The International Journal
of Not-for-Profit Law
Volume 1, Issue 3, March 1999
The months of January and February saw a number of developments relating to non-profit organizations in Canada, though the ultimate impact of these events remains to be seen.
In the second issue of this Journal, an article appeared dealing with the decision of the Supreme Court of Canada in the case of the Vancouver Society of Immigrant and Visible Minority Women. While the Society lost that case by a vote of 4-3 and thus was not registered as a charity under the Income Tax Act, the reasoning of the majority is still being studied to determine the implications of its rationale, which included a greater emphasis than in the past on an organizations purposes as well as an explicit broadening of the meaning of the term “education” within the classic common law definition.
With a short period of time, we had the following developments.
- The Supreme Court refused to hear the appeal of Human Life International (Canada) from an earlier decision of the Court of Appeal. This latter decision took an expansive view of the question of what are prohibited political activities for charities in Canada and many were hoping that the top court would modify the lower court’s views.
- The Federal Court of Appeal asked for further written arguments in the case of Alliance For Life in the light of the Vancouver Immigrant Women case, even though the case had its oral arguments four months earlier. This will be the first time the Court of Appeal will be called upon to interpret what the Supreme Court said in the Vancouver case. A decision in this case should be coming out in late April or early May and will tell us much about the actual impact of the Supreme Court decision.
- Revenue Canada, just before a hearing date was to be set in the case of Grand Forks Volunteer Bureau Society, reversed its stance and decided to register the organization whose primarily goal is to train volunteers and to match individuals with organizations which needed volunteers. This was a major policy change by Revenue Canada in that it has accepted that the organizations which volunteers could be matched with need not be limited to registered charities but could include most non-profit organizations even if they did not fit the common law definition of charities.
Revenue Canada also issued a long-awaited paper on Community Economic Development (CED) which tries to come to grips with finding a position between the common law position that a charity cannot offer economic benefits to individuals except within the limited common law definition (ameliorating poverty, scholarships and the like) and the growing recognition that job creation and economic development are crucial methods to fighting many of society’s current economic woes. (The British Charity Commission is struggling with this issue as well.)
The paper, which is stated to be a discussion paper but which de facto now represents Revenue Canada’s policy on the topic can be found at the Charity Division’s web site. The address is https://www.rc.gc.ca/~dwdrink/rc4143e.html
The paper has received widespread approbation in the Canadian charity community and many from outside Canada who have seen it have been favourably impressed with its attempt to meet current needs while at the same time remaining consistent with common law principles.
The so-called Broadbent report came out in early February, delayed many believe, until the Supreme Court came down with the Vancouver decision. This report, entitled Building on Strength: Improving Governance in Canada’s Voluntary Sector was the final report of the group and was based on cross-country hearing and submissions which were stimulated by its earlier discussion paper, Helping Canadians Help Canadians: Improving Governance and Accountability in the Voluntary Sector .
As expected, the very lengthy report came up with a series of recommendations in the various areas it studied and heard submission on. These were:
- Capacity Building
- Organizational Governance and Stewardship
- Program Outcomes
- Access to the Federal Tax System
- Regulation of Financial Management
- The Legal Framework
It is beyond our capacity to review all of these areas in these pages, but we would first say that generally speaking, we feel that the panel did a remarkable job, particularly since the members were (deliberately) chosen from outside the sector. It was believed that “outsiders” who know well the working of both organizations and government would carry more weight than having a panel made up of “experts” who might be seen to have their own agendas. We suspect that this decision was very wise, indeed, in the process of trying to get the ideas accepted by both organizations and government.
We have had strong interest in a few of the areas covered (which does not mean a lack of interest in the others) and we trust we will be forgiven if we focus primarily on the recommendations in these areas.
One of our long-time concerns has been what has come to be known as the “definition” problem, which organizations will be recognized as charities for tax purposes. The report deals with this subject under the rubric of “access” to the tax system. It’s recommendations, which we wholeheartedly agree with , are summarized as follow:
“We propose the following process for establishing a legislated definition:
- A task force (involving representatives of government and the voluntary sector with the sector as a full and equal partner) be established to develop a modernized concept.
- This proposal is presented to Parliament which debates and adopts a definition which is incorporated in the Income Tax Act.
- The definition should be reviewed periodically to meet changing circumstances and values. Review by a task force of government and sector representatives every ten years should be made mandatory in the legislation. Individual organizations that have been denied status could still appeal to the courts if they believe that the policy has been misapplied by the agency responsible for registration. The definition having been decided upon by Parliament, however, such cases in the future would be less significant in shaping the direction and content of the policy.
- The registration process should be open and transparent. All applications for and decisions regarding registration should be considered public information. The federal government should routinely publish policy guidelines for interpretation related to “grey” areas between legislative reviews.
- The court of first instance for appeals of federal government decisions on individual cases should be changed from the Federal Court of Appeal to the Federal Tax Court in order to make the appeal process more accessible and less expensive.
