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'A charity is a charity is a charity'--The Common Law and Income Tax Act Charity Regulation.

As I write this column, a major government report on a Canadian social innovation and social finance strategy is pending. Earlier this year, the federal Budget contemplated exploration of preferential tax treatment for certain types of journalism. In each of these fields, it has been suggested that means be found to give groups access to charitable foundation resources, if not to full charity status.

In the early decades of the last century, Parliament extended charity tax preferences under the Income Tax Act (ITA), which had earlier been available to a limited number of organizations. In doing so, it used the common law meaning of charity, rather than creating a statutory equivalent. This decision to use the common law methodology to determine what qualifies as a charity, rather than listing types of organizations or named organizations as eligible, has shaped the federal regulatory regime since its inception. Whether Parliament's choice was purposeful or more a consequence of convenience than forethought can be debated, but it has unquestionably complicated the work of both the federal charity regulator--the Canada Revenue Agency (CRA)--and the country's registered charities.

The common law tradition generally views any charity as a charity with the same privileges as any other charity and as subject to the same constraints as any other charity (i.e. 'a charity is a charity is a charity'). This view is held regardless of whether its objects mandate it, in the famous formulation set out in Commissioners for Special Purposes of the Income Tax v. Pemsel (Pemsel), to relieve poverty, advance education, advance religion or undertake other purposes beneficial to the community in a way that the law regards as charitable.

Among other tenets of charity common law is the requirement that a charity pursue exclusively charitable objects. This is an obligation that has been somewhat eased by case law allowing pursuit of ancillary and incidental endeavours (essentially work that on its face doesn't appear charitable, but is a means to achieving charitable ends) without offending the exclusively charitable requirement.

Yet another principle, also found in Pemsel, is that charity is not limited by political jurisdiction. So Canadian charities can carry on or fund work abroad, and foreign charities can fund or do work in Canada. The key common law limitation on this is that endeavours, whether foreign or domestic, cannot be illegal or contrary to public policy, as these characteristics disqualify conduct from being treated as charity.

In Canada, the federal regulatory regime over charities has grappled with this common law legacy in a number of ways. Certain types of entities not fitting within the meaning of charity as defined through case law have been afforded treatment akin to charities under the ITA. These entities are called qualified donees. As well many ITA charity provisions reflect or are structured as proxies for common law strictures with respect to charity. In their particulars, such ITA measures may ease or restrict common law requirements.

This hodgepodge is apt to cause confusion, partly because sometimes regulatory provisions adopted for tax policy reasons are quite out-of-step with the requirements established by the common law. Measures requiring registered charities to be resident in Canada, and mandating tracking of the flow of foreign monies into Canadian charities, for example, are clearly rooted in tax policy not common law. The common law doesn't generally fetter either of these aspects of charity.

If, as is sometimes suggested, the common law is opened up to accommodate social innovation/social finance, the delicate balance that limits private benefit relative to public benefit under charity common law would need to be accounted for. And, if through legislation you provide for certain non-profit journalism as qualifying as charity, it is not clear how you reconcile that with the common law prohibiting partisan involvement and limiting non-partisan political engagement by charities. (Or for that matter, with ITA provisions regulating the political activities of registered charities.)

Canadian law to some extent distinguishes between charities that do their own work (charitable organizations) and those that fund the work of other charities (public and private charitable foundations), but does not typically draw a distinction between funding from individual donors and funding from foundations. Doing so for social innovation/social finance and/or journalism groups, would effectively create different classes of charities.

Moreover, moving away from the 'a charity is a charity' principle would introduce even greater complexity into a system that is already widely seen as overly complicated.

One solution to this dilemma might be to treat certain social innovation/social finance and/or certain journalism groups as qualified donees. However, as well as necessitating carving out detailed special rules for such groups in legislation to address how they could depart from general principles that apply to others, doing so would be at odds with recent trends to have qualified donees increasingly subject to the registration and regulation that applies to other registered charities.

As well, essentially, the ITA regulatory regime is a closed system that contemplates restriction of the use of tax-supported donations for a limited range of public benefit ends. That said, except for certain measures to prevent tax avoidance, inter-organizational transfers of resources are not closely tracked or constrained, and any effort to do so because certain groups are given different privileges from others would put more stress on already strained regulatory resources.

As possible reforms of the federal charity regulatory regime are explored, flawed understanding of the interaction between the common law and tax policy could undermine reform efforts and thwart any simplification of the system. Whether considering who's in and who's out or how legislative or administrative measures could be improved, knowing what considerations are in play--and why--will be essential to bettering the system.

Filed Under: Not-for-Profit Law Tagged With: charities, charity, Income Tax Act, regulation

By Peter Broder (Posts by Peter Broder)


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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Author:Broder, Peter
Date:Jul 1, 2018
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