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Regulatory bias.

It is now commonplace that the traditional distinctions between the private, public, and voluntary sectors are becoming blurred. There is, undoubtedly, an element of truth to that given the rise of "triple bottom lines", public-private partnerships, and interest in social enterprise in the voluntary sector. But two recent federal regulatory initiatives show that voluntary sector organizations remain much more prone to strict oversight than their for-profit counterparts. This means that if there is indeed an increasing overlap between the sectors, charities and not-for-profit organizations face a marked disadvantage in how they operate.

Over the summer, Industry Canada released its proposed Regulations for the new Canada Not-for-Profit Corporations Act (CNCA). The Regulations establish the thresholds and parameters that will apply when the department begins to administer the new law.

The CNCA drew controversy when it was being developed because, although it replaces a statute that is nearly a hundred years old and modernizes the framework under which federal not-for-profit corporations will be constituted and operate, it features an approach under which voluntary sector organizations are regulated in a manner akin to the way for-profit entities are under the Canada Corporations Act (CCA). This entails, in most instances, treating members as equivalent to shareholders and giving them similar rights and remedies.

The importance of moving to an approach where stakeholders become primarily responsible for minding the governance and operations of federal not-for-profit corporations, and away from the activist government regulation of the old legislation, should not be gainsaid. However, the shift to shareholder-style democracy is a difficult cultural change for some types of not-for-profit organizations--such as faith-based groups.

Disputing whether it is appropriate to equate members and shareholders can distract from another crucial element of the new regulatory scheme. Although a greater emphasis on the role of members was one aspect of the new Act, it also imposed an onerous accountability regime based on the source and amount of the revenues received by the corporation. If a not-for-profit corporation derives more than $10,000 from the public or government during a fiscal year, that triggers a set of enhanced accounting and disclosure requirements.

This accountability regime betrays an attitude to regulating not-for-profit corporations more in line with the historical approach of government of the sector rather than the modernized take that is supposed to inform the new statute.

Differential accountability is not unprecedented. Under the CCA, corporations making public share offerings have different accountability requirements than private companies. However, imposing enhanced obligations on the relatively few publicly-traded companies in the for-profit sector is not the same as requiring increased accountability of the huge percentage of not-for-profit corporations getting revenue from government or the public.

What's evident here is the very different regulatory mindset that seems to apply to voluntary sector groups. Under the CNCA, the threshold for the enhanced requirements kicking in is $10,000--at which point, the organization becomes what is known as a "soliciting corporation." Any soliciting corporation with $50,000 in annual revenue must (subject to certain exceptions) hire a public accountant and undergo a more rigorous review of its books than an equivalent size group that isn't a soliciting corporation. It may also have enhanced filing and/or disclosure obligations.

If the same criteria applied to for-profit entities, massive numbers of companies would be caught by the provisions. Federal, provincial, and municipal governments routinely fund for-profit concerns through measures like salary subsidies, economic development grants, and support programs for product development and marketing (see In Alberta, for example, the provincial government supplements the wages of workers in accredited for-profit child care facilities in amounts that would see any organization with more than a handful of employees easily surpassing the $10,000 threshold. And where this type of direct funding isn't available, indirect support is often available in the form of preferential tax treatment and other measures.

The double standard applied to the voluntary sector is even more apparent in a private members Bill being considered by Parliament. That legislation, Bill C-470, proposes a $250,000 cap on compensation for employees or contract staff of registered charities. Charities not complying with the cap would be subject to deregistration. A key rationale behind the measure is the fact that registered charities can issue receipts to their donors which means that the government foregoes the tax revenue associated with these donations.

Supporters of the Bill suggest that, even though the contribution made by the government through its preferential tax treatment often represents only a small portion of the overall revenues of the registered charity, this contribution should allow the government to dictate decisions made by the governance body of the organization on how to staff and operate the charity.

The foregone revenues on the Research and Development Tax Credit--let alone other preferential tax treatment available to for-profit businesses--exceeds the tax expenditure on credits and deductions for personal and corporate charitable donations. Yet there is no suggestion that the measure be extended to the for-profit firms that typically benefit from the Research and Development Tax Credit.

Perhaps it is time to level the playing field and either apply these measures to everyone or to no one.

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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Title Annotation:Not-for-Profit Law; government regulations on voluntary sector organizations
Author:Broder, Peter
Geographic Code:1CANA
Date:Jan 1, 2011
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