr. Hoops Harrison: Sorry about that.

Mr. Paul Szabo: The credit is a little bit different, because to the extent that you don't use this non-refundable credit it's transferable to a parent. Because we have progressive tax rates you can make all kinds of assumptions, but at the high end in our tax system, in Ontario for example, we're talking about effectively a fifty cents on the dollar refund.

The student fees you're talking about here are all over the map depending on the university. My alma mater is right up there. Western is up at $238.51. That basically means that, in the optimal case, you would like the taxpayers of Canada to subsidize another $120. That's what we're talking about here, $120. Is that right?

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Mr. Hoops Harrison: Assuming you're going to go on, I'll say yes, that's basically right.

Mr. Paul Szabo: At the highest; but for, say, the average university, the fees are probably less than $100.

Mr. Hoops Harrison: That's correct.

Mr. Paul Szabo: So all of this is about $50 on average for most students across Canada.

Mr. Hoops Harrison: Over and above other student fees for services provided by the institution.

Mr. Paul Szabo: But they are already eligible for the tax credit, pursuant to the last budget.

Mr. Hoops Harrison: Right. Well, pursuant to this bill, if I'm not—

Mr. Paul Szabo: Yes, the last budget, which this bill is introducing. Sure.

I guess the question I have for you, and I think it's really important to know what the student association has to say, is do you feel students or their parents or both should be responsible for any portion of the education costs of their children or of themselves, as the case may be?

Mr. Hoops Harrison: Should parents be responsible?

Mr. Paul Szabo: Should parents or the student, if there is income, be responsible for any portion of the post-secondary education costs, other than what they pay indirectly through income taxes?

Mr. Hoops Harrison: Absolutely; absolutely and wholeheartedly. I think there's a misunderstanding in this country that students want a free ride for education. Students very much understand that they have a contribution to make to their own education, but they also understand that the community or society has a contribution to make, because it raises the level or standard of the entire nation.

I would like to comment on a couple of things. You say your alma mater is Western. I'm sorry I have to make excuses for this, but my organization has one one-hundredth of the budget of the student association at Western. Unfortunately, we don't have a researcher there and we have to farm out our research documents. The University of Waterloo paid for this and there were some miscommunications.

If I can reiterate, we're not asking for the student fees to be tax-deductible but to be eligible for the tax credit, like everyone else. In my interpretation of the last budget, when Minister Martin spoke, it was simply to say all ancillary fees will be eligible for a tax credit. My interpretation was, well, student fees are an ancillary fee—they come in the same category on my cheque—so they would be eligible as well. But what this bill speaks of is all ancillary fees except for student fees. It's very direct in its discrimination, almost, against students.

Mr. Paul Szabo: At Western there was also a fee for the pub, to be a member of the pub, to get in. That's an ancillary fee.

Mr. Hoops Harrison: No.

Mr. Paul Szabo: If you want to be a social animal in university, you have to be a member of the pub.

I think I'm splitting hairs, but the issue is that some are education related, others are discretionary, based on an elected student body.

Mr. Hoops Harrison: You can interpret it in that way, but—

Mr. Paul Szabo: Is that not true?

Mr. Hoops Harrison: No, they are not discretionary, they are mandatory. They are charged by the institution.

Mr. Paul Szabo: The activities and the expenses of the student association are under the control of the students.

Mr. Hoops Harrison: That's correct.

Mr. Paul Szabo: So if they got this tax credit, which is transferable to their parents, and they went out and incurred other fees to any level.... Let's say all of a sudden there were a $1,000 student fee and it was to buy a gift for everybody on graduation. If we did this it would then be a tax credit under the Income Tax Act and in fact the taxpayers of Canada would be subsidizing 50¢ on the dollar for gifts for every student on graduation.

Mr. Hoops Harrison: I've heard this argument before, and I can say that's simply not the case. An institution—

Mr. Paul Szabo: Mathematically, that could be the case.

Mr. Hoops Harrison: Mathematically, but it's simply not going to happen; and I'll explain why.

First, I'm here because what I hope you will do is amend the bill to say all mandatory fees charged by an institution should be eligible for a tax credit. That would include student fees.

If a student association ever did raise its fees to $1,000 for a slush fund that would be used as a tax shelter fund or something like that, so they wanted to charge it and say ha-ha, it's included under the tax act, all the institution has to say is this is a ridiculous fund and we're not going to collect this; because in order for any fee to be charged by an institution it has to be approved by the administration to be collected. They can simply say no, this is ridiculous; we're not going to collect this fee. Therefore it would not fall under the tax act.

Mr. Paul Szabo: It still would, but you're saying good people would still do good things.

Mr. Hoops Harrison: No, what I'm saying is that if you make the bill read all mandatory fees charged by an institution and if the institution does not collect it, then it does not fall under the tax act.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Harrison.

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Ms. Karen Redman: Just following along that line, my caveat in going down this road for your request is the degree of accountability for the expenditure. You're talking about levying it, but isn't it true that student associations have a fair degree of latitude in how they spend these fees? You've talked about them being all over the map.

Mr. Hoops Harrison: Latitude in terms of what they choose to do with their money?

Ms. Karen Redman: Yes.