We believe that a modern democratic process of deciding which voluntary organizations get full access to the federal tax system will go a long way to promoting greater transparency and credibility of the sector.”
The Committee then looks at another matter close to our hearts, the issue of what body should regulate charities and make decisions:
“After further research and consideration, we recommend an institution that might be seen as a blend of our original models 2 (a federal commission) and 4 (the non-governmental model), with elements taken from each. We have concluded that the new agency should be attached to the federal government for two main reasons:
- the Commission would have an important role in recommending registration for new applicants. This is a recommendation involving public dollars under the federal income tax system. It is extremely unlikely that the federal government would, or should, delegate such responsibility under the Income Tax Act to a third party. The continuing attachment to the federal income tax system is also one reason that the Commission is appropriately a federal responsibility.
- there is a compelling rationale for having one national agency that is a central repository of information about voluntary organizations and that ensures sound accountability, as well as national registration, rather than separate provincial and territorial agencies or processes. Moreover, few voluntary organizations today operate in geographical isolation, even if they operate primarily at the local level. Many belong to national umbrella organizations; with the popularity of the Internet, a local organization could fundraise nationally, or even internationally. Thus it is simply not efficient or effective to have the proposed functions of the Commission duplicated in each province and territory.”
There is further discussion about the role, functioning and makeup of such a commission. We happen to agree, once again, with almost the entire set of suggestions n(including federal government financing). While we know there will be debate about details, we hope that the discussion will now go beyond the current status of whether the process should be taken away from Revenue Canada (it indubitably should) and focus on the nature of the replacement body.
The Report also deals with a third contentious tax related issue, the business activities of charities and non-profits.
“In our view, a business should be considered related and permissible if it:
- promotes, extends, supplements or is an offshoot of the organization’s charitable goals, or;
- uses specialized expertise developed in the course of the charitable work, or;
- maximizes the use of assets and personnel necessary to the usual operation of the charity, or;
- uses goods or services which have all been donated, or;
- involves substantial voluntary labour in the production or distribution of the goods and services, and;
- does not place the assets or finances of the organization at undue risk or displace the charitable mission as the dominant activity, and;
- does not distribute the income earned for private gain (naturally, salaries and operating expenses can be paid).
- The Income Tax Act and other legislation should be amended to permit registered voluntary organizations to undertake business activities that are neither related to their mission nor conducted primarily with voluntary labour, but require them to pay income tax on the profits from unrelated business. If an unrelated business is divested into a separate, taxable entity, this entity should be able to deduct from its income, subject to the usual limits, its donations to its owning charity.”
This last recommendation would follow the practice of many countries, including the United States. While we recognize in principle that this is a valid approach, we remain concerned that the approach will lead to the kind of mare’s nest found in the U. S. where there are continuing legal fights about what is or is not a “related” business. The Broadbent “tests” of relatedness are fine as an expression of principle, but would be difficult to administer fairly.
We would note, without comment, one other recommendation. A revised system should
reaffirm and maintain the legitimacy of space for non-partisan political advocacy. While partisan activities should continue to be forbidden, the right of bearing a public witness on an issue affecting the very purpose of a charitable organization should be affirmed. The rules governing advocacy activity need to be clarified in ways that can be better understood, that militate against arbitrary application and that cohere with the values of a healthy civil society. In particular, the 90/10 rule has to be regarded as only an approximate standard since allocations under it are extremely difficult for a registered organization to calculate or Revenue Canada to measure. The important tests are that the rule not be applied in an arbitrary or unduly restrictive manner.
Thought this article in much longer than those we normally run in these pages, it does not begin to do justice to the quality of the Report as a whole. (For example, recognizing the need for different reporting requirements based on the size of an organization is a welcome suggestion, implementation being long overdue.) We are optimistic that it will help move the process towards a legislated solution to many problems associated with the non-profit sector. Indeed, the day after the Report was issued, Revenue Minister Herb Dhaliwal said the “political will is in place to push ahead quickly with plans to reform the way governments, charities and volunteer organizations work together”. He seemed to suggest that a new “charity commission” was high on the agenda.
As my late grandmother would have said, “from your mouth to God’s ear”.
We understand that in the wake of the Report, the Voluntary Sector Roundtable (an umbrella organization for the sector) and the Privy Council Office (essentially the Prime Minister’s bureaucracy) are consulting on personnel (from both the private and public sector) who will be appointed to three main committees set up to more closely investigate options which will allow the government to fulfil its promises to work more closely with the voluntary sector. Three main areas of concentration have been identified and no fewer that seventeen government departments and agencies are involved in the exercise.
We expect that this will be a case of move swiftly but with bureaucratic caution…which means that it all likelihood, it will be a year or more before we see even the outlines of any new federal policies. But given the benign neglect (or worse) many of the key issues of concern to the sector, have received in recent years, we are hopeful that before we reach retirement age, some changes for the better will be implemented.
The web site for the Broadbent Report is https://www.pagvs.com/Building on Strength.htm.