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The International Journal
of Not-for-Profit Law

Volume 5, Issue 1, September 2002

A publication of the International Center for Not-for-Profit Law

Table of Contents


The Economics of Non Profit Accounting and Auditing: Suggestions for a Research Agenda
Marc Jegers

Australian Charity Law Reform Proposals
Prof. Myles McGregor-Lowndes

Charities and Terrorism: The Charity Commission Response
Debra Morris

Charity Law Review in Ireland and the Challenges for the State/Third Sector Partnership
Kerry J. O'Halloran

The Kamehameha Schools Admissions Policy Controversy
Randall W. Roth

Case Notes

Asia Pacific:
Fiji | New Zealand

Central and Eastern Europe: Croatia

Middle East and North Africa:

North America:
Canada | United States

Sub-Saharan Africa:
South Africa

Western Europe:
European Union | The Netherlands

Country Reports

Financial Action Task Force (FATF) on Money Laundering

Asia Pacific:
Regional | Burma | China | Japan | New Zealand | Singapore

Central and Eastern Europe: Estonia | Kosovo | Latvia | Romania

Latin America and the Caribbean: Regional

Middle East and North Africa: Regional

Newly Independent States: Belarus

North America:
Canada | Mexico | United States

South Asia:
Afghanistan | India | Sri Lanka

Sub-Saharan Africa:
Congo | Malawi | Nigeria | South Africa | Sudan | Tanzania | Togo | Zimbabwe

Western Europe:
Regional | Belgium | France | Germany | Italy | The Netherlands | Portugal | Spain | United Kingdom

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Editorial Board

Country Reports: North America


New Proposals for Federal Charities Regulation

by Robert Hayhoe*

As discussed in issues 2:4 and 4:2/3, the Canadian federal government is engaged in a series of consultations with the voluntary sector on a number of issues as part of the Voluntary Sector Initiative (“VSI”).  One of the working groups (or joint tables) of the VSI is the Regulatory Joint Table to which has been assigned the task of recommending changes to the legal environment for charities.  However, it is important to note that certain areas have been explicitly left out of the mandate of the VSI, including the definition of charity. 

The Joint Regulatory table has now published its much anticipated report Improving the Regulatory Environment for the Charitable Sector (the “Report”).  The Report contains recommendations in four areas: 1) accessibility, 2) appeals, 3) intermediate sanctions, and 4) institutional reform.  Although the report (commissioned by the Federal government) is ostensibly limited to Federal powers of responsibility (income tax), it does moot the possibility that charities which operate in multiple provinces may be subject to expanded federal jurisdiction. [1] The VSI is planning to hold a series of stakeholder consultations on its proposal in the Fall of 2002.

1. Accessibility & Transparency

The Report recommends that the charity specific documentation, which is now available to the public from the Canada Customs and Revenue Agency (“CCRA”) (application for registration, governing documents, T3010 information returns), remain available.  The Report recommends that financial statements attached to T3010s also be made available to the public (CCRA will not currently release this attachment).  The most significant change recommended for charity specific information is the publication of more or less detailed reasons for each application for registration which is granted or denied.  The Report also recommends that the CCRA make available to the public its internal policies and procedures on registration and other issues.

Both of these recommendations deserve support.  The new information which is being proposed to be released will enable charities and their legal advisors to better comply with the law and with the CCRA’s administrative policies.  It should also compel greater consistency in the CCRA’s registration decisions (for reasons discussed below under the heading of “appeals”.

2. Appeals

The current appeal process for a denial or revocation of registration by CCRA is an appeal on the record to the Federal Court of Appeal.  Since the Federal Court of Appeal is a senior level court, appeals to it are expensive and procedurally daunting.  The applicable Federal Court rules treat the registration decision of the CCRA as a decision by a tribunal and, as a general rule, do not permit reference to any evidence which was not before the CCRA at the time of its decision.