Mr. Hoops Harrison: From working in a student association, I can tell you that only about 17% of an operating budget is something that you can change. The rest of it is already secured in salaries, infrastructure and overhead. Most of a student association's budget is not actually money they can spend, but, rather, total annual gross revenue from businesses, and there's already an equal amount of expenditures for those businesses.

I might have to be very clear about this. It's not as though a student association says “Okay, we have $500,000. What flavour should we have with our pancakes?”—or something like that. There's a strict accounting process in that any budgetary matters must go before the students themselves and the student councils.

Most student association financial decision-making bodies have university administration on board. Also, student associations are covered under the Universities Act in most provinces, so they are susceptible to the same sorts of audit processes and checks and balances.

Ms. Karen Redman: One of the reasons why I ask that question is that my information is that at the University of Carleton in the first two months of 1997-98 they've already spent two-thirds of their discretionary fund. I sense that there aren't the controls.

You frame your comments in “most” and “some” and “often”, and I guess it just causes concern for me to go down this road.

Mr. Hoops Harrison: Can I ask what controls are in place in institutions like universities and student services?

Ms. Karen Redman: They're subject to financial and political accountability of their boards.

Mr. Hoops Harrison: It's the same with the student associations.

Ms. Karen Redman: You talked about the Millennium Fund as an either/or. Isn't there room in the application of the Millennium Fund for academic standards as well as needs?

Mr. Hoops Harrison: I'm sorry, can you repeat the question?

Ms. Karen Redman: You talked about the Millennium Fund funding being paid out or delivered on economic terms alone. Is there not room for both academic and needs assessment in how we deal with the Millennium Fund?

Mr. Hoops Harrison: That was something we considered, and we said, “Well, why not have some aspect to it”.

This is going to get very general right now, and then move to the specific.

First of all, our entire post-secondary education system is a house of cards. Let's be quite frank. I'm not saying that it is bad, but you have four players: the federal government, the provincial government, the institutions and the students. Right now all of them are trying to solve the problems independently. Four years ago all of them were trying to get rid of the problems. The federal government was cutting transfers; the provincial governments were cutting operating grants to the institutions; institutions were cutting student services and raising tuitions; and students were having to take out more loan money and going into more debt. Furthermore, they were trying to solve their problem themselves.

At the University of Alberta they created a $20 optional fund called the access fund. Every student would pay in. They would have the ability to say “No, that's okay, I don't want to contribute”. This money would go into a slush fund for needs grants for students that needed money in addition to their student loans.

There is a 110% collection rate for the access fund. There are always more people that apply than they can give out, and it is students helping students. It's not just the case any more where we're always demanding that the government has to step in, but instead perhaps we can pool our own moneys.

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This is a good thing. We're not asking for the federal government or anybody else to contribute. We just want to be recognized for it. Under legislation like this, it's still assumed that this is like Animal House at institutions.

I'd just like to point out one thing. I'm not upset at all, I'm just very serious. These people are adults. I know there's the perception of students that says this is “Fun High” or something like that, but the guidelines in student associations are the same ones in universities.

The thing that really upsets us is the budget cutbacks that have gone through over the past few years. As another example, when they did cutbacks and were told to cut back their high-end administration at the University of Alberta, to get rid of a vice-president, they got rid of the vice-president of student services.

They also froze funding for student services so that the level required for what students needed was no longer there. Students had to do things themselves. They knew the institution wasn't going to do them, so they helped fund the financial aid office or it was going to have to be closed down. They instituted their own student help centre, which provided counselling and so forth, and which other institutions provide themselves. They have their own book and exam registry. They have a safe walk program and an ombudsman service, which most institutions also provide for students under the dean of students.

I just very much want to make the point that—and this is getting back to the Millennium Fund again—the entire post-secondary system is based on merit. If you're academically qualified, you'll get in. Institutions are competing for students, and they're the ones offering the chancellor's scholarships or the president's scholarships in order to get the best people. There already is that meritorious component of scholarship out there because the institutions want it.

Education is the great equalizer in society. It means that no matter where you are, once you graduate from that institution, you'll have the same chance as everybody else, no matter where you started from. The government's responsibility is to ensure that everybody can get that chance—not equality of result, but equality of opportunity.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. McKay, do you have a very quick question?

Mr. John McKay (Scarborough East, Lib.): Very quick.

I just want to ask you about the perverse results of the request that you put forward. Because of the uneven nature of the various universities.... At the University of Western Ontario, the total tax credit, deduction—or however you wish to phrase it—would be somewhere in the neighbourhood of $600, whereas just above that, it's $150 at the University of Manitoba. Aren't you therefore almost creating an incentive for all universities to boost themselves up to the level of the highest university in order to max out on the credit or deduction in terms of university council fees and students' fees? In other words, aren't you effectively creating a whole bunch of services and costs that will have a perverse result because there is now “a deduction or a credit”, creating an enormous burden on the federal government, whereas previously the services were either free or not there at all?

Mr. Hoops Harrison: Okay, I think I might be interpreting your question right. At the last budget, I think the reason ancillary fees were going to be considered eligible for a tax credit was because tuition is eligible for a tax credit. When there was a freeze or a cap in some provinces, the way a lot of institutions were getting around raising tuition was by increasing ancillary fees. You can see that the University of Western Ontario is one of the largest proponents of that policy or pattern of going outside of tuition while still falling under legislation.

