With the federal government’s spotlight on foreign funding of political activities by Canadian charities in the Budget last year, registered charities may be reluctant to become or stay involved in political activities. Bill C-38, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on March 29, 2012 and Other Measures, changed the rules regarding the political activities of charities by adding a revised definition of “political activity” to the Income Tax Act (“ITA”) and creating new sanctions. However, the basic regime for political activities by charities remains largely unchanged, as does current Canada Revenue Agency (“CRA”) policy.
Allegations create chill effect
Numerous allegations have been made against environmental charities regarding the use of donations claimed to have been received from foreign sources. As well, various politicians have questioned the appropriateness of foreign funding of Canadian environmental charities for the activity of government lobbying. Senator Nicole Eaton initiated a Senate inquiry on February 28, 2012 to study foreign funding of charities in Canada, based upon her own claims that such funding was improperly influencing Canadian policy discussion. These attacks and others on environmental charities have created an unfortunate chill effect for charities wanting to engage in political activities.
Rules result in double counting
The rules regarding political activities, however, remain essentially unchanged. Bill C-38 amended the ITA by revising the definition of “political activity” under subsection 149.1(1) to now include “… 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”. This largely impacts foundations or charities that fund other charities to carry on charitable activities.
The change focuses on the intent of the donor charity as opposed to that of the recipient charity and will result in a double counting within the allowable limit on resources for political activities. A charity that funds another charity for the purpose of enabling political activities will be required to count that donation against its own 10% limit, and the recipient charity will count the expenditure of those funds in its 10% limit.
Bill C-38 also introduced new intermediate sanctions that will apply to inaccurate reporting in respect of political activities or exceeding the limits on political activities. In such situations, CRA can impose a one year suspension of tax receipting privileges (in addition to revocation). According to the Director General, these proposed intermediate sanctions will provide the Charities Directorate with an additional tool to encourage compliance with existing legal requirements.
Along with these legislative changes, the Budget provided the Charities Directorate of CRA with an additional $8 million to enhance its education and compliance activities in the area of political activities.
More disclosure required
Finally, Bill C-38 also requires more disclosure of political activities. The new T3010 requires detailed information about political activities, including information about gifts intended for political activities, how funds are spend on political activities, and charities that receive money from foreign sources for the purpose of carrying out political activities are required to disclose the amount received, the nature of the political activity and the country of origin of the donor.
The new rules and sanctions introduced by Bill C-38 relating to political activities supplement the existing regime, but do not change the basic regime for political activities. However, there will no doubt be enhanced scrutiny of political activities by CRA. As a result, charities will need to be vigilant in ensuring that they understand and are compliant with the rules before embarking on or continuing in the area of political activities.
Charities that want to become engaged in or continue to be involved in political activities will need to do so with their eyes wide open. They will need to carefully study and comply with the rules that are set out by CRA, as well as enhance existing efforts to maintain good books and records in order to be able to justify that the calculation of resources expended in political activities stays within the allowable resource limits. Political activities are still fair game for charities. But as with any game, you must know what the rules are and play by the rules.
Karen J. Cooper is a partner with Carters Professional Corporation and practices charity and not-for-profit law in the firm’s Ottawa office. Formerly a Senior Rulings Officer with the Income Tax Rulings Directorate of Canada Revenue Agency, as well as former counsel for the Department of Justice in tax litigation. Ms. Cooper is a contributing author to The Management of Charitable and Not-for-Profit Organizations in Canada (LexisNexis Butterworths, 2009) and has been recognized as a leading expert in charity and not-for-profit law by Lexpert and The Best Lawyers in Canada. Ms. Cooper can be reached at firstname.lastname@example.org.