Cuts in government grants are inevitable. Innovative social enterprise could replace that revenue. Those conclusions of the Mowat Centre for Policy Innovation at the University of Toronto are highlighted in the Centre's March report, Strengthening the Third Pillar of the Canadian Union.

The publication predicts that governments will cut grants to charities and nonprofits as they are forced to "tighten their belts" to rein in fiscal deficits. To help the sector overcome these cuts in funding, the publication suggests that charities and nonprofits should be able to turn to innovation in social enterprise. This would require loosening the current restrictions on charities and nonprofits engaging in for-profit ventures.

Why charities, nonprofits matter

The publication highlights the importance of the charitable and nonprofit sector in Canadian society. There are over 161,000 charities and nonprofits in Canada, which accounts for $106.4 billion, or roughly 7.1% of the Canadian economy.

Ontario has approximately 46,000 charities and nonprofits. Together they account for approximately $50 billion of annual revenue and 1 million jobs. The report highlights the important role of volunteers in these organizations, as well as the fact that charities and nonprofits raise $813 million in funding for research.

The critical role that charities and nonprofits play in providing government-sponsored programs and services cannot be understated. Maintaining a healthy and well funded charitable and nonprofit sector should be an important priority of government, the report states.

Government-imposed red tape

The publication also highlights the problem of overlapping federal and provincial jurisdiction in regulating the sector. While interprovincial trade barriers have come down with regards to for-profit businesses, the same cannot be said for the charity and nonprofit sector.

The publication also suggests that the Canada Revenue Agency may have overstepped its authority under the Income Tax Act. "It is also argued that CRA's role has expanded into aspects of nonprofit sector operations that have nothing to do at all with the Income Tax Act - specifically political activity, advocacy and fundraising."

CRA's regulation of fundraising activity is characterized as "overly rigid and lacking in the nuance and flexibility necessary to accommodate the realities of charities of vastly different sizes and circumstances." On the question of social enterprise, the publication states that there is "...mounting frustration in the sector with the CRA's interpretation of policies governing social enterprise activity undertaken by charities and nonprofits."

Proposed solutions

The publication makes five recommendations.

1.     Federal and provincial/territorial governments should embrace the sustainability of Canada's nonprofit sector as an explicit policy goal and address problems in the current policy and regulatory frameworks governing the sector that are barriers to this.

2.     Federal and provincial/territorial governments should establish a formal federal-provincial/territorial process to address nonprofit sector issues and challenges, giving particular attention to the pressing issue of sustainability.

3.     The federal government should undertake changes to the Income Tax Act and interpretations of the Act to allow charities and nonprofits more flexibility in how they generate funds, giving attention to the example of the UK and the Province of Ontario, which have liberalized rules to allow enterprising activity as long as all proceeds are directed to fulfillment of the organization's mission.

4.     The federal government should also aim in the longer term to limit CRA's regulatory role to administration of the Income Tax Act, and work with provincial/territorial governments to find an alternative means of addressing policy and regulatory decisions governing other aspects of the sector, such as the definition of charity, registration of charities, advocacy, fundraising and political activities.

5.     Provincial/territorial governments should establish a joint process to modernize and harmonize provincial/territorial rules and regulations affecting the sector on a national basis.

Download the Mowat Report

Terrance S. Carter is the managing partner with Carters Professional Corporation, and Counsel to Fasken Martineau DuMoulin LLP on charitable matters. He is a member of Canada Revenue Agency's Technical Issues Group, past member of CRA's Charities Advisory Committee, Chair of the National Charity and Not-for-Profit Section of the Canadian Bar Association, and has been recognized as a leading expert in Canada by Lexpert and Best Lawyers in Canada.

Mr. Carter is also editor of www.charitylaw.ca, www.churchlaw.ca and www.antiterrorismlaw.ca and a consulting editor of Charities Legislation and Commentary 2009 Ed. Email for more information.