Innovation and the Charitable Sector

Not for Profit Law Column

The merger of the Canadian Cancer Society and the Canadian Breast Cancer Foundation  announced on February 1, 2017 has been welcomed by many.  The hope is that by  joining forces  the two organizations can have greater impact on cancer research and support programs.

For those who lament the large number of charities in Canada and what’s dubbed (without any widely-accepted metric) the “inefficiency” of many organizations, this type of move is self-evidently a good thing.

In the case of the Canadian Cancer Society and the Breast Cancer Foundation, because of their similar mandates, there are likely organizational synergies that can be realized by the merger. There will certainly be some donors that will be happy not to receive solicitations from similar charities, so bringing the two together may be the right move.  Even so, it may be worthwhile questioning the assumptions that fewer is inevitably better and bigger is always more efficient.

At common law, charities – along with meeting certain other criteria in how they are constituted – are granted status because their purpose is to do good or to relieve disadvantage.   On this basis, unless one is willing to argue that in 21st century Canada there is already enough good or no further need to relieve disadvantage, it is hard to make a case that there are too many charities.

Because of their tax status, charities are not eligible for Research and Development Tax Credits that are available for their for-profit counterparts. Many of the government programs that support private sector innovation are also closed to them.  Moreover, although the common law contains measures to discourage the wasting of charitable assets – or more precisely to hold accountable those responsible for the stewardship of charitable resources for carelessness or misuse of the property in their care, it pays little heed to “efficiency”.  Instead, it values prudence and caution over getting the biggest bang for the buck.  This leads directly to charities being expected to limit themselves in what business activities they undertake.

In some jurisdictions common law restrictions on putting charitable assets at risk are reinforced in legislation. Such statutes, however, are frequently little known and little enforced.

Adding confusion to this is the better-known fact that registered charities and their donors are granted highly favourable treatment under the federal Income Tax Act (ITA). From this ITA recognition often flows preferential treatment under tax and other statutes at the federal, provincial and municipal levels.

Even though, in the aggregate, less than 10% of charity revenues flow from personal and corporate donations, and of that percentage only about 50% is subsidized by government in the form of foregone taxes, the preferential treatment leads to registered charities being viewed primarily as a “tax expenditure”.   In the public imagination this generally translates into a rationale for a robust regulatory regime to control what charities do, and how they do it.

More particularly, preferential treatment helps give rise, or at least contributes, to complaints about “too many charities” or that “many charities are inefficient”.  Since charities’ successes frequently can’t be gauged in financial terms, it is easy to find this worldview compelling.  While in some jurisdictions there has been a move to impute a monetary value to the benefits arising from tax expenditures, as well as to the costs, that is not yet the norm.  So, one is only looking at one side of the balance sheet.

This leaves us with characterizations of the charitable sector that are not only ill-considered, but may be at odds with what should actually be happening.

At common law, charities – along with meeting certain other criteria in how they are constituted – are granted status because their purpose is to do good or to relieve disadvantage.   There is much discussion these days about economic disruptors, and how many traditional industries are being undermined, replaced or rendered unrecognizable by nascent technologies and new ways of working.  In the face of this, the federal government sees innovation as key to future Canadian economic success. In its last budget it identified several sectors where it will be actively supporting development of new products, services and technologies.

Because of their tax status, charities are not eligible for Research and Development Tax Credits that are available for their for-profit counterparts. Many of the government programs that support private sector innovation are also closed to them.  Yet, historically, the sector has been a fount of innovation. Many features of contemporary Canadian society – whether in social welfare, health, education, environmental protection, human rights or other areas – have been pioneered in the charitable sector.

That makes it doubly important that we do not stifle organizations because of an impression that they are too numerous or because they apparently don’t operate with requisite efficiency in financial terms.

Only time will tell whether the amount of fundraising and research capacity – to name only two key elements of the work – of the merged cancer groups will equal that of the two old organizations.

Clearly, institutional players and large corporations have a role to play in innovation. However, recent economic history shows that transformative ideas often originate in small organizations and unexpected places.  That suggests that, in the charitable sector, we should merge with caution.

Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton, Alberta. The views expressed do not necessarily reflect those of the Foundation.
About Peter Broder

Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton, Alberta. The views expressed do not necessarily reflect those of the Foundation.

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