So it's only fair to say that since ancillary fees make up such a large portion of a student's educational costs, they should be eligible for the same credit. What you're doing is taking away that incentive to go through this route of increasing ancillary fees by making them all eligible under the same category.

By making student association fees eligible for a tax credit, there is no moral hazard, if you will. Students will just have the free reign to increase their fees, because, as I said, all the institution has to do is make it ineligible for a mandatory fee. It just has to say no, it's not going to collect this. It then won't fall under the act.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. McKay.

Mr. Ritz, is it riveting?

Mr. Gerry Ritz: It's just a short comment.

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You mentioned that you don't see education tied to industry demand. I take it that's not the way you want to see it go.

Mr. Hoops Harrison: No, I said it's not wholly tied to industry demand.

Mr. Gerry Ritz: I just wondered how we get this whole youth under-employment or unemployment situation down if education is not directed to industry demand. How do we ever come to grips with that?

Mr. Hoops Harrison: Right now, I don't think we've gotten to a good point. Right now, I think we have a liberal arts education that is equal to the demand, but the industry demand isn't there. The reason is that there is no guidebook or report card for institutions in terms of how they should develop their programs to match them with the economy and so forth. They just simply go on with what they do. And in many cases education in this country is way behind the times.

You're thinking now of having computers in classes. It's only just been within the last five years that we've seen classes with computers or with laptops in them. This is the same way they've been teaching education for hundreds of years, and there really is a catch-up to do.

One thing we did at the University of Alberta was done by the students. The students' union conducted a survey of over 400 businesses, community organizations and volunteer organizations, whether they were private or public-sector, and we asked them what the 20 most important skill sets were that they needed from graduates. We didn't ask if they needed computer employees or not, but what the needed skill sets were. Of all those people surveyed, 90% said they needed communications skills. Now, what are institutions doing in their programs to promote communications skills? Seriously, in an engineering class, do you have a public speaking course? Even in philosophy, are you supposed to be doing class presentations?

There is a curriculum in primary and secondary education, but our post-secondary education system is dependent on the institution. If we really want to ensure that a Canadian graduate is going to be up to the level, I think we need to institute some of these guidelines.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Ritz.

Mr. Harrison, thank you very much for your presentation today, and have a good journey home.

Mr. Hoops Harrison: Thank you very much.

The Vice-Chair (Ms. Paddy Torsney): We're going to do a very quick turnover to the Charitable Incentive Review Task Force, because we do have a vote this morning. Can we get Mr. Boyd-Thomas and Mr. Floyd to the table? Thank you.

While the witnesses are getting settled, I wonder if we could do our two motions very quickly.

The first motion is the adoption of the minutes of the steering committee, which are all before you. We just need to make one change to the steering committee report, and that is that we're having a second meeting, which is scheduled for Tuesday. At the end of the large paragraph, where it says “It was unanimously agreed”, it would say “appear on Thursday, February 12, 1998 and Tuesday, February 17, 1998 and that Clause-by-Clause consideration of the Bill be scheduled for Thursday, February 19”.

Is there any discussion, or are we in agreement?

Some hon. members: Agreed.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

The second motion is that, in view of the changes in the committee's workplan to the end of March 1998, the committee authorize the reduction of its budget of the amount of $25,000 and that these funds be returned to the Liaison Committee.

Mr. Tony Valeri (Stoney Creek, Lib.): We're returning a surplus?

The Vice-Chair (Ms. Paddy Torsney): Yes, we're returning a surplus.

Mr. Gerry Ritz: Oh, I'm in agreement with that.

The Vice-Chair (Ms. Paddy Torsney): May I have a mover?

Mr. Gerry Ritz: I so move.

(Motion agreed to)

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Now, our current witnesses are David Boyd-Thomas and Gordon Floyd, from the Charitable Incentives Review Task Force. It's nice to see you here. As you know, we probably need to leave this room at about 10.30, so it's your choice as to whether you want a lot of questions or want to use the time for your presentation.

Mr. Gordon Floyd (Member, Charitable Incentives Review Task Force): Thank you, Madame Chair.

We'll try to leave as much time for questions as we can. We very much appreciate this opportunity to continue what has now been a three- or four-year dialogue with this committee about issues that affect the charitable sector and charitable giving in Canada.

• 0950

I'm Gordon Floyd. I'm the director of public affairs at the Canadian Centre for Philanthropy. David Boyd-Thomas is the director of the office of gift planning at the University of Toronto. Both of us are members of the Charitable Incentives Review Task Force, which is a task force established by the Voluntary Sector Roundtable.

I'll be offering some initial comments and then I'll ask David to deal with the technical stuff to take you through some of the more detailed aspects of our presentation, including some specific amendments to the legislation that we would like you to consider in your clause-by-clause examination of Bill C-28.

We've also brought today a copy of a more formal brief, which we'll be leaving with you for your examination when you deal with clause-by-clause next week.

