October 26, 1998

To:Strategic Policies and Priorities Committee

From:City Clerk

Subject:Issuance of Charitable Status by Revenue Canada

Recommendation:

The Municipal Grants Review Committee on October 26, 1998, recommended to the Strategic Policies and Priorities Committee the adoption of the attached report (October 13, 1998) from theCommissioner of Community and Neighbourhood Services recommending support of the recommendations of The Panel on Accountablity and Governance in the Voluntary Sector with regardto the issue of Charitable registration under the Income Tax Act, recognizing that some ethno-specific not-for-profit organizations may provide some economic benefits to some of its members.

City Clerk

R. Dyers/tl

Item No. 4

(Report dated October 13, 1998, addressed to the

Municipal Grants Review Committee from the

Commissioner of Community and Neighbourhood Services)

Purpose:

To report on the issues concerning charitable registration status from Revenue Canada.

Funding Source, Implications and Impact Statement:

There are no additional costs to the City.

Recommendations:

It is recommended that:

(1)the City Council support the recommendations of The Panel on Accountability and Governance in the Voluntary Sector and communicate to the Parliament of Canada that:

(a)the Federal Parliament develop a definition of "charitable" for purposes of charitable registration under the Income Tax Act, by establishing a parliamentary committee or a four-level task force (involving representatives of the federal, provincial, municipal and the voluntary sector);

(b)Parliament amend the Income Tax Act to incorporate the definition of "charitable";

(c)once developed the definition be reviewed by a parliamentary committee or task force every ten years and amended as necessary to meet changing circumstances; and

(d)the registration process be open and transparent; that all applications to and decisions regarding registration be considered public information;

(2)the Prime Minister of Canada, as well as the Premier of Ontario be advised of City Council's concerns respecting limitations of the Income Tax Act subsection 248(1) and associated common law interpretation, and specifically of the negative impact these limitations have on non-profit community organizations that serve specific immigrant and refugee communities;

(3)City staff work in co-ordination with public foundations, private foundations, the Panel on Accountability and Governance in the Voluntary Sector and other relevant bodies in identifying ways and means of assisting non-profit community organizations that do not have charitable tax status;

(4)City staff, in the process of recommending allocation of grants, take into consideration the hardships and disadvantages faced by non-profit community organizations which are not registered charities; and that this consideration form part of the formal practice in implementing the City's municipal grants policy;

(5)the City's municipal grants eligibility criteria for any of the City's grants programs, line-item grants, or ad hoc grants provide that it is not a requirement for an applicant to be a registered charity; and

(6)the appropriate City officials be authorized and directed to take the necessary steps to give effect thereto.

Council Reference/Background/History:

The Municipal Grants Review Committee, at is meeting of September 28, 1998, had before it a report, "City of Toronto Grants Policy". A deputation was made by the Hispanic Development Council concerning the grants policy. As a result, the Municipal Grants Review Committee directed the Commissioner of Community and Neighbourhood Services to report on the issues regarding Revenue Canada raised in the depution by the Hispanic Development Council.

The Hispanic Development Council informed the Municipal Grants Review Committee that some ethno-specific non-profit organizations are experiencing difficulties in obtaining charitable tax status from Revenue Canada. The matter was investigated by staff of the Access and Equity Centre and the results are as follows.

To become a registered charity, an organization must apply under the Income Tax Act to Revenue Canada. The law governing charitable purposes has its roots in a 400 year-old English law of 1601 called the Statute of Elizabeth, as well as common-law. The tests set out in the 1891 Pemsel judgement, in use today, identifies four general categories of charitable purposes. For an organization to be registered as a charity, its purposes have to fall within one or more of the following categories:

(a) the relief of poverty;

(b)the advancement of education;

(c)the advancement of religion; and

(d)other purposes beneficial to the community as a whole that the courts have identified as charitable.

To qualify for registration under the Income Tax Act subsection 248(1) an organization must be established and operated for charitable purposes and it must devote all of its resources to charitable activities. The charity must be resident in Canada, and cannot have any income payable to benefit its members.

To fall within the fourth category, a charity has to meet a public benefit test. Under this test, an organization must show that:

(a)its activities and purposes provide a tangible benefit to the public;

(b)those people who are eligible for benefits are either the public as a whole or a significant section of it in that they are not a restricted group or one where members share a private connection such as social clubs or professional associations with specific membership; and

(c)the charity's activities must be legal and must not be contrary to public policy.

