publication date: Jun 7, 2012
author/source: Adam Aptowitzer
material is based on C.D. Howe Institute
Commentary No. 343, At the Crossroads:
New Ideas for Charity Finance in Canada, Adam Aptowitzer and Benjamin
Dachis, March 2012.
Canadians are a generous and understanding
people. We have a range of social programs designed to help people who have
fallen on hard times or who otherwise are less well off. But, as a rule, we aim
to help people toward self-sufficiency and independence.
Yet, despite the parallels between the
desperation of individuals and charities struggling for alms to support their
existence, there seems to be little appetite to help charities to self-sufficiency.
There may be a variety of tools to reduce a charity's reliance on donations but
perhaps the most potent is to unleash the potential that comes with charities
running private businesses.
To a certain extent charities already have
this power, but it is limited to those charities where the business is
"related" to the objects of the charity or where the business is run entirely
an unrelated business work (sort of)
Unfortunately, there is very little actual
law to help interpret the meaning of the word "related." While the Canada Revenue Agency
has published a
useful guidance of its understanding of the term, the CRA's interpretation is
limited by a plain meaning of the law, and so it still cannot help the majority
of charities looking to become self-sufficient.
There are ways in which a charity can
participate in an unrelated business. One way is to have a private corporation
in which the charity owns shares (perhaps all of them) run the business. This
corporation then donates the profits of the business to the charity. By donating
the profits to the charity they avoid taxation in the private company, and the
net result is the same as if the charity ran the unrelated business.
One practical problem with this solution,
though, is the limit on the extent of income which can be deducted as a result
of donations to charity. Effectively, the rule requires that donors to charity
pay some tax even if they want to donate 100% of their income to charity. The
result is that donors cannot donate 100% of their income because some amount is
needed to pay the tax. The rule extends to corporations owned by charity, and
so charities that attempt to run businesses in this matter lose some amount of
the profits to tax.
charities be unfair competition?
There are also policy problems with allowing
charities unrestricted access to business markets. The first relates to
competition. For-profit businesses are taxable entities. They balk at the
thought that their competition may be non-taxable and able to reinvest funds
which would otherwise go to taxes back into the business.
The second issue is that charities may be
able to fund money-losing businesses through the issuance of charitable
donation tax receipts - and of course there is the more general issue that
charities receive money intended for charitable purposes that may be
inappropriately spent on business ventures.
And finally, there is the simple problem
that every dollar given to charity is partially subsidized through taxpayer
funds, and so every time charities engage in business the government loses tax
tax changes would have great impact
The good news is that there is a
comprehensive way to deal with these concerns. The bad news is that it requires
some knowledge of corporate taxation to appreciate it. Small businesses that
are engaged in active business (i.e. not simply collecting rent, royalties or
investment income) are taxed at a relatively low rate on their first $500,000
of taxable income.
Using this as a starting point, if the
limit on the deductibility of charitable donations was raised to 100% on this
first $500,000 of income, the actual loss in revenue to the government would be
minimized. The tax rate currently on corporations that maximize the charitable
deduction ranges from 2.8% in Manitoba to 4.8% in Quebec. Raising the allowable
deduction limit would lower these tax rates to zero for the relevant income. While this would obviously result in a loss
of some income to the government, the actual percentages are minimal. Moreover,
income not distributed to the charity would be fully taxable at the usual
could parallel fundraising guidance
The concern about charities using receipted
funds to keep money-losing businesses afloat has an analogy under the current
system. Clearly, not all fundraisers work out as planned and some lose money. To
take the analogy one step further, many fundraising activities require an
initial outlay of capital, and it may be some time before the charity sees a
significant (or any) return on capital,
The CRA recognizes these issues and has
published an administrative guidance to help define appropriate fundraising expenses.
The same approach could be adapted to providing guidance for charities
undertaking business ventures.
The proposed new system has other benefits
as well. Perhaps the greatest is that it would facilitate the use by charities
of social enterprise and social finance. There may be many opportunities open
to charities, given that there are very few restrictions on the types of
activities private corporations can undertake.
On the other hand, the danger exists that
directors of charities may become so preoccupied with their business operations
that they ignore their charitable ones. This can be easily addressed by
requiring a majority of the directors of the private corporation to be arm's
length from the directors of the charity. As well, there are economic benefits
to encouraging groups with organization and capital to participate in the job
Fundamentally, there exists a relatively
easy way to allow charities greater access to business markets and self-sufficiency
while limiting the risks involved. If this is what we aim for as individuals,
should not this be our aim for our charities as well?
the full paper at http://www.cdhowe.org/pdf/Commentary_343.pdf.
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
Fundraiser (now 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, the Ottawa Estate
Planning Council and various large and small Canadian charities. 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.
speaking engagements and consultations, contact him at 613-237-3300 or visit