You may recall that representatives of the Voluntary Sector Roundtable appeared before you during your round table meeting in the fall of October 27, 1997 here in Ottawa. Our group at that time included Bill Strain, from the Conference for Advanced Life Underwriting, David Armour from the United Way, Monica Patton from the Community Foundations of Canada, my colleague Patrick Johnson from the Canadian Centre for Philanthropy and David Boyd-Thomas representing the Canadian Association of Gift Planners.

I think it's only appropriate, as we begin, to acknowledge the work of this committee in underscoring in its previous reports to the House the importance for several years now of charitable giving. It's thanks, in large measure, to the efforts of this committee and to the Minister of Finance that the government has adopted initiatives in both the 1996 and 1997 budgets to encourage charitable giving by Canadians. Certainly we want to underline that the initiatives that have occurred over the last couple of years are welcomed and very much appreciated by those of us who are in the charitable community.

We note that in your report, “Keeping the Balance”, one of your recommendations was as follows: that the committee recommends that the government examine resolution 21 and develop appropriate measures to prevent abuse without introducing disincentives to charitable giving. That recommendation captures the essence of our presentation and our message to you this morning.

Resolution 21, you may recall, was a provision that was designed to deal with abuses that were perceived within the Department of Finance of gifts of shares in privately held companies. We recognize that in the legislation drafted by the tax policy officials in the Department of Finance they have responded to some of the concerns that we have raised with you previously and in other meetings directly with them.

Their proposed anti-avoidance rules were introduced because of the department's concern about possible abuses where a donor is not at arm's length from the issue or the securities that are made as a donation. The legislation that was initially released on July 31 has been altered and appears in a much less offensive form in Bill C-28 than it had when it was originally presented, but we are still extremely concerned that the legislation remains excessively complex at a time when the tax rules dealing with philanthropy must be kept simple. The legislation, as it's drafted, is too severe and it's not appropriately targeted to its original purpose.

You may recall that when the Voluntary Sector Roundtable representatives appeared here in October they shared with you an alternative approach, an approach based on valuation. We continue to believe that this approach is a much more effective one to counter the perceived abuses. In fact, in your report last December you referenced that as being an appropriate alternative proposal.

At this point, Madam Chair, I would like to ask David Boyd-Thomas to provide you with more detail about our comments and our concerns and our recommendations.

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Mr. David Boyd-Thomas (Member, Charitable Incentives Task Force): Thank you, Gordon.

Again, I would like to express both personally and on behalf of the task force our appreciation to the committee and also to the Department of Finance official with whom we've worked over the past year, and indeed this committee, now for going on three years, as we were saying on the way up this morning, for the opportunity to continue our very helpful and productive and indeed constructive dialogue, which has been going on over incentives for charitable givings by Canadians to Canadian charities across the country.

This morning in our official submission to the committee we have provided to you highlights of our proposals, specifically referenced to Bill C-28, as Gordon said earlier, to aid you in your decision making and discussions next Thursday, as we just heard, for the clause-by-clause review of the bill. I would like to take a few moments this morning to highlight some of the key areas of the legislation that has been proposed, areas we would like to draw your attention to, with some recommendations for some slight modifications, what we view very strongly as improvements, again to simplify what can occasionally be a very complex process and what we feel at this point has been tabled as a needlessly complex process.

Our first point has to do with what is proposed as a five-year window to monetize. “Monetize” is a word that was put forward by the Department of Finance officials. We first saw it in the July 31 proposals put forward by the Minister of Finance. Subsequently it has been used in Bill C-28.

Effectively what they are proposing is that where the donor, the Canadian citizen, makes a gift of what is now called a “non-qualifying security”, or private shares, there would only be a deferred entitlement to tax credits or deductions, and this deferred period is limited to sixty months or five years, unless, of course, the charity disposes of or monetizes the gift of those shares during that period. We believe quite firmly the sixty-month, five-year timeframe is both arbitrary and, frankly, unnecessary. Given that the proposals state that the donor must wait until the monetization occurs to claim any of their tax relief, there's no fiscal incentive to force monetization to occur early. On the other hand, to take away the donor's deferred claim to tax relief upon the expiration of the five-year deadline we feel is unduly harsh. Thus it's our recommendation that in proposed paragraph 118.1(13)(c) the sixty-month time limit for monetization be removed.

Our second point is a statement that the value for the tax receipt, or the tax relief, if you will, to the donor be the lesser of the value of the time when it is initially given to the charity and the value at the time the charity monetizes it, in our new language—we prefer “disposes of”—for determining the tax relief. Again, we're entering into what we feel is a needlessly complex formula, which is frankly unwarranted.

We are recommending that the value of this gift should simply be fixed at its value at the time the gift is recognized for tax purposes—recognized in the sense of monetized. Thus if the value goes up during this deferred period the tax relief will be higher. If the value of those shares goes down during that deferred period until they are monetized, there will be a corresponding decrease in the amount of tax relief the taxpayer would enjoy. We feel this is fair and equitable, and perhaps most important, straightforward and simple.

Item three is the arm's-length requirement. As it is proposed in Bill C-28, gifts of private shares to a public charity are accorded status, in the new terminology—it's very interesting that throughout this document the Department of Finance is introducing new terms for the charitable sector, and we have got to know them very quickly since December 8, when the bill was tabled—a category called “accepted gifts”. To qualify for the favourable tax treatment, the accepted gift, if you will, must be made to a public charity with which the donor “deals at t arm's length with each director, trustee, officer and like official of the donee”—the donee being the charity.

