The federal government’s move to eliminate capital gains taxes on the -donation of publicly listed securities to private foundations is being welcomed by Canada’s phi-lanthropic sector.

“We’re delighted to see capital gains taxes eliminated,” says Hilary Pearson, president of Montreal-based Philanthropic Foundations Canada.

The Private Giving Foundation at TD Waterhouse Group Inc. is also “thrilled” with Ottawa’s move, says Jo-Anne Ryan, the foundation’s Toronto-based executive director.

The main focus of the foundation is “donor-advised funds.” Clients can give directions regarding how their contributions are spent but leave the administration to the foundation. Ryan says TD also works with clients to see what giving vehicle best suits their phi-lanthropic planning. “We also have clients who want to set up their own foundation,” she says.

The change, announced in the 2007 federal budget will mean more potential business for advisors, Ryan says. Clients who want to contribute more to their existing private foundations, or clients looking to set up private foundations, will be seeking financial advice. Advisors can be part of a foundation’s team, along with lawyers and accountants. “It keeps them in the loop,” she says.

This is the fourth change Ottawa has made to capital gains taxation affecting charitable donations since 1997. Prior to that year, donors to all foundations — public and private — had to include in their income 75% of the capital gains on listed securities donated to a charity.

In 1997, the inclusion rate was cut in half, to 37.5%, for donations made to public foundations — but not to private foundations.

In 2000, Ottawa reduced the capital gains inclusion rate for all taxpayers to 50%. However, donors to public foundations got an even better boost; the inclusion rate for them dropped to 25%.

In last year’s budget, Ottawa completely eliminated capital gains taxes on donations of publicly listed securities to public foundations. Then, in this year’s budget, donors to private foundations got the same benefit.

“There has been considerable lobbying to make this happen,” says Heather Evans, a lawyer and partner with Deloitte & Touche LLP in Toronto.

This zero inclusion rate will apply to gifts made to private foundations on or after March 19, 2007.

The potential downside of Ottawa’s announcement is a set of rules, called the “excess business holdings regime,” designed to control private foundations’ holdings.

Philanthropic Foundations Canada “is resigned” to the new regime, says Pearson, but it intends to talk with the federal Finance Department about the details before the budget proposals become legislation.

The federal government made a commitment in last year’s budget to consult with private foundations and philanthropic organizations about the development of “self-dealing” rules.

Finance Depart-ment officials were concerned that people could get unduly beneficial control over a particular company through the combination of having their own shares in the company and shares of the same company held by their private foundation. This also could be a way of getting a tax benefit for donating shares while still maintaining corporate control through their foundation.

The excess business holdings regime places limits on foundation shareholdings; these take into account all the holdings of non-arm’s-length people connected to a private foundation.

In an unexpected twist, Ottawa has mandated that the regime will apply to both publicly listed and private, unlisted shares. “We were not expecting this,” says Pearson.

Wealthy clients often set up private foundations so they can donate their private shares into them, says Karen Cooper, an Ottawa-based lawyer with Carters Professional Corp. For example, an entrepreneur might want to sell his company and donate the sale proceeds and some of his shares into a newly established private foundation that he wishes to run — so he can give back to his community.

Another example, says Evans, is when an entrepreneur takes his company public and then donates the shares to his private foundation.

While efficient tax planning may be one of the reasons for setting up a private foundation, it does not necessarily imply self-dealing. The experts are waiting to see Ottawa’s proposed legislation.

The excess business holdings regime identifies three ranges of shareholdings, each with different implications for a foundation:

> Safe Harbour: A foundation will be in a “safe harbour” if its holdings total 2% or less of all outstanding shares for each class of shares that it holds of that corporation.

@page_break@> Monitoring Required: If at any time in its taxation year, a foundation’s holdings of one or more share classes of a corporation exceeds 2%, the foundation will be required to report the shares held at the end of the year, in all share classes of that corporation, by the foundation and by non-arm’s-length persons.

> Divestment Required: When the foundation and all non-arm’s-length persons hold more than 20% of all outstanding shares in any share class of a corporation, divestment will be required.

Private foundations currently are required to report the total value of their investment assets to the Canada Revenue Agency each year when they file an information return. However, they are not required to disclose what securities they hold.

This is changing under the new regime. The following information will be made public: when a foundation is outside a safe harbour regarding any corporation; the name of the corporation; the total percentage of the foundation’s shareholdings of the corporation; and the corporate shareholdings of non-arm’s-length persons.

However, the identities of non-arm’s-length shareholders will still remain private. IE