Recently a bill was proposed in the Senate –BILL S-222 An Act to amend the Income Tax Act (use of resources), which will eliminate the “own activities” requirement of charities and change the rules for Canadian charities working with non-charities, both in Canada and abroad. The bill was introduced on February 8, 2020. In this brief note, I will highlight some concerns with the bill.
We have discussed our concerns about the “reasonable person” test here. Now let’s talk about what will be needed to ensure that the funds are spent on charitable purposes.
What is a “charitable purpose”?
In the new proposed legislation to ensure that funds are “used exclusively for a charitable purpose” will the Canadian charity need to check the purposes of the non-charity to see whether they have purposes that are exclusively charitable? If they did not then presumably the funds could be spent on a non-charitable purpose. If the group being funded had purposes that were both charitable and non-charitable then presumably you will need some of the measures of control that are used in “direction and control” to make sure that your funds are used for exclusively charitable purposes.
Keep in mind that the vast majority of non-qualified donees don’t have purposes. Do all the purposes of the non-qualified donee need to be charitable? If only some of a group’s purposes are charitable then how are you going to ensure that all of the resources are spent on charitable purposes? Perhaps you will not be able to fund the group.
References to charitable purposes presumably mean the charitable purposes that are considered charitable under Canadian law. This may reduce substantially the number of groups to which you can transfer funds as many foreign charities may have some purposes that are not charitable under Canadian law or they are broad and vague or they are a business that does not have “purposes” at all. One could imagine that many charities in Canada will need to get rid of their current partners, in favour of other partners that have exclusively charitable purposes under Canadian law.
Even if this bill is passed, which changes the status quo, that does not mean that other changes may not be forthcoming which further change the new status quo whether it is further changes to the ITA and treatment of donations, increased enforcement over foreign activities, increased use of anti-terrorism legislation to govern foreign activities, etc.
It is interesting to note that despite previous assertions that the new proposed rules would be similar to the US “expenditure responsibility” regime that does not appear to be the case. My understanding is that you have to pay an excise tax in the US if you don’t meet the standard for expenditure responsibility. The implications in Canada for not meeting these new ITA requirements are more significant than an excise tax. A charity could be revoked. Also as I have mentioned before in the US expenditure responsibility rules, there are certain general requirements but also a long list of impermissible activities. Those sort of safeguards are not in this legislation.
Also the name is rather peculiar. “Effective and Accountable Charities Act” – I guess charities are not effective and accountable and this act is somehow making them effective and accountable. It certainly does not increase the accountability of Canadian charities and depending on how you view the “reasonable person” it may make charities far less accountable.
As we discussed before if the ostensible reason for this change is to encourage more funds going to small local NGOs in Canada and around the world then this change is unlikely to have that impact as I noted in my commentary on the article “Going the Extra Mile – The Liability of Foreigness in US Foundation International Grantmaking to Local NGOs 2020“.
My main concern with this type of change is that it could be used by a small number of Canadians to move between $40-80 billion outside the country to locations that have weak non-profit or charity oversight such as some tax havens or some countries that provide no fiscal benefits for donating to charities. Let us say a charity in Canada has $1 billion dollars. It transfers the whole amount of $1 billion to a non-qualified non-profit for research. Then that non-profit provides the $1 billion to another non-profit entity to do research (which is considered a charitable purpose). So the non-profit reports back to the charity that the $1 billion has been spent on a research grant. Canadian charity’s role is now over and it shuts down as it no longer has assets. Meanwhile, the second non-profit decides to hold on to the money as that country that they are located in does not have a disbursement quota system and none of the funds are spent for decades or the funds are eventually spent but with little oversight they may be spent on non-charitable purposes or activities. In this one particular scenario, Canadian donors have just lost perhaps $700 million in tax incentives, various levels of government have less funds for various purposes and this results in cuts to funding for charities in Canada by various levels of government in Canada. Groups, which receive government funds, should be concerned about this scenario as government may have a lot less funds in the future to fund your groups.
I am an advocate for having more international philanthropy and especially increasing the funds going from Canada to the Global South and to be provided to groups that are locally established and having local legitimacy. This proposal, unfortunately, will do nothing to increase that – but after some wealthy people have moved their money out of Canada and saved tens of billions in taxes, it is the poor who will suffer as Canada cracks down on international activities!
Unfortunately, with the ambiguity created by this bill, it is difficult to know what the ultimate outcome will be. Will this result in less transparency and accountability or more? Like some other proposals, we have seen it is a giant experiment that might fail miserably. In an article, “Some are calling for changes to Canadian charity rules for foreign activities” I discuss how the current requirements for a structured arrangement are not perfect but with the huge tax incentives given to charities they work quite well and provide a lot of flexibility to Canadian charities.
Here are all 4 notes:
Original title of blog post: Will changing structured arrangements into a reasonable person test help the charity sector? – Part 4 – Charitable purposes and conclusion
By Mark Blumberg, Blumbergs, Canadian Charity Law