We view this additional and new provision as an unreasonable requirement, which will disqualify many of the core supporters of a charity from making such a gift.

• 1000

Again, the provision fails to recognize the fact that some of the strongest potential donors and supporters to a charity tend, through our experience, to be involved with that charity perhaps as either a volunteer director or a trustee of that very charity. The provision here would effectively deny them from receiving a tax credit if they indeed wished to go forward to make a gift of private shares to the charity on which they sit.

We also feel—perhaps most importantly—that this is redundant. The provisions have already stipulated, as proposed, that the donee, the charity, must be either a public charity or a public foundation, which, by definition already covered in the Income Tax Act, must have a majority of its directors or trustees at arm's length from its donors. So effectively the Department of Finance is proposing in Bill C-28 to add an extra layer, if you will, of security against abuses. Frankly, we feel this is redundant. It's almost going overboard, if we may be so strong on that particular point.

So, again, our recommendation here is that we delete the appropriate paragraph—we've referenced this in our document for your consideration—so that this non-arm's-length duplication will be removed.

Our fourth point is that bias against private charitable foundations comes in two forms in Bill C-28. Specifically, the new incentive that is offered for reduction in the capital gains inclusion rate for gifts of public stocks is not available for these same gifts to private charitable foundations. So it's okay that we give gifts that are public stocks and they enjoy half the capital gains inclusion rate for gifts to public charities and public foundations—for instance, community foundations are public foundations—but it's not the same treatment, as gifts would be treated at the full inclusion rate if they are made to a private charitable foundation.

The second bias that we have detected in the bill and noted strongly is the fact that the new excepted gift provision for private shares is not available if the donee is a private charitable foundation.

Existing provisions—again, here we are looking at some redundancies and some overlapping that has been proposed by the department—governing private foundations, specifically in the Income Tax Act in subsection 189, points one through four, are already sufficient to protect against self-dealing. Thus, gifts of private shares to private charitable foundations should be permitted to be fair and equitable.

As I have mentioned already, not only have we worked with this committee but also we have been meeting throughout the past year on numerous occasions with Department of Finance officials, whom we commend for being forthright and open in their discussions with us. We appreciate that on the part of the officials. During our conversations with them, we have seen throughout the year in what they have tabled, especially on July 31, and then again changed as introduced in Bill C-28, they have conceded that indeed publicly traded shares are easily evaluated, at arm's length in nature and not subject to self-dealing or abuse. Thus, it is also quite unreasonable.

They've actually admitted this, so we're drawing the conclusion: thus, why are they still denying it for transfers to private charitable foundations? If indeed part of their problem was valuation, on that point they have now conceded that indeed public securities are easily determinable in terms of their value and they have built-in provisions against self-dealing or abuse.

Again, our point is let's draw the logical extension of this and allow the new treatment for gifts of public shares to go to private charitable foundations as well.

Frankly, this distinction, if left intact in Bill C-28, is leading dangerously close to a value judgment being made by the Government of Canada on the social value of public versus private charitable foundations. This is something that we strongly urge the government to think very long and hard about. Well, perhaps not too long, maybe shortly, but to give some due thought to.

Within our group we have some notable lawyers in the areas of trusts and estates and tax law in Canada, who have advised our group. A potential conflict in Bill C-28 with other existing laws has come to our attention.

Specifically, the proposed monetization requirement will no doubt engender arrangements. As a donor is being cultivated to make a gift to a charity, arrangements will be made between the donor and the charity before the gift is actually made. These collateral arrangements for the disposition or monetization of those shares may potentially disqualify the characterization of the transfers as a gift under subsection 69 of the Income Tax Act, which is the definition of what is a charitable gift.

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It is our recommendation that we add into the new provisions table in Bill C-28—this is under amendments to section 118.1—a new subsection, proposed subsection 118.1(21), which would direct that disposition arrangements should be ignored for purposes of divining transfer as a gift. It's just to give us some leeway to get around a possible conflict within the existing law as tabled and as it stands, as it should, in subsection 69(11).

Also on charities, our sixth point is that charities across Canada are subject to a disbursement quota of 4.5% of their capital as an expenditure each year. During this deferral period—I'm going back to the new proposals for monetization—a charity may be forced to dispose of other assets in order to meet the existing disbursement criteria as they are holding onto these private shares. Each year they are looking at their disbursement quota, and if they have a large group of shares that have been donated, it's going to force them to adjust their disbursement quota in an untoward fashion, in an unplanned manner, one that is perhaps not particularly prudent for that organization. So again, we're recommending that the non-qualifying securities be removed from the disbursement quota, from what is called the “disbursement base calculation”, during the deferral period.

Our seventh point is about “loanbacks”, as they are characterized by the Department of Finance and as laid out in proposed subsection 118.1(16). Under the proposed provisions dealing with loanbacks, there appears to be no mechanism to address the situation where a charity inadvertently acquires a non-qualifying security from a donor who has already made a gift to that same charity. Certainly it's our experience with Canadians who are making ongoing support in a sizeable fashion to charities that they make multiple gifts over time. They perhaps made a gift back in 1990. They make an annual gift each year. They do another substantial gift in 1995. They are contemplating now making another gift in 1998. They are making different, sizeable gifts. We know that inadvertently—and we stress the “inadvertently” part—a charity could have a problem where the donor has already made gifts that are going to impact on the non-qualifying gift made in the future, thus forcing a freeze on the entitlement to their tax credit.

