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Budget 2012 — if you are a charity, you can breathe now
Anyone following the news over the past few months is well aware of the Conservative government's concern about charity involvement in what are loosely termed "political activities." In fact, that concern is not limited just to this government. Judges have been facing this issue for many years.
Fundamentally, the reason that charities cannot engage in political activity is that it would be impossible for a judge to determine if a particular political activity was properly in pursuit of a charitable object. For example, if a charity organized to relieve poverty lobbied to change a law it felt relieved poverty, a judge may have to decide whether such a change to the law would actually be charitable. This is an impossible position for a judge, and so political activities in general have been ruled out.
Allowance, though, was made for some political activities where those activities were a) not of a partisan nature; b) were connected with the charity's objects; and c) ancillary to the charity's main activities. Of these, the ancillary test is the most difficult to quantify, as it limits a charity to using only 10% of its resources (financial, volunteer, and otherwise) and so enforcing this rule poses practical difficulties for the Canada Revenue Agency.
Nonetheless, even if a single charity were limited to using only 10% of its resources for political activity, several charities could act in concert toward the same end and each remain within the charitable rules by using less than 10% of its resources for the political activity. Furthermore, a single charity could, in effect, expend its entire receipted revenues in a year on political activities by transferring a portion of its revenues to any number of charities and directing those proceeds to the same political activities carried on by the recipient charities.
Loose definition will impair tight sanctions
Budget 2012 attempts to correct this mischief with a number of measures. First, it requires charities to report the specific amounts they spend on political activities. Second, charities and foundations will be restricted from transferring funds to other qualified donees in order to fund their political activity. Finally, charities can now have their charitable status suspended for engaging in political activity.
While it is clear that political activities by charities are to be significantly curtailed, the definition of political activity is so circular that one knows it will undercut the enforcement of these provisions. The budget defines political activity as
Includ[ing] the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee;
Most of us learned in grade four not to define a word by using that same word in the definition. Unfortunately, what most grade-schoolers know, the drafters of the Income Tax Act have forgotten. And so it would seem that while a court cannot opine on the charitable nature of a specific political activity, we may need one to help clarify the meaning of the term generally.
Foreign qualified donees
In last year's budget, significant attention was paid to the definition in the Income Tax Act of a "Qualified Donee" (a ‘QD'). For all intents and purposes a QD is an organization which has similar treatment to a registered charity. So, for example, donations to a QD receive the same tax treatment as a donation to a registered charity. The list of QDs include the federal, provincial, and municipal governments as well as a list of foreign organizations that is updated periodically by the CRA.
Budget 2011 took rather extreme steps to ensure the integrity of the donation system by subjecting QDs to some of the same rules as registered charities. Thus, it was surprising that Budget 2011 did not address the status of foreign charities which had QD status in Canada. The law on the topic was of course known: foreign groups to whom the federal government made gifts could receive QD status. But what was not known was the type of gift, how the decision was made to make such a gift, and whether all gifts sufficed or just certain ones.
Budget 2012 continues where its predecessor left off. Now, foreign charitable organizations that receive a gift from the government may apply for qualified donee status if they pursue activities that are either a) related to disaster relief or urgent humanitarian aid or b) in the national interest of Canada.
The decision to accept such an application will be made by the Minister of Finance together with the Minister of National Revenue and the status as QD will last for a 24 month period. Foreign organizations currently on the QD list will continue to be qualified donees until the expiration of the period of their current status.
Failure to file the T3010
In a surprise move, Budget 2012 gives the CRA the power to suspend any registered charity or Registered Canadian Amateur Athletic Association that is missing some or all of the required information in its annual T3010 information return. The suspension would begin within seven days of being informed of the defect and could last until the defect is corrected.
While the proposals include measures to appeal the suspension this is (like items in last year's budget) a dramatic increase in the reliance on the CRA's goodwill in enforcing what are otherwise ambiguous provisions. For example, the CRA can always take the position that the T3010 form is simply deficient in the information required. Most charities do not even understand the T3010 form; many, if not most, charities are filing incorrect forms.
The most surprising part about these proposals is that the Charities Directorate simply does not have the human resources required to review the T3010s as they are submitted. They are not vigorously reviewed until a charity is audited, or the information is relied upon by a donor or the media. So it would seem, at least until the Directorate's personnel budget is increased, that the provision is aimed at relatively superficial deficiencies in the T3010 obvious on a cursory review.
The CRA has been eminently successful in shutting down the leveraged tax donation industry, and Budget 2012 provides additional measures to ensure that it does not rise from the dead. Generally speaking these measures increase the penalties on the promoters of tax shelters that the CRA determines are offside.
Of interest to charities is an announcement in Budget 2012 that the Minister of Human Resources and Skills Development is modernizing the administration of grants and contributions to reduce red tape and make it easier to access funding.
Budget 2012 also teased the sector with an announcement that long-awaited guidance from the Government regarding social finance will be announced by the Minister of Human Resources and Skills Development.
Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraising & Philanthropy and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute.
As a speaker, he has presented to the National Symposium of Charity Law, the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners and the Ottawa Estate Planning Council. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.
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