Revenue Canada, in its literature, states that "advocating the interests of a group is rarely charitable since a charity exists for the benefit of the whole of society, not just narrow sectional interests. Thus an organization that is constituted "to promote and defend the interests" of its members would not qualify as a charity. Professional associations and other societies that provide benefits to a restricted class of people are not considered as charitable." Revenue Canada rejected the application of the Coalition of Agencies Serving South Asians (CASSA) on the following grounds:

(i)promotion of a culture, or of an ethnic group, is not a charitable purpose; and

(ii)that CASSA's fundamental goal is to advocate on behalf of the South Asian community, such advocacy is not considered to be a charitable purpose;

(iii)advocating or lobbying the government on behalf of the agencies it represents is considered political action which is not a charitable purpose; and

(iv)CASSA's member organizations, most of them, are not registered charities, therefore the assistance CASSA provides to its members cannot be considered as a charitable purpose.

Certain ambiguity exists as to how large and inclusive the community that benefits from a charity's activities must be, for example can the community that benefits be limited according to gender, ethnicity or language?

The Panel on Accountability and Governance in the Voluntary Sector:

The Panel on Accountability and Governance in the Voluntary Sector (PAGVS), chaired by Mr.EdBroadbent and established by the Voluntary Sector of Canada, in its discussion paper, "Canadians Helping Canadians: Improving Governance and Accountability in the Voluntary Sector" (May 1998) identified the following issues:

(a)there is no clear definition of charity or charitable for purposes of obtaining charitable registration under the Income Tax Act;

(b)the definition currently used has evolved as a result of court decisions;

(c)the costs of attaining a contemporary definition are falling on groups seeking to be included in the definition; and

(d)there is a lack of transparency of the registration process as well as the revokement process.

The PAGVS proposed the following recommendations:

The Parliament of Canada:

(a)develop a definition of charity by establishing a parliamentary committee or a four-level task force (involving representatives of the federal, provincial, municipal and the voluntary sector);

(b)debate and pass legislation amending the Income Tax Act; and

(c)even if set in legislation, the concept should be reviewed by a parliamentary committee or task force every ten years to meet changing circumstances.

The Ontario Law Reform Commission:

The Ontario Law Reform Commission in its working paper, entitled "A Report on the Law of Charities" (1996), discusses the difficulties with the current common-law definition of "charity". The Commission recommends against the adoption of a statutory definition of charity, and instead recommends a more liberal interpretation of the common-law definition. The Commission presents, as a rudimentary definition:

"a truly charitable act is that act whose form, actual effect, and motive are the provision of the means of pursuing a common or universal good to persons who are remote in affection and to whom no moral or legal obligation is owed."

Other Case Law:

Applicants who have been rejected by Revenue Canada can appeal, at their own cost, to the Federal Court of Appeal and ultimately to the Supreme Court of Canada. The PAGVS discussion paper cites the following two court decisions as examples:

(a)Polish Canadian Television Production Society (1987), with objects of advancing multiculturalism and, in particular, the Polish Canadian community was held not to be charitable. The Federal Court gave essentially no reasons for its decisions and declined to express a view as to whether such objectives are to be considered charitable within the terms of the Income Tax Act.

(b)The Vancouver Society of Immigrant and Visible Minority Women v. The Minister of National Revenue -Supreme Court challenge.

This community organization had applied for and been denied charitable tax status on the basis that its objectives and activities, which include advocacy, did not come within the common law definition of "charitable". The Society argued that the meaning attributed to the term "charitable" failed to take into account the inequality suffered by the immigrant and visible minority women it represented and its need to address that inequality in its work.

The Federal Court denied charitable status largely based on what the court characterized as indefinite and vague purposes and activities, which did not clearly identify the recipients as persons in need of charity as opposed to those in need of help. The court repeated the principle that laudable community services are not necessarily charitable at law and activities and objects of general public utility are not always charitable in the legal sense. The Society appealed to the Supreme Court of Canada, which has heard the appeal and has yet to release its verdict.

Definition in England and United States of America:

As British, American and Canadian laws have evolved from English common law, it is worthwhile to make a comparative review:

The British legislators are in the process of adopting a new public benefit test. The role of the British Charity Commissioners has become one of reflecting social values so that, for example, the amelioration of race relations is a proper object of charity in England, whereas in Canada it is still under consideration.

In the United States of America, Regulations to the Internal Revenue Code s.105(c)(3) state that the term "charitable" also includes the elimination of prejudice or discrimination, the defence of human and civil rights secured by law, and the efforts to combat community deterioration and juvenile delinquency.

Clearly, there is no one universal definition of charities. However, Britain recognizes the need for devising a new public benefit test and the United States of America has already instituted a more broader definition.

Limitations Imposed on Public Foundations:

A charitable foundation at law is only authorized to provide funds to organizations which are registered charities. For example, the United Way of Greater Toronto, a public foundation is authorized to provide funds only to those organizations that are registered charities, or to use funds to carry out its own charitable activities. As such, non-profit community organizations that are not registered charities, have limited access to this funding sources.

