Canadian Tax Haiku of the Week:
Charities do good
Parties do Politics so
CRA not bad
Introduction
While we have been tough[1] on the Canada Revenue Agency[2] (the “CRA”)[3] and critical of the government (going so far as to call the PM “evil”[4]) in recent weeks, criticisms of the ongoing CRA audits of the political activities of various charities are unwarranted. These criticisms stem from the belief that the current conservative federal government has somehow been misusing the CRA to target its political opponents in such areas as the environment and human rights.[5] However, while the optics of the situation doesn’t look too good, we fully support the CRA in this crackdown, as a reasonable restriction that will continue to curtail any connection between Canadian charities and lobbyists.[6]
Background
In 2012, the CRA began dramatically increasing probes of charities for their political activities[7], the press seems to be focusing on the ongoing audits of environment groups that challenge the government’s energy policies, international aid groups, anti-poverty organizations and human-rights agencies. Over this time, the CRA’s initial budget of $8 million for the political-activity audits has grown to $13 million.[8] There are 52 political-activity audits currently underway.[9]
The CRA contends that these special political-activities audit of charities are designed to be balanced across the political spectrum rather than focus on groups with particular leanings.[10]
Charitable Entities Subject to Specific Rules
The CRA is tasked with ensuring that all charities[11] stay within the parameters of the Income Tax Act of Canada (the “Act”). To be honest, the CRA doesn’t really care about the importance of the work of a charity if that work puts it in violation of the Act.
The reality is that if a charity wants to retain their tax-related benefits, they are limited in the amount of political activity it may engage in. Charities are limited to allocating to 10 per cent of their budget to “political activities.”[12] Which are generally considered to be “administrative expenses”. Generally speaking, Canadian tax law has always very narrowly defined charities and what activities they can undertake, and the tax authorities in Canada have always closely monitored charities. Given that donations to charities are effectively a “tax expenditure” from a policy standpoint (taxpayers give money to the charity rather than to the government via the charitable tax credit system), the government has an obligation to ensure that these funds are properly spent.
The CRA presumes an activity to be political if is aimed at pressuring a government to change a law, a policy or a decision. Additionally, a political activity can also include the making of gifts to other organizations intended for political activities.[13] Charities can engage in some political work if that work is “non-partisan” and is “connected and subordinate to the charity’s purpose.”[14] Thus, this 90/10 rule is not so black and white.[15] There are many activities that might be considered political in nature, but are accepted by CRA as charitable. There are also some political activities are completely prohibited.[16]
Because of complexity involved in distinguishing between charitable and political activities, CRA audits are indeed necessary to prevent groups that lobby the public from taking advantage of tax rules. However, it needs to be said that these rules have always been on the books, and have long been a part of the Canadian tax law landscape. So some of the more vocal charities under audit seem to be complaining that “the rules that apply to everyone should be applied differently for us because we are “special?”. Indeed, spending resources complaining about the government crackdown and somehow trying to pin it on the current conservative government also seems like a partisan political activity rather than charity work, which sort of underlines the point that maybe these organizations are a bit to political.
While the rules that govern charities in Canada have been seen as a limitation on the freedom of speech by some,[17] viable alternatives are available which allow for free speech while also complying with the spirit of the Act. A charity can simply create a separate organization that promotes its social goals through political means.[18] This organization can support, oppose, and even attack whichever candidates it desires, but it will not be able to issue charitable receipts or receive funds from organizations that do. [19]
Conclusion
Political-activity audits appear to be a permanent part of the CRA’s work going forward. The federal government is trying to separate charities from becoming de facto lobby groups. It is enforcing the distinction between what have always been narrowly defined charitable activities and political advocacy groups (which are not-for-profit groups in Canada). If an organization wants to receive a tax benefit, it has to play by the rules and abide by the Act.
Intuitively, these rules limiting the ability of charities to make donations to political organizations and get too involved in politics make sense.[20] Why limit the political activities of charities when they are still allowed to donate receipted funds to organizations that are not limited themselves? Otherwise there would be a huge loophole that would allow political campaign funds to be “washed” via charities. While the immediate results may seem to be self-serving for the current government, the rationale behind the policy is sound, and fundamentally pro-democracy. Left-leaning readers may still not be convinced, but imagine for a moment what Canadian politics could look like if right-wing groups were able to wash massive political campaign donations via churches and other “conservative” charities?
And just as an FYI, if you really want to make a tax-deductible donation to a group that is steadfastly opposed to the policies and priorities of the current government, and perhaps more in a position to actually do something about it, you can always do so: donations to the political party of your choice, and also benefit from a comparable tax subsidy.
by Jonathan N. Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law
[1] http://dominiontaxlaw.com/recent-cases-where-taxpayers-have-won-costs-the-tax-court-gives-the-cra-a-little-tough-love/
[2] http://dominiontaxlaw.com/cra-owes-a-duty-of-care-to-taxpayers/
[3] http://dominiontaxlaw.com/cra-flunks-tax-pleadings-101/
[4] http://dominiontaxlaw.com/a-modest-proposition/
[5] http://www.ctvnews.ca/politics/ndp-calls-for-independent-probe-into-cra-s-targeting-of-charities-1.1917074
[6] http://business.financialpost.com/2014/07/29/why-the-cras-crackdown-on-charities-may-be-reasonable
[7] http://www.cra-arc.gc.ca/chrts-gvng/chrts/bt/chrtsprgrm_pdt-2014-eng.html
[8] http://www.ctvnews.ca/politics/ndp-calls-for-independent-probe-into-cra-s-targeting-of-charities-1.1917074
[9] http://www.theglobeandmail.com/news/politics/canada-revenue-agency-says-charities-probe-even-handed/article19793673/
[10] http://www.theglobeandmail.com/news/politics/canada-revenue-agency-says-charities-probe-even-handed/article19793673/
[11] Section 149.1(1) of the Income Tax Act of Canada (“ITA”).
[12] http://www.charityinfo.ca/articles/Canada-Revenue-Agency-audits-what-charities-need-to-know9
[13] http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html#N102CA
[14] http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html#N101E8
[15] http://business.financialpost.com/2014/07/29/why-the-cras-crackdown-on-charities-may-be-reasonable
[16] http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html#N102A4
[17] http://pencanada.ca/blog/charities-politics-and-pen/
[18] http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html#N103DF
[19] http://business.financialpost.com/2014/07/29/why-the-cras-crackdown-on-charities-may-be-reasonable
[20] http://business.financialpost.com/2014/07/29/why-the-cras-crackdown-on-charities-may-be-reasonable