This is a cumbersome and inefficient process which is almost never used by charities.  As a result, the CCRA Charities Directorate functions with little judicial oversight and valuable precedents are not developed.  The Report recommends that the existing process be replaced with a mandatory internal CCRA review followed by a proper trial (with new evidence permitted) at the Tax Court of Canada. 

The recommendation for a new appeal process is a sound one, which addresses serious deficiencies in the current system.  It is also the same two-step process that is in place for the appeal of virtually all other Canadian federal tax disputes.  Furthermore, the Tax Court of Canada is arguably more suited to take on this role, in terms of both judicial background and subject matter jurisdiction, than is the Federal Court.

3. Intermediate Sanctions

The only penalty in the Income Tax Act for most violations by a registered charity is de-registration (with consequent loss of tax exempt status, ability to issue donations receipts and the imposition of a tax equal to the charity’s assets).  This penalty is too severe for most infractions, causing charities to feel threatened and causing the CCRA to feel that it lacks effective tools to compel compliance.  The Report recommends a four tier progression of compliance tools, as follows:

Tier 1 is proposed to be an educational function of providing general advice to the sector and specific answers to compliance questions from charities.  Tier 2 is proposed to involve the charity and the regulator agreeing on how a problem should be resolved.  The example given of the type of problem to which Tier 2 sanctions should apply is the failure to file information returns.  Tier 3 proposes financial penalties on charities of 5-10% of the charity’s previous year’s income as well as financial penalties on individuals who benefit inappropriately from a charity or who approve non-charitable expenditures in an amount of 25% of the benefit or expenditure.  The Tier 3 proposal for suspension of qualified donee status will result in the charity not being able to issue the donation receipts, which Canadian donors require in order for their donations to give rise to a tax credit.

In all cases, the report suggests that any substantial financial penalties be applied cy pres for charitable purposes by the government (rather than going to federal general revenue).

While Tier 1, Tier 2 and Tier 4 compliance tools are all in use by the CCRA at present, the proposed addition of the Tier 3 compliance tools has the potential to encourage compliance and discourage the CCRA from seeking to apply deregistration in situations where fairness does not warrant such a harsh penalty.

4. Institutional Reform

The Report considers four potential federal regulatory regimes for charities.  These are an enhanced CCRA Charities Directorate (perhaps flowing from the CCRA’s current Future Directions initiative (as discussed in issue 4:2/3), an enhanced Charities Directorate assisted by a sector-controlled advisory agency, a Charity Tribunal to make registration decisions (but with all other functions remaining with an enhanced CCRA), and a Charity Commission to carry out all functions now carried out by the CCRA.  The Report details the advantages and disadvantages of each proposed model and asks for input on the proposals.

* Robert Hayhoe is Barrister & Solicitor at Miller Thomson LLP in Toronto. He also serves as Regional Co-ordinating Editor (Canada) for IJNL.  He can be contacted at rhayhoe@millerthomson.ca

[1] Subsection 92(7) of the Constitution Act, 1867 ostensibly reserves constitutional jursidiction over charities for the provinces: “In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say, ...  The Establishment, Maintenance, and Management of Hospitals, Asylums, Charities, and Eleemosynary Institutions in and for the Province, other than Marine Hospitals.”  It might be possible to interpret subsection 92(7) to permit federal regulation of inter-provincial charities.  Although the issue is mentioned in the Report, it does not appear to have ever been considered in detail by a court or a commentator.

Updates on Canada’s Tax Legislation for Registered Charities

 by Paul Bater*

1. Volunteering.as a charitable activity The Canada Customs and Revenue Agency (CCRA) has announced in spring 2002 that, following a change in policy, it will now accept that an organization formed to promote volunteering for the benefit of the community through broad-based activities can be eligible for registration as a charity, and that such organizations are not required to limit their beneficiaries to registered charities or other qualified donees.

