Paul Martin, the Finance Minister, has indicated he will likely extend beyond their five-year trial period the provisions that effectively halve the capital-gains tax on gifts of appreciated listed securities to not-for-profit institutions. This is encouraging, because the changes are achieving their purpose. But Mr. Martin should go even further and exempt such donations from capital-gains tax entirely.

This would considerably boost the endowment funds of universities, hospitals, research institutions and the like. They could hold the stocks for income and further growth or turn them immediately into cash. This would expand their capacity to fund undertakings such as scholarships, research projects and investments in better equipment and facilities.

Large gifts of appreciated stocks have been the backbone of the substantial permanent endowment funds built up by comparable U.S. institutions. The U.S. has long given a full capital-gains exemption.

Jean Chretien, the Prime Minister, himself acknowledged last month that U.S. endowment funds are overwhelmingly "out of all proportion to those of our universities." Harvard University, for instance, has an endowment fund of $16-billion (US), compared with $1-billion for the much larger University of Toronto. The point is that about 90% of the money in U.S. endowment funds comes from donations of appreciated capital property – mostly gifts of securities.

Mr. Martin narrowed the gap appreciably in his 1997 budget. He reduced the income inclusion rate on capital gains deemed triggered by donations of stocks to 37.5% from 75%. The donor gets a tax-deductible receipt for the market value of the shares, but must pay income tax at the top marginal rate on 37.5% of the difference between the effective cost base of the securities and market value. Eligible securities include stocks, bonds, warrants and futures listed on recognized stock exchanges.

However, this change will expire at the end of 2001 if not found effective in increasing donations and in "fairly" distributing the additional donations among the charitable sector. An official government analysis hasn't been done yet, but there's lots of anecdotal evidence of major increases in donations of listed securities to various kinds and sizes of charitable institutions. The donors say these gifts would not have been made without the change.

An example is the gift of $50-million worth of shares from Stewart Blusson, co-discoverer of the Diamet diamond mine, to the University of British Columbia for research funding. Universities in Alberta and Saskatchewan have reported sizable gifts or pledges of stock. The University of Toronto has received more than $40-million in donations of shares since 1997. The University of Western Ontario has had 10 gifts of shares totalling $1.5-million in just the past few months. The United Way of Greater Toronto has received $5-million in share donations. The Royal Ontario Museum has been given $1-million in shares to endow a curatorship. The Princess Margaret Hospital Foundation in Toronto has received $3-million in stock as part of a pledge to fund research chairs. About 7% of donations to Carleton University last year were in the form of securities, compared with only 1% three years ago.

Other charitable groups have reported increases in these kinds of gifts. Some had none in the form of shares before. But some recipients also say the size of some donations would have been greater with a full capital-gains exemption.

Apparently, though, Department of Finance officials think the present provisions are adequate. They have also argued that the trial-period measure provides a slightly more generous incentive in Canada than in a typical U.S. state. However, these assumptions are based on an average cost base for gifted shares of 40% of market value – an assumption that's disputed.

Donald K. Johnson, vice-chairman of Nesbitt Burns Inc., the Toronto-based investment firm, says this may be the case for small gifts, but the effective cost base is typically closer to zero for large gifts of securities by donors who have built their companies from scratch into successful enterprises. In these cases, U.S. tax treatment is more generous than here. Stanford University, for example, has just announced a $150-million (US) gift of shares for biomedical research. The donor would have been stuck with $28-million (US) in capital-gains tax if taxed the same way as in Canada. Stanford, by the way, has also received a stunning $600-million (US) in shares from the co-founders of Hewlett-Packard.

Mr. Johnson contends the benefits of eliminating the remaining capital-gains tax on donations of shares in Canada would far outweigh what some estimate would be $10-million to $35-million a year in forgone tax revenues. A prominent fundraiser for non-profit groups, he would also like the definition of gifted eligible securities widened to include shares purchased through the exercise of stock options.

Mr. Martin's fiscal update broached the possibility of relief from the other economic disincentives imposed by capital-gains taxation. This wider issue needs addressing, too. But a complete exemption on gifts of securities to charitable institutions would certainly quickly raise the level of Canadian philanthropy.