In view of this limitation, The United Way of Greater Toronto is exploring avenues of how it can assist such non-profit community organizations. City staff should work in co-ordination with the United Way and other public as well as private foundations in this regard.

Comments and/or Discussion and/or Justification:

There are over 75,000 registered charities in Canada, with approximately 6,072 registered charities located in Toronto based on 1995 Revenue Canada data. Over 50 percent are religious and educational institutions, and hospitals. Non-profit community organizations whose applications for charitable tax status have been rejected, suffer certain implications. Moreover, with annual fiscal restraints faced by each level of government, the non-profit community organizations have been receiving less and less grants from governments over a period of several years. The general directive has been that the community sector should raise funds from the broader community or the private sector. However, those non-profit community organizations that are not registered charities face certain limitations, as outlined below:

Implications of Not Being a Registered Charity:

(1)Ineligible for financial assistance from public and private foundations:

Ethno-specific organizations which are not registered charities cannot apply for funding assistance to public or private foundations. Under charitable law, public and private foundations are required to fund organizations that are registered charities. For example, the United Way of Greater Toronto is a major funder in Toronto, but ethno-specific organizations which are not registered charities cannot benefit from this funding source.

(2)Inability to obtain financial assistance from individual donors or private corporations:

Under the Income Tax Act, individuals or corporations receive an income tax deduction against submission of a charitable tax receipt. This serves as a good incentive for giving. Ethno-specific organizations which are not registered charities cannot provide a charitable tax receipt and thus experience limitations in raising funds through such individual donors or private corporations.

(3)Potentially ineligible for provincial and municipal relief from taxes:

Some provinces and municipalities will only grant certain licences or provide relief from provincial and municipal taxes to organizations that are registered charities under the Income Tax Act.

(4)Inability to benefit from special provisions under the Goods and Services Tax:

If the organization provides taxable goods and services, special provisions are available for registered charities under the Goods and Services tax rules.

(5)Inability to benefit from the Ontario Lottery Corporation:

Lottery dollars are generally available to registered charities only. There is approximately $100 million available through this source. Non-profit community organizations which are not registered charities do not qualify for this money.

In addition, the Province of Ontario, on cancelling its permanent charity casino initiative for which it had set up a $40 million Advance Fund, has advised that this $40 million will be distributed to registered charities, through a one-time funding this year. The City of Toronto's allocation amounts to $8.8 million. Non-profit community organizations which are not registered charities cannot get any of this money.

The implications of a non-profit community organization not qualifying as a registered charity are significant. It takes away from the legitimacy of such organizations. Without charitable status, organizations have very limited avenues to obtain funding. Without adequate funding, an organization cannot serve its community as required. It results in high staff turnover in these agencies and could result in the delivery of poor services. This, in turn, has a long term negative effect on the health of our communities.

Possible Remedies/Solutions:

The City could consider the following measures to ameliorate the disadvantage faced by those non-profit community organizations which cannot become registered charities:

(1)Advocate for a change in the definition of charitable law by supporting the proposed recommendations of The Panel on Accountability and Governance in the Voluntary Sector, and communicating this support to PAGVS, as well as to the Parliament of Canada.

(2)The Federal and Provincial government leaders be informed of the disadvantage encountered by non-profit organizations that are not registered charities.

(3)City staff work in co-ordination with public foundations, private foundations, The Panel on Accountability and Governance in the Voluntary Sector and other relevant bodies in identifying ways and means of assisting non-profit community organizations that do not have charitable tax status.

(4)City staff, in the process of recommending allocation of grants, should take into consideration the hardships and disadvantages faced by non-profit community organizations which are not registered charities, this to form part of a formal practice in implementing the City's municipal grants policy.

(5)As part of the City's municipal grants policy, the City include that there be no requirement in the eligibility criteria of any of its grants programs, line-item grants or ad hoc grants, for an applicant to be a registered charity.

(6)Staff to provide progress reports on this issue such that City Council is kept fully apprised of the situation.

(7)City Council, keep in mind that when it is addressing the tax reassessment for the year 2001, it has to define the word "similar" organization since Bill 16, "Small Business and Charities Protection Act, 1998" provides measures to protect charities and similar organizations from large property tax increases.

Conclusions:

The concerns raised by the Hispanic Development Council appear to be valid and legitimate. The Income Tax Act charitable law is based in a 400 year old statute, as well as common law. Both of these do not respond to the needs of the communities in our times. The Panel on Accountability and Governance in the Voluntary Sector has identified key shortcomings of charitable law and have proposed recommendations to effect reform of the definition. The City of Toronto can take action, at no additional cost to the City, to provide some remedies to non-profit community organizations as described in this report.

Contact Name and Telephone Number:

Cassandra Fernandes

Tel: 392-3834