(Registered Charities Newsletter No. 12, Canada Customs and Revenue Agency, Spring 2002)

2. Unrelated business activities. In May 2002 the Canada Customs and Revenue Agency issued for consultation proposed guidelines on related business activities of registered charities.  Most charities, other than private foundations which are not allowed to carry on either related or unrelated businesses, will not lose their registration if they carry on a related business.  The concept of related business is not fully defined in the legislation and there is little case law on the subject.  The guidelines suggest that charity activities that would not be considered to be a business include: the sale of donated goods, occasional fundraising events and sponsorship deals, and managing its own investments.  Where a business exists, it will be considered to be “related” if it is linked to the charity’s purpose and subordinate to that purpose.  An unrelated business will be treated as related if 90% or more of those engaged in the business are unpaid volunteers.  If a charity operates an unrelated business, it will be exposed to de-registration unless it takes steps to arrange for the business to be carried on by a separate taxable corporation.  The charity can retain control over the taxable corporation if this is permitted by its governing documents, by the relevant provincial law (e.g. it appears that the Charitable Gifts Act in Ontario prohibits such arrangements), and by the Income Tax Act (which currently precludes foundations from acquiring, other than by way of gift, a majority of the voting shares in a taxable corporation).  Comments on the draft guidelines are invited by 31 October 2002. 

(“Guidelines for registered charities on related business activities”, Canada Customs and Revenue Agency, May 2002)

3. CCRA Guidelines on Audit of Registered Charities.  The Canada Customs and Revenue Agency has published guidance on its approach to auditing registered charities.  Once an audit is complete, the Charities Division of the CCRA will normally issue one of the following four types of letter:

Once a Notice of Intent to Revoke Registration is issued, the charity can file a notice of appeal with the Federal Court of Appeal within 30 days of the receipt of the notice.  Generally, a charity that appeals is allowed to maintain its registration until the court issues its decision.  Otherwise, the de registration is effective from the date of its publication in the Canada Gazette.

Applicants for registered status may also occasionally be audited.  Applicants that are at risk of being denied registration are normally sent an AFL and given 60 days to respond. Once a denial letter is issued, the applicant has 30 days to file an appeal to the Federal Court of Appeal.  (Registered Charities Newsletter No. 13, Canada Customs and Revenue Agency, Summer 2002). Editor’s Note: for related developments, see the report by Robert Hayhoe in this issue on the Joint Tables proposals.

4. Information returns. In September 2002 the Revenue Minister announced the results of a consultation on how the Canada Customs and Revenue Agency can improve service and compliance. The recommendations concerning charities include a reduction in the length of the charities information return (Form T3010) from 2003, and the introduction by 2005 of an online facility for all aspects of a charity’s dealings with the CCRA, including the ability to access public information returns of all charities.

(Future Directions, Canada Customs and Revenue Agency, 26 September 2002)

5. Proposed change in rule on large charitable donations.  The Federal Finance Department is considering an amendment to the Income Tax Act that would replace the current requirement that charities do not derive more than 50% of their capital from one source with a requirement that the donor maintains an arm’s length relationship with more than half of the directors, trustees and officers of the organization. The proposal is intended to encourage large private gifts to endow charitable foundations.

(Charity Village NewsBytes, 30 September 2002)

Prudent Investor Rule adopted in British Columbia

New legislation (the Trustee Investment Statutes Amendment Act) introduced in April 2002 will repeal the obligation to invest only in prescribed investments and allow charitable and other trusts established in British Columbia to adopt a “prudent investor” approach to making and managing their investments unless specifically restricted by the terms of the trust document.  This will go into effect once an implementing regulation has been issued.  Similar legislation (the Trustee Act) has also been introduced in Alberta with effect from 1 February 2002, but under this law older trusts are still required to comply with the list of prescribed investments.  PB (Miller Thomson Charities and Not-for-Profit Newsletter, September 2002)

* Paul Bater is Senior Research Associate – International Bureau of Fiscal Documentation.  He can be reached at paulbater@eudora.com


