The Canada Revenue Agency (CRA) is proposing to revise legislation (Income Tax Act) affecting charities. CCEDNet is studying this issue to gain a better understanding of how this might affect charities in Canada. CRA is accepting comments on this issue until August 31 and we encourage you to submit a response. CCEDNet is also drafting a response and we would love to hear your feedback. Please send your comments to Matthew Thompson at firstname.lastname@example.org.
CRA's intents around revising the Income Tax Act in regards to the fundraising activities of charitable organizations are unclear. The likely cause is the more recent discoveries and public inquiry into fraudulent charitable activities and the use of charitable funds to support terrorist groups. Certainly, charitable organizations can stand to benefit from better legislation and regulation that would help preserve public goodwill towards charities. However, changes to legislation could also potentially create extraneous barriers to the activities of Canadian charities.
A brief background on the legislation currently in effect
The Income Tax Act in Canada sets out the scheme whereby registered charities are exempt from tax on their income and entitled to issue official tax receipts for certain donations they receive. However, the Act does not define what is "charitable," leaving this classification to the interpretation of the Court. The Court frequently uses what is called the Pemsel classification to determine whether an organization's purpose and activities are charitable. The Pemsel classification is considered to refer to the preamble in the Statute of Elizabeth, which sets out examples of charitable purposes. Under this classification the purpose must be for "for the benefit of the community or of an appreciably important class of the community." The activity of an organization is determined to be charitable in relation to how it furthers the organization's purpose and not in relation to the character of the activity.
Some key issues
Some of the key issues being looked at, as outlined in the attached summary by the Ontario Nonprofit Network (ONN), are:
• The new guidelines include a broad definition for fundraising activities that include what could be considered earned income activities (i.e. the sales of chocolate bars, a car wash service, etc.) that do not directly further the purpose of the charitable organization.
• CRA's guideline proposal does recognize the limitations for smaller organizations or those organizations that may have a smaller constituency or appeal from which to draw donations but instead of accounting for these within their recommendations they have instead suggested that exceptions to their guideline will be made on a case-by-case basis. Effective legislation should clearly differentiate between large and small to medium charities by accounting for the different financial, administrative, donor relation, etc. costs and constraints of small and medium sized charities.
• CRA's stance is that fundraising is not a charitable activity. Given that the vast majority of charities depend upon fundraising activities to fulfill their budget demands there may be need to redefine fundraising as a charitable activity - providing that raised funds are used to further an organization's purpose (which at times might vary in terms of how much of the funds go towards covering the organization's operating costs).
• The proposed ratios of fundraising cost/fundraising revenue in fiscal period are:
- Rarely acceptable: more than 70% (charity nets less than 30%)
- Generally not acceptable: 50% to 70% (charity nets 30% to 50%)
- Potentially not acceptable: 35% to 50% (charity nets 50 to 65%)
- Generally acceptable: 20% to 35% (charity nets 65% to 80%)
- Acceptable: less than 20% (charity nets more than 80%)
- For more information on CRA's Charities Directorate's proposed guidelines concerning the fundraising activities of a charitable organization please click here>>
- Also, for an interesting court case around this subject review Vancouver Society of Immigrant and Visible Minority Women v. M.N.R.,  1 S.C.R. 10.
- Read the Ontario Nonprofit Network's briefing note to the field on this subject>>
You can send your response to:
Charities Directorate, CRA
Ottawa ON K1A 0L5
For any questions, please contact: Matt Thompson, CCEDNet Research Assistant