The International Journal
of Not-for-Profit Law

Volume 8, Issue 1, November 2005

Arthur Drache, Chairman of the Board of the International Center for Not-for-Profit Law, is a Canadian lawyer specializing in the tax treatment of charities and not-for-profit organizations, a regular contributor to The Financial Post, and the editor of The Canadian Taxation of Charities and Donations.

It is difficult for a non-American to make substantive comments on the Eisenberg article except to note that it raises issues which are potentially international in scope. But the fact of the matter is that Eisenberg’s observations about what is happening in the United States are not mirrored in Canada.

We do not, for example, have any scandals concerning overpaid trustees and directors, because the basic rule for charities (as opposed to non-profits, a much larger group) is that directors serve without remuneration, a position which hearkens back to the common law. While there have been cases of embezzlement, these have been very few and far between, and the reported cases involve comparatively small amounts of money. And we do not have serious problems of economic competition between private sector businesses and charities.

One reason, of course, may be that in Canada the state has had a major role in operating and funding large parts of we would call the third sector, most notably in the area of health care and education, where “private” operations are, to say the least, unusual. There is also the common law role of the state in all matters involving “public” charities, a role undertaken to a greater or lesser extent through provincial attorneys general offices.

And while recent changes in the laws in Canada have attempted to make “charities” transparent, we have never seen much of a public demand for this. Indeed, while all registered charities (now about 85,000) have had to file public information returns that are found on the regulator’s website,1 such information has been available for almost 30 years for the asking. But anecdotal evidence suggests that the only ones who asked before the website posting were academics and individuals looking for “dirt” on organizations they didn’t like. In 30 years, we never had a potential donor who did such a search as a prelude to making a gift.

The main point, however, that I want to make is this.

The examples Eisenberg uses and refers to seem to be huge organizations, either in terms of operations or in terms of endowments. But in Canada (and, we suspect, in the United States as well), the vast majority of registered charities range from small to minuscule in size and are operated by volunteers. These include individual houses of worship, local daycare centers,2 single-issue local organizations (e.g., help for the homeless), and so on.

In Canada, we have a trend (which I suspect would be supported by Eisenberg) of increased reporting and financial oversight, along with government demands for still more transparency. The fundamental problem is that all such proposals are meant to apply to all registered charities.

It is fair to ask, for example, why the corner church with, say, 100 families as members has to produce the same detailed public reporting form as a multi-million-dollar international aid organization. Typically, the church raises funds only from its members, though it may run the occasional bazaar or bake sale open to others. It is typically run only by volunteers, and the only paid person is usually the member of the clergy who runs the services. The international aid organization, on the other hand, has scores if not hundreds of workers, raises funds from the public, and deals in millions of dollars annually.

Should these two organizations, both of which are “registered charities,” be subject to the same level of transparency and the same level of both public and private reporting? The knee-jerk answer is that donors to both organizations get tax relief for donations, and so the state has a right (or obligation) to exercise its oversight function. But what public good is there in letting somebody living 3,000 miles away get information about a church with which he or she has no connection at all?

The broader issue, it seems to me, is that while much can be said for high levels of oversight for very large organizations, legislators tend to enact rules that apply to everybody. Certainly they may ask for substantially more information from a private foundation with an endowment of hundreds of millions of dollars than from a smaller organization, but in practical terms the demand for information and the increasing complexity of the rules bear much harder on the small groups than on the large ones.

A small charity often cannot afford accounting or legal services – or if it retains professionals, ends up paying a disproportionate amount for services that are meant only to satisfy government, not its members.

Certainly in Canada, the trend is to keep demanding more information and more detail. And every “reform” proposal ends up creating burdens falling on the small organizations much more heavily than on the large ones.

Part of the political problem is in fact one that Eisenberg refers to: the issue of who speaks for the sector. In Canada, we have had a five- to seven-year exercise of consultation with the government, primarily through a body funded by government.3 This segued into a sectoral group, the Voluntary Sector Forum.4 But while both of these groups are well meaning, the main complaint from many in the sector is that they do not represent the “little guys” – who remain without much of an effective voice in policy-making issues.

Of course, this is understandable, given the problems of making contact with small organizations that are staffed only by volunteers. But the issue remains that whatever the problems of representation, these umbrella groups are not truly representative; consequently, the “solutions” to problems are often, at least as implemented, a burden to the small groups.

One lesson anybody involved in ICNL learns very quickly is that it is seldom appropriate to try to impose one country’s “solutions” to problems in the third sector on another country. The best we can do is to try to lay out for policy makers what is being done in other jurisdictions, with the hope that some aspects may be of use within the country in question.

This being the case, it is hard for a non-American to critique an article that focuses on U.S. problems. But I do believe that in assessing both problems and solutions, targeted legislation should be the name of the game, bearing in mind that in all likelihood, the problems and issues identified by Eisenberg apply only to a comparative handful of organizations, not to the sector as a whole.

The problems may be troublesome, but the solutions should take into account the fact that the vast majority of organizations are far from troublesome. It is bad policy to subject everybody to an onerous regime where only a few should be targeted.

Notes

1 www.cra-arc.gc.ca/dchmf/haip/srch. The main federal regulator is the Canada Revenue Agency, known as the CRA. Some provinces do engage in limited regulation, primarily over such matters as fundraising.

2 Which are of course subject to oversight by provincial and municipal governments.

3 The Voluntary Sector Initiative, https://www.vsi-isbc.ca/eng/about/index.cfm.

4 https://www.voluntary-sector.ca/.