With a federal election slated for this October, there is little chance we will see any major changes to the Income Tax Act (ITA) rules governing registered charities in the coming weeks.
Once the election is over, however, whichever party forms government could do worse than use the recently-released Report of the Special Senate Committee on the Charitable Sector as a blueprint for a needed and long-awaited revamping of federal regulation of charities and non-profit organizations. The report, Catalyst for Change: A Roadmap to a Stronger Charitable Sector, is available online.
Leaving aside the issue of the role of registered charities in public policy debate, which was the subject of new legislation passed by Parliament last December, charity regulation is not something that has drawn much attention federally in recent years. (Indeed, action on the political activities rules was only prompted once there had been a successful court challenge to the old ITA provisions under the Canadian Charter of Rights and Freedoms.)
The report offers a roadmap for addressing a host of problems plaguing the current regulatory regime.
It features 42 recommendations, and while not all of them will be feasible to implement or are uncontroversial, taken broadly they present the opportunity to:
- modernize the current regulatory system;
- simplify or clarify various regulatory structures or requirements;
- reduce unnecessary red tape for registered charities and other sector groups; and
- better align Canadian regulatory practice with that of comparable jurisdictions.
The report, Catalyst for Change: A Roadmap to a Stronger Charitable Sector, is available online.Major reform of the framework would also almost certainly trigger large efficiency gains both for the regulator and sector organizations.
Before any reform is undertaken, it is important to better define the rationale for charity regulation. That will both help ensure consistent future development of law in this area and reduce the risk of overwhelming organizations that are heavily volunteer-driven with compliance obligations. Commonly cited rationale are:
- to preserve tax-assisted assets (for eventual use on public benefit purposes);
- to economize or limit a tax expenditure; and
- to justify, and support, some idea about what is legally considered charity.
Historically, in Canada, what qualifies as a registered charity has largely been defined through the common law – past rulings by judges about what kinds of philanthropic endeavours fall within the legal meaning of charity. But, because registered charities and their donors enjoy generous tax privileges, there has been ongoing debate over to what extent ITA legislation should reinforce or modify the common law of charity – which allows for a wide range of altruistic, public benefit endeavours.
In the view of many legal scholars, once a group’s endeavours (as set out in its purposes or objects) have been accepted, a charity can engage in whatever conduct it chooses so long as that conduct is not illegal, contrary to public policy or otherwise at odds with its charitable character. In contrast, it is typical under the ITA for certain transactions or types of transactions to be prohibited or constrained. How these approaches are reconciled will obviously have a big impact on whether charities operate in an enabling or restrictive environment.
Once these preliminary questions have been answered, attention can be turned to the Senate report.
Crucially, the report endorses:
- a new Tax Court appeal process for charity registration and revocation decisions;
- a program to assist organizations in bringing those appeals;
- streamlining of the categories of registered charity (from a charitable organization/public foundation/private foundation model to a public charity/private charity model);
- development of a standardized reporting mechanism across departments and jurisdictions and improved treatment of overhead and infrastructure costs in government funding of sector groups; and
- reform and/or clarification of direction and control (specifically, a move to an expenditure responsibility standard of accountability) and related business regulatory requirements and several operational improvements in the CRA Charities Directorate.
Other positive ideas featured in the report include calls for:
- more systematic and regular research on the sector;
- regular review of ITA provisions governing registered charities and more precise drafting of legislation pertaining to them;
- policy changes to promote giving and volunteering and an initiative to reduce volunteer screening costs for sector organizations;
- better support for charity and non-profit organization human resources including development of a portable pension plan for the sector;
- measures to foster diversity in the sector governance and personnel;
- a commitment to federal funding practices based on longer timeframes and proportionate reporting requirements;
- bringing sector organizations more fully into government innovation and procurement initiatives;
- more accessible capitalization for sector work and ventures; and,
- reform and clarification of certain rules for non-profit organizations.
Further study is proposed for issues such as: the most appropriate regulatory regime for non-profit organizations that are not registered charities; what charities should report on the T3010, and public disclosure of sector ITA filings and decisions; the current ineligible individual rules; the impact of anti-spam measures on the sector; and, certain changes around tax treatment of gifts of real estate and shares in privately-held corporations.
… charity regulation is not something that has drawn much attention federally in recent years.Another aspect of the report worth commending is a call for pilot projects on a destination of funds test and permitting gifts to entitles other than qualified donees with appropriate safeguards.
Matters that the report recommends be referred to the newly-established Charity Advisory Committee (for which one recommendation endorses a broad and inclusive membership) include:
- the question of adoption of a statutory definition of charity versus continued reliance on the common law;
- the merit of changing the disbursement quota and whether it ought to be set by statute or in regulation;
- establishment of clear policy rationale and a principle-based framework for qualified donee and other tax-assisted categories of organizations; and,
- exploring an appropriate regulatory approach to donor-advised funds.
At least one recommendation needs to be re-thought or refined. It isn’t clear that the suggestion to situate a Sector Secretariat under the Minister of Innovation is the best option for ensuring that adequate thought is given to how a wide range of government policy potentially affects the voluntary sector.
Overall, however, the report charts an exciting path forward.
About Peter Broder