Change in Tax Status of NPOs

Article 70 of the Income Tax Law has been renumbered as Article 95 and amended, with effect from 1 January 2002, to extend the categories of not-for-profit organization to which tax deductible donations can be made.  The new categories include community development and environmental protection organizations.  The main categories of public benefit activities that continue not to be eligible for tax benefits include human rights and cultural activities, other than museums and promotion of fine arts.  Reported in the Official Gazette, 1 January 2002.  PB

United States

1. Church Politicking Bill Defeated

Despite backing from House Republican leaders and heavy lobbying by conservative Christian groups, the House defeated a bill that would have allowed churches and other nonprofit religious organizations to endorse political candidates and spend money to help elect them.  The bill would have amended § 501 (c)(3) of the Internal Revenue Code, which prevents tax exempt religious and other organizations for electioneering for candidates for public office. 

The 239 to 178 vote followed a debate in which supporters said the bill would restore First Amendment rights under the US Constitution to houses of worship. Opponents said it would erode the constitutional separation of church and state, also required by the First Amendment.

The bills' backers included Majority Leader Richard K. Armey and Majority Whip Tom DeLay, both of Texas; the Christian Coalition, Southern Baptist Convention, Family Research Council and Concerned Women for America; and evangelists Pat Robertson, Jerry Falwell and James Dobson.  Opponents included the United Methodist Church, the Presbyterian Church (USA), the American Jewish Committee, and the Congress of National Black Churches. 

2. GAO Report on the IRS and Not-for-Profits.  In April 2002 the US General Accounting Office issued a report on the supervision of charities.  Its main conclusions include:

The US Treasury is supporting legislation, which is currently pending in Congress, to remove some of these restrictions.  (“Tax-Exempt Organizations: Improvements possible in public, IRS and state oversight of charities”, GAO-02-526, 30 April 2002).

3. FEC Regulation Makes Exception for Not-for-Profit Organizations in Regulations under BCRA.  The Federal Election Commission (FEC) approved final regulations on September 26 implementing a ban on broadcasts by corporations (including not-for-profit organizations) and labor unions that refer to federal candidates within 60 days of an election or 30 days of a primary.  The FEC used its authority under the Bipartisan Campaign Reform Act of 2002 (BCRA), which directed the ban, to carve out two important exceptions: free air time and broadcasts by charitable, educational and religious groups that are exempt under Section 501(c)(3) of the Internal Revenue Code.

The final rule has not been published.  FEC's draft rule contained no exemptions, arguing that any reference to a federal candidate broadcast during an election cycle is likely to have some impact on the election.  However, when the FEC commissioners met to discuss and vote on the draft, several amendments were proposed.

Republican Commissioner Bradley Smith proposed the amendment exempting 501(c)(3) organizations from the ban, as did Democratic Commissioner Karl Sandstrom .  By the end of the day the Commission voted 4-2 to exempt 501(c)(3) organizations from the rules.  There are no lobbying or similar exemptions for other types of not-for-profits.

At the public hearing many groups urged the Commission to create exemptions that would protect nonpartisan speech.  OMB Watch and the Alliance for Justice argued for the exemption for 501(c)(3) organizations, noting that the tax code prohibits these groups from supporting or opposing candidates.

The new rules will become part of the record considered by the Supreme Court in a lawsuit challenging BCRA's constitutionality.  The FEC action will weaken arguments that the law infringes on free speech rights, since the broadcast ban is now clearly targeted at the kind of soft-money-funded attack ads that flooded the airwaves during the 2000 election.  For coverage of other FEC issues, see Case Comment: Beaumont v. Federal Election Commission, elsewhere in this issue .

*Karla W. Simon is Professor of Law and Co-Director of the Center for International Social Development at the Catholic University of America.  She is Editor-in-Chief of IJNL and can be reached at simon@law.edu.


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ISSN: 1556-5157