Again, we're making a recommendation. Although you may start to think a lot of these are not in and of themselves very large or substantial, they are trying to make this a smooth and simple package. We're basically adding provisions that would make the rule inapplicable in the monetization period for gifts of non-qualifying securities which have already been received from the same donor.

Our final point is about a charitable gift type called “charitable remainder trusts”. These are trusts established for the benefit of Canadian charities. They are irrevocable vehicles whereby a donor places assets into a trust, which will ultimately pass to the charity. The donor will retain use of any income triggered by that asset and a tax receipt will be issued—guidelines have already been issued by Revenue Canada—for the present value of those assets placed in the trust.

It is already the expressed intention of the Finance officials that their provisions as outlined in Bill C-28 should not at all impact on charitable remainder trusts. That's all their proposals on anti-avoidance rules. They did not intend to impact on charitable remainder trusts.

Nonetheless, we have had a look at this, and certainly our legal counsel has looked at this, and found that they were skirting very close to the fact that their definition as proposed for the non-qualifying security in the bill is just broad enough to include charitable remainder trusts. Again, as you will probably note, and as characterized in our presentations both to this House committee and also to the Finance officials, when we enter into these gift vehicles we are exceedingly cautious to make sure indeed we are dotting every i and crossing every t as we go through these gift arrangements.

That's why we feel it's so important to clean up some of these loose ends in the legislation. Thus, on the charitable remainder trusts, you will note we have a recommendation that we're adding just a quick word, to make it a “debt obligation”, as opposed to just an “obligation”, in the recommendation on proposed subsection 118.1(18).

I have just run through what you have in about eight pages of our submission in somewhat further detail. We amplify slightly in our written submission and we do hope that will help you with your clause-by-clause review coming up next week.

At this point, Madam Chair, we will entertain your questions.

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Mr. Gordon Floyd: Actually, I would like to add one note at the end.

David has described a series of quite technical amendments. You may be aware—we've referred to this in our comments—that since the February 1997 budget we from the charitable sector have been meeting often with Finance officials, with tax policy officials, around this issue.

You are probably also aware that the original proposals that were announced in the budget as resolution 21 have already been amended three times. We are proposing a number of other clean-up amendments.

I would like to reiterate that our very strong belief is that this entire scheme of regulating perceived abuse or the possibility of abuse is far too complex. It is so complex that it invites complex strategies to get around it.

It is our very strong feeling that, as they are, the self-dealing rules, which are very tough in terms of charities, are strong enough to deal with the kinds of perceived abuses or possible abuses that concern the Department of Finance, that this entire scheme of regulation is a scheme of overkill and one that does not add to the integrity of the system in the way the Finance officials hoped it would.

We continue to feel that concerns of self-dealing can be dealt with at the common law without further amendment and that the only additional provisions required are ones that can be dealt with by regulation to have a much tighter valuation procedure, along the lines that we proposed to you in October.

The recommendations we're coming to you with today are recommendations to do our very best to clean up and ensure that there is integrity, as much as there can be, in such a complex scheme of regulation. We continue to believe that the complexity of this scheme is entirely unnecessary and, frankly, entirely inappropriate.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Floyd.

As you know, we have to go to a vote, colleagues. The bells will probably start ringing in about 4 minutes, so we will leave here in roughly 19 minutes.

Have you questions, Mr. Ritz?

Mr. Gerry Ritz: Thank you, gentlemen, for your presentation.

I have one comment. Have you any dollar figures on the losses you expect charities would incur if this went through as you see it? Are there ramifications in these clauses and in this type of legislation to the universities and private schools and so on that have been using a lot of donations from the private sector in the last little while in order to make up the funding losses that they've seen in the cuts?

Mr. Gordon Floyd: Yes, there are ramifications to those institutions, and to many smaller charities as well. It's impossible to put a dollar figure on those. I would invite you, though, to look at the problem from this perspective.

We're really talking here about the donations that would be made by an entrepreneur whose wealth is typically tied up in a family-owned or other privately held company. In most cases, that kind of a donor is going to want to make a donation from the privately held company, a donation of shares or a donation of some part of the shareholder debt that's in that company. Those are the donations that are being discouraged and discriminated against with this type of legislation.

An enormous amount of the wealth in Canada is held in those kinds of entrepreneurial and family-owned businesses, and that's the kind of stuff that's being blocked or discouraged by this legislation.

• 1015

Mr. David Boyd-Thomas: In our submission to the committee from the Canadian Association of Gift Planners on October 27 we drew to the attention of the committee some gifts that were paralyzed, as it were, and put in stasis: for instance, a chair in humanities at the University of Calgary; a substantial gift of about $200,000 or $250,000 to the United Way in greater Toronto, and some other gifts we knew of. Unfortunately, because of donor privacy and confidentiality and because it's only proposed, we weren't at liberty to discuss who they were, but these were very much the situation of entrepreneurs who cared deeply about the mission of those particular projects and felt that was the only way they could fund at that level and they “had their hands tied”. Those were the words being used.

