Should the government rethink the way it deals with charities?

Posted on September 14, 2016 in Governance Policy Context – Full Comment
September 14, 2016.   Lauren Heuser

If ever someone had cause to agree with Oscar Wilde’s quip, “No good deed goes unpunished,” it would be Canada Without Poverty. For 43 years, the charity has been fighting poverty. It has hosted dinners bringing together politicians and the poor. It has held policy summits. It has run a human rights course advocating changes to laws.

This, it turns out, is too much of a good thing. After a comprehensive audit, the Canada Revenue Agency concluded that a full 98.5 per cent of CWP’s activities were political in nature. Since the Income Tax Act prohibits charities from devoting more than 10 per cent of their resources to “political activities,” this is a bit of a problem.

CWP doesn’t deny its activities are political. To the contrary, it insists they must be for it to be effective. It’s therefore unwilling to restrict its activities, but also unwilling to forfeit its charitable status. As such, it has turned to the courts, seeking a declaration that the rules restricting its political activities unconstitutionally violate its freedom of expression and association.

This is a clever argument, although the case is more about the entitlement to a benefit than the denial of a freedom. Private organizations can say whatever they want. Charities cannot, but this is in exchange for the government exempting them from tax obligations and subsidizing charitable giving. CWP acknowledges it has no right to charitable status, but argues that once this status is granted, its freedoms cannot be unconstitutionally restricted. If CWP is right, government would be obliged to subsidize charities, regardless of what they say or who they associate with.

CWP is about as sympathetic a claimant as they come. But it would be dangerous to conclude, based on its example, that charities should be free to engage in political activities while receiving preferable tax treatment. What’s good for the goose is not necessarily good for the gander. Canadians might approve of CWP receiving state support, but would they also support subsidizing a religious charity that advocates discriminatory laws and policies? More problematically, charities could become the arms of political parties (think American-style political action committees). If they maintained their special tax status, government would end up indirectly subsidizing political parties, some more than others.

So what should be done? Some people argue the solution is to scrap the charitable rebates. If people feel strongly about poverty, they say, the will support a CWP regardless of whether they get a tax benefit for it.

Some donors would, but it seems certain the charitable sector would suffer as a result. It’s not clear we want this (which I say not only because I’m on the board of a charitable organization): a robust charitable sector benefits Canada as a whole.

For one, in democracies, public expenditures are largely dictated by majority preferences. In winning last year’s election, the Liberals got the go-ahead to fund the projects they said they would fund, because a plurality of voters backed their ideas. Minorities do not have the same ability to direct public funds to purposes that might improve aggregate welfare. By supporting charities, the government can improve aggregate welfare by enabling minorities to target projects that the majority might not support.

The charitable sector can also incubate good ideas. The government may lack information about the returns on certain investments (like research initiatives or breakfast programs for the needy), leading it to under-invest in important causes. Subsidizing charities can enable the government to leverage better information about the net social returns from certain investments.

If we accept that there’s a place for charities, and support at least some limits on their political activities, where does that leave us? In short: in need of a complete overhaul of the sector. Rather than one set of rules applying to all charities (regardless of their size and purpose), we need targeted rules that apply differently to different organizations. A CWP might need greater licence to engage in political activities; others might appropriately be kept to the 10 per cent limit. In all cases, a clearer definition of “political activities” is required and partisan activities should remain strictly off limits.

There’s a catch, though. Ottawa likely lacks the jurisdiction to implement these wholesale changes. Charities are the provinces’ responsibility. The feds have simply managed to legislate in this area using blunt tax laws (which helps explain the mess we’re in).

As one expert suggests it’s conceivable that — if challenged — a court might find that the “political activities” rule exceeds the proper purpose of Ottawa’s taxation power, and is thus unconstitutional on federalism grounds. This would pave the way for the provinces to step in with more nuanced legislation. Now that would be a constitutional challenge I could get behind.

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2 Responses to “Should the government rethink the way it deals with charities?”

  1. It’s extremely important for the Canadian government to regulate political activities a charity is involved in, because charities could use subsidies as a way to promote or demote political parties or policies. However, it’s often difficult for charities to create change or make a statement without involving political activities. Since charities can be extremely beneficial for Canadians well-being (especially for those of a minority or vulnerable group). Canada could implement alternatives for charities that exceed the 10 per cent of political activities without losing their charitable status. They could implement a penalty for charities that exceed this limit. Charities that exceeded this limit would been given less subsidies, this would encourage charities to limit their political activities while maintaining their charitable status and still receive some tax benefits. But this punishes charities that are addressing social issues that are heavily impacted by politics. So another alternative could be for charities to apply for a separate status which would grant them a higher per cent in political activities while still receiving full subsidies, if they could justify it was for a non-discriminatory, charitable purpose.

  2. Julia Kinna says:

    This article raises many exceptional points in terms of the government and how it deals with charities. However, I feel as though many people support charities for the reason in which that they receive a tax benefit for it and if that tax benefit was removed; it is possible that the numbers of donors would decrease. In that case, the charities would suffer. In my opinion, I believe a graduated step-down approach would be beneficial, depending on the percentage in which the charity is political in nature; the tax hold benefit will either increase or decrease. If a charity were under 10% related to government policy, the donor would receive 100% of the tax hold benefit back. If the charity were between 10-50% government related, the donor would receive 50% of the tax hold benefit back and so on and so forth. With this step-down approach everyone will still receive a benefit rather than it being all or nothing and it would encourage charities that surpass that 10% to do less political activities seeing as the revenue would go up. With that being said, in order for something like this to take place the CRA would have to change their guidelines.


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