There is continuing narrative regarding Canada Revenue Agency (CRA) regulations specific to registered charities operating business activity. The general feeling seems to be a need to relax or seemingly eliminate restrictions through the introduction of a Destination of Profits test , expansion of the Related Business rules , and/or a recommendation that legislation focus on charities’ purposes rather than on activities. Stagnant or decreasing funding and donations, and interest in the social enterprise concept, and the apparent barriers to its operation by registered charities, appears to be the primary drivers of this conversation.
In my view, a discussion of potential changes to regulations should be done wearing a lens of impartiality rather than a traditional advocacy hat. This makes the starting point an objective and practical review of relevant CRA policy as opposed to an emotive appeal to open up streams of revenue, ones that are potentially being denied due to outdated and/or unnecessary constraints, which tends to place social good above all other considerations.
Registered charities are afforded the privilege, rather than the entitlement, of tax-exempt status accompanied by the ability to issue receipts for gifts. They are conferred this status as their purposes are philosophically different, if not opposite, from for-profit entities. Fundamentally, they exist to steward charitable resources and activity that provide a public benefit and do not operate with an intention to make profit, which in theory means they would not be earning income that needs to be taxed. Public trust in charities, supported by CRA’s regulatory oversight, allows for billions of dollars of government funding and donations to be directed towards charities in the belief it will used for charitable purposes.
Registered charities are essentially public entities that are stewarding what are essentially public assets towards charitable ends. I believe citizens and businesses who pay taxes should be viewed as default supporters of the charity sector regardless of whether they make donations or engage in volunteerism. This means the success of the charity sector is a group effort by the Canadian public as a whole rather than from those directly associated with the sector itself. I believe this is represented in CRA policy for charities with its encouragement of financial engagement by the public and in the rules specific to business activity which maintains an even playing field between charities and tax-paying entities.
Potentially making that playing field uneven needs to be approached pragmatically as taxpaying corporate entities and individuals should be protected against unfavourable tax regulations. Potential unfairness is not necessarily attributed to charities being exempt from paying taxes on business income but rather on the introduction of competition in the marketplace which could be artificially supported by donations and funding. The evenness of the playing field among charities also needs consideration.
In my view, there should be two distinct discussions on potential rule changes for business activity. The first one would deal with charities operating an unrelated business (as defined by CRA) within their corporate confines (as opposed to a wholly owned subsidiary); the second one would deal with the administration of fee-based and employment-based charity programs (which are often referred to as ‘business’ in sector narrative but are treated as distinctly different from business activity by CRA) and whether there is a reason to make CRA policy changes.
An overview of relevant CRA policy and suggestions for focusing the discussion can be found here.
David Oyler is the principal for Oyler Consulting based in Halifax, NS. You can reach him at www.oylerconsulting.ca
