The
Budget proposes new rules impacting the ability of charities to engage
in political activities and requiring new disclosure rules on political
activities.
Current
rules re political activities
Charities
in Canada advocate regularly on many issues of public policy. Much of that activity falls within the realm
of charitable activity and is widely recognized as a positive for our
communities. The Income Tax Act also permits
registered charities to engage in limited non-partisan political activities
that are ancillary and incidental to their charitable purposes. “Political activities” are generally
understood to include any activities intended to promote the change or
retention of any law or policy of any level of government (whether Canadian or
foreign), or to encourage the public to contact any public official with a view
to promoting changes in the law or policy.
However, a charity’s political activities cannot be partisan (directly or
indirectly support, or be in opposition to, any political party
or candidate for public office).
Proposed
changes
While the
Federal Government acknowledges that charities play a valuable role in the
development of public policy in Canada, it indicates that there is a need to
ensure that charities respect the limits on political activities which are
currently in the Income Tax Act. The Federal Government also sees a need for
greater transparency in respect of these activities. These concerns appear to be driven by a
perceived increase in foreign funding of charities engaged in advocacy
activities, particularly in relation to environmental issues like pipeline approvals.
The
Budget proposes a new definition of “political activity” that includes the
making of a gift to a qualified donee if it can reasonably be considered that a
purpose of the gift is to support the political activities of the qualified
donee. The definition of “charitable
purpose” will also be revised to exclude gifts to qualified donees that
constitute political activities under the new definition.
The result
of these changes is that grants to qualified donees that can be considered to
be made in support of the donee’s political activities will be considered
expenditures by the donor charity on political activities and these expenditures
will be included in the calculation of the resources of the donor charity devoted
to political activities.
The Federal
Government is also proposing that the CRA increase the required reporting that
charities must make on political activities, including the extent to which such
political activities are funded by foreign sources. The Budget does not provide detail on the
increased reporting that will be required, but we expect that charities will be
required to disclose the amounts received from foreign sources for political
activities, and possibly the identities of the foreign donors.
Intermediate
sanctions for political activities are introduced by the Budget. These will
allow the CRA to penalize Canadian charities or RCAAAs and for excess expenditures on
political activities where under the current provisions of the Income Tax Act revocation was the only
sanction available.
Further, the CRA will be
granted the ability to suspend the tax-receipting privileges of a charity or
RCAAA that provides incomplete information in its annual
information return until the charity provides the required information. The impetus for this latter provision appears
to be to ensure that charities file all required information regarding
political activities, but depending on how the legislation is drafted, it could
potentially be applied to any incomplete information on a T3010 Return.
Comments
These
rules raise several issues of concern.
In particular, it is unclear when a grant to a qualified donee will be
considered to be made with “a purpose” of supporting the political activities
of the qualified donee. Many qualified
donees engage in small amounts of political activities in support of their
charitable mission. Will all gifts to these organizations be considered to have
been made with a purpose of supporting these political activities, or only
gifts specifically earmarked for political activities? If all gifts are caught, will the entirety of
the gift be considered an expenditure on political activities, or only the portion of the gift that corresponds with the proportion of political
activities of the donee? Furthermore,
how is a charity to know whether and to what extent a qualified donee engages
in political activities, and as of when must this be determined (a problem that
is only compounded when considering that if the donee is a registered charity,
it may itself have made grants to other qualified donees which are deemed to be
expenditures on political activities under the new rules)?
Without
clarity on these issues, a charity may find itself offside the new restrictions
on political activities without knowing it and without an option to avoid it,
short of ceasing all funding of qualified donees. At a minimum, the calculation
of resources spent on political activities has become dramatically more
complicated and difficult. We expect
that Canadian grant making charities should begin using granting agreements
designed to provide explicit limitations on the recipients’ political activity.
It is
difficult to comment on the proposed increased reporting requirements in the
absence of specific details on what will now be required to be disclosed. However, such increased disclosure naturally
raises potential privacy concerns on the part of foreign donors that have a
legitimate interest in not having their donations made public.
We will
continue to monitor these rules and any CRA commentary on them. It is hoped that the rules will be revised
before being enacted to provide greater clarity on their interpretation and
application, and to ensure that charities are not subjected to an unreasonably
onerous reporting regime in respect of political activities. Nonetheless, given the political climate and
these new rules, foreign charities funding advocacy in Canada and Canadian
charities funding or doing advocacy (particularly environmental advocacy)
should be very careful.
