A step forward for charities: Senator tables Bill to reform restrictive rules

February 17, 2021 | Susan M. Manwaring, Andrew Valentine, Katrina Kairys

Early last week, Senator Ratna Omidvar tabled Bill S-222, The Effective and Accountable Charities Act (the “Bill”), to break down barriers for Canadian charities working with other organizations, both in Canada and abroad.  The Bill, if enacted, will bring age old law and policy into the 21st century at a time when charities, non-profits and grassroots organizations need support more than ever.   The proposed reforms have been met with applause by sector organizations, their stakeholders, and the communities they serve.

In June 2019, the Special Senate Committee on the Charitable Sector, led by Senator Omidvar and Senator Terry Mercer, published a report following a study of the impacts of current federal and provincial legislation on charities and non-profit organizations.  There is one set of rules in particular that poses challenges for charities across the spectrum—both big and small, whether operating domestically or abroad.  This is the “own activities” requirement imposed by the Income Tax Act (the “ITA”) and the “direction and control” rules required by Canada Revenue Agency (“CRA”) policy.

The current law requires that Canadian charities spend their resources only on their own charitable activities and maintain “direction and control” over the non-charities they work with.  Specifically, the law requires that a