Op Ed | Why do we need a new legal regime for charities?

publication date: Oct 30, 2018
author/source: Hilary Pearson, Philanthropic Foundations Canada

In 2016, Canadian foundations collectively contributed grants of about $5.7 billion to Canadian charities. These grants support activities in many areas, from the environment to health to social services across the country. This is a large amount, even spread across 86,000 or so charities. But what isn’t discussed much is the legal framework that constrains the conditions under which these grants are given. For charitable foundations to become more effective funders in today’s Canada, we need a comprehensive review of the existing regulatory framework for charities in the Income Tax Act.

To a person outside this debate, a review may seem like a big ask. But the Income Tax Act is a key to the deployment of charitable capital. Today, as framed, it prevents effective partnerships between the charitable sector and the private and public sectors.

The federal government took an important step this September by releasing legislative proposals that would remove the limits on so-called “political” activities of charities from the Income Tax Act. This was a first response to the Consultation Panel on the Political Activities of Charities which reported in 2017. It is good that the government is willing to remove this provision which has discouraged charities from contributing to the development of public policy. This is an important step in reviewing the regulation and policing of charities through their political activities.

But the current federal law and regulations still constrain funders in ways that discourage partnerships and innovation. These constraints include:

• Disproportionate reporting requirements,

• Rigid rules governing financial relations between charities and non-charities,

• Lack of regulatory clarity on the ways in which investment capital can be provided to charities by charitable foundations, and

• Excessive focus on the activities rather than the purposes of charities.

Such limits combine to make charities and charitable funders less innovative, less effective and less capable of contributing to our society overall. We would like to see federal regulation and law that encourages rather than deters legitimate and productive partnerships between charities, foundations, businesses and governments.

There has not been a comprehensive review of the Income Tax Act with respect to charities in fifty years. This makes no sense. Many of the provisions were introduced piecemeal and are inconsistent with each other. This is no way to regulate an important sector that contributes so much to Canada’s economy and society in the 21st century. Such a review will take some time, as it should. And ideally it should be done in collaboration with experts and actors in the charitable sector itself. But it needs to be done.

Such a review could include an open discussion on the definition of charity, which has not been modernized in Canada as it has been in other commonwealth jurisdictions such as the UK and Australia. Given the increasing need for more revenue from sources other than philanthropy or government, why not consider allowing charities to generate revenue by engaging in business activity as long as it is destined to activities that are in pursuit of charitable purpose? Why does the Income Tax Act focus on activities rather than simply refer to charitable purposes? Charities are confusingly monitored and forced to report, by the CRA, on various kinds of activities some of which are charitable, some fundraising, some administrative and of course some political. How to decide consistently and report clearly? Should activities be removed from the Act? The courts themselves have pointed out the confusions and difficulties posed by focusing on defining various activities of charities. These are some of the questions that a comprehensive review could address.

In today’s landscape of donors, recipients and civil society organizations, foundations arguably have a unique role. They are long term funders, they are able to take calculated risks, even the risk of failure, since there are few short-term consequences to a failed grant. And so they can fund the experimental, the

innovative or unproven social initiative, in a unique contribution to the process of social change. These characteristics make it even more important that they be allowed and encouraged to fund flexibly and creatively while always respecting public policy frameworks and policy goals.

Hilary Pearson is President of Philanthropic Foundations Canada, a national network of family, independent and corporate grantmakers in Canada which includes many of the largest private charitable foundations in the country.An expert in nonprofit governance, Ms. Pearson has served on several national boards of directors, including those of Pearson College of the Pacific, Imagine Canada, the Stratford Shakespeare Festival of Canada, CARE Canada and Indspire. She chairs the Advisory Body of the Coady Institute at St Francis Xavier University and is a member of the Advisory Committee to the Masters Program in Philanthropy and Nonprofit Leadership at Carleton University. She holds a BA and MA from the University of Toronto, and honourary doctorates from Carleton University and the University of New Brunswick. She was appointed a Member of the Order of Canada in 2018.

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