Subsequently we have heard there are mounting cases such as that, including my own institution at the University of Toronto.

Mr. Gerry Ritz: The arm's-length clause.

Mr. Gordon Floyd: The arm's-length clause is very important.

Mr. Gerry Ritz: If an alumnus tried to donate to his alma mater, of course, that's at arms' length. How do you get around that?

The Vice-Chair (Ms. Paddy Torsney): Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you.

I have a particular interest in this area. I represent a riding in rural Manitoba. For a number of years now the people in the southern part of the riding, the Mennonite people, have registered with Statistics Canada as having the highest rate of charitable donations and contributions through churches and other kinds of groups. I have to agree with you that attempting to explain some of the changes we are doing here in Ottawa to some of these groups is enormously complex and difficult. I certainly agree that the more simply that we can craft some of our instruments here and convey those properly to Canadians...we're all going to be better off for this, because there are, in my view, a lot of people, individuals and privately held companies, who would be willing under some of these actually very generous rules to make further contributions and therefore perhaps take the weight off government on other sides for different social programs and so on.

I have to confess that in the complexity of this, David, I was trying to follow your dissertation here, but it was a little difficult because it's my first round on some of these technical issues. The question I had was this. There are a number of Canadians who in the last few years, of course, because of the growth in mutual funds and stocks and so on.... It has pulled back a bit, but that gets into your question about when to cash in that option. What was the word you were using?

Mr. David Boyd-Thomas: Monetizing. It's the Department of Finance term.

Mr. David Iftody: Yes. I would want to see an instrument, or a way of crafting an instrument, and then being able to convey that to the public, to an average couple somewhere in Canada who in the past three or four years have seen their stock options grow and make considerable profits. They may sit down around this time of the year, or later, and say, well, you know, we've made some money; rather than sending it back to Ottawa...there are a number of exciting charities within our own community, in the arts or church or hockey club or what have you, which could use some extra help. In order to get them to that door to do that, I think we have to make that pathway very clear and very specific.

What kinds of things in that example—I don't want to go into the private part of it; it's a little more complex—those individuals in those stocks and mutual funds and wanting to do some profit-taking, what could we do in some pragmatic ways to facilitate that process?

Mr. Gordon Floyd: The provisions that are already announced policy, about reducing the capital gains tax on those gifts to public foundations or to charitable organizations, have already done an awful lot along those lines. I really do want to acknowledge that. We're seeing the difference right across the country in donations of publicly traded securities to public foundations.

Mr. David Iftody: Do you have a dollar increase on that from last year?

Mr. Gordon Floyd: We don't yet. The measure was announced only in February. We're still trying to gauge the actual dollar impact, and to measure that.

About the additional measures, I think David hit on this when he was talking about private foundations. Many of those people would like to do their philanthropy through a private foundation.

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Certainly if we look at the gap in philanthropy between Canada and the United States, we can account for almost all of that gap when we look at the difference in the private foundation activity between the two countries. Private foundation activity in Canada is minuscule compared to what exists in the United States, even after you multiply it by ten.

If we are hoping to close that gap, all the evidence indicates that the place where we will close it is by encouraging private foundation philanthropy in Canada.

These measures are discouraging private foundation philanthropy. As David referenced, the reduced capital gains tax, even for publicly traded shares, is not available if you make that gift to a private foundation, if you take the mutual funds and use them as the asset base for your private foundation.

Mr. David Iftody: What's interesting is that we had discussion here earlier about education—you probably heard the young man making his interventions—and my general sense is that many of these private sector donations in the U.S. are going to research institutes and universities. Is that correct?

Mr. Gordon Floyd: Yes, I think that education is the largest single beneficiary of private foundation philanthropy in the United States.

Mr. Tony Valeri: I have to echo Mr. Iftody's comments about the complexity and the technical nature of these particular amendments.

I also appreciate the comments you made with respect to your ongoing consultation with the Department of Finance. In fact, I think some of the changes are a direct result of your contributions.

I want to focus on the loanback question for a second. You can correct me if I'm wrong in my interpretation of this, but essentially what we see in front of us is the idea that when a donation is made from a private entrepreneur, a donation of say 10% of his shares as a private company, the issue is whether that individual should receive the tax benefit at the time of the donation or when those shares are monetized. Is that the basic thrust of your argument?

Mr. David Boyd-Thomas: Yes. Specifically, a monetization window has been proposed—this is the five years—that we feel is arbitrary. We feel that should be left open. Then the second follow-up to that, of course, would be we feel that the tax relief, the value if you will, should be determined at the monetization point, not when the gift is initially transferred to the private foundation.

Mr. Tony Valeri: The reason being that you expect the value to increase over that time?

Mr. David Boyd-Thomas: Yes.

Mr. Tony Valeri: Okay.

Mr. Gordon Floyd: It could change.

Mr. Tony Valeri: Right. Hopefully to increase.

What happens, then, if in fact what you're proposing is put in place and the taxpayer dies?

Mr. David Boyd-Thomas: There was actually a provision that there would be the deemed disposition and monetization would become a fait accompli at that point in time.

Mr. Tony Valeri: After the demise?

Mr. David Boyd-Thomas: Yes.

Mr. Tony Valeri: The other point I wanted to make was that in your first recommendation you're asking that the five-year window be eliminated—right?

Mr. David Boyd-Thomas: Yes.

Mr. Tony Valeri: Then you go further. Number seven says that the loanback rule is flawed, and you propose amending subsection 118.1(16) by adding a provision that makes the rule inapplicable where within a period, 60 months, after the donor acquires a non-qualifying security the security ceases to be non-qualifying or monetization occurs.

If you get the amendment in number one, what happens to this number seven? You would essentially say the window is gone, and monetization essentially would occur whenever it occurs, but what happens with this inclusion of other non-qualifying securities? What if monetization doesn't occur for twenty years? How does this rule fit in?

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Mr. David Boyd-Thomas: Actually, as you will see not in the recommendation part but in the explanatory text, it goes back to another part of the charities, fiscal management. That is the ten-year period, with restrictions, for endowed gifts.

I apologize, since we've made a bit of an assumption here as I read this. We were going to simplify it as our proposal to you.

For endowed gifts to charities, there's a ten-year holding period, which holds out from the disbursement quota the endowed gifts. What we were trying to do here.... For example, if a donor had made a gift of $10,000 in 1995 and then in late 1998 they decided, gee, we have new provisions by the Government of Canada, I'm going to give some shares in my XYZ Toronto Equipment Co. because I want to support that charity, those gifts are now...basically, they go through where the transfer has been made—not monetized yet, but they are now held by the charity. They are still within the ten-year window within the initial $10,000 to $20,000 gift from five years ago. We're still only at year three, and we're watching within that...because most charities hold these endowed gifts....

They are lined back to the one donor because typically they will be a donor's fund within the charity. It's the same project being funded. The hand of the disbursement quota on the non-qualifying security may just start to force disbursement on the initial funds which came in three years before, or at some point earlier.

Mr. Gordon Floyd: But the recommendation in number seven would still hold. It's just that the monetization period would be an open-ended monetization period rather than restricted by five years.

The Vice-Chair (Ms. Paddy Torsney): Mr. McKay.

Mr. John McKay: What is the Department of Finance theory on the five-year window? When I listen to your argument, it seems to make perfect sense. There's really no taxable consequence in the giving or the charity holding the asset until it cashes in its chips, if you will. Is the issue, from a Finance perspective, an issue of contingent liability? I just can't figure this out.

Mr. Gordon Floyd: This is a hold-over from the original resolution 21. The five-year period was originally included in the measure that was introduced in the budget.

I don't want to pretend I can get inside the heads of the Department of Finance officials who have been dealing with this, but they backed off in many aspects of this. This was one that held on.

Mr John McKay: There doesn't seem to be a logical defence for it.

Mr. Gordon Floyd: There doesn't seem to be a logical defence for it. As nearly as there is a logical defence, it has to do with record keeping that goes beyond five years.

Mr. John McKay: On the issue of record keeping, if I make a $100,000 gift of my mutual funds to Charity X, what is the record that gets created at that point? Why does the Department of Finance care?

Mr. Gordon Floyd: There was a record-keeping argument in the original proposal because there were other gifts that couldn't be made until the original gift was monetized, but with the current version that no longer holds. Even the record-keeping argument doesn't hold any more.

The Vice-Chair (Ms. Paddy Torsney): Ms. Redman.

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Ms. Karen Redman: On the point that you made about the amount of philanthropic activity in Canada versus that in United States, you said these measures were, in your estimation, not the direction in which we should be going. Are there proactive things we can do? Besides the government stance on charitable giving, are there other things at play that cause this schism between the United States and Canada? Just give me a quick answer.

Mr. Gordon Floyd: I think a significant part of the schism exists because of the existence of estate taxes in the United States. One way to avoid paying your estate taxes in the U.S. is to make a donation to charity. We're not here today to recommend the imposition of or the return of estate taxes in Canada, but I do think that certainly explains some of the gap.

I think the other significant tax-related factor that's at play does have to do with the treatment of gifts of appreciated property. Even after the provisions that are included in this legislation, the treatment of gifts of appreciated property in the United States is much broader than it will be in Canada. The rule in the U.S. is that a gift of publicly traded shares, privately held shares, or real estate holdings—which are both excluded from the Canadian legislation—is completely exempt from capital gains tax, whereas here they're being included at half-rates. Even publicly traded shares get included at half-rates. This is why we see David Packard making a $600 million gift in the United States, or Ted Turner making a $1 billion gift of shares. It's because they have these much more generous tax incentives to spur those very large gifts.

The Vice-Chair (Ms. Paddy Torsney): I'm getting some comments from my riding from people who want to make donations as well. The other day, when I asked the officials who were before us about some of these things, I know that they did seem to have a bit of an approach that there were black helicopters circling, and that they always had to be one step ahead of the thinking of some of the people out there. I think you may have hit the nail on the head with the comment that they're being overzealous in their attempts to try to stop people from ripping off the system.

I apologize for the slow exodus, but we do have a vote. Thank you very much for participating.

Mr. Gordon Floyd: Thank you.

The Vice-Chair (Ms. Paddy Torsney): The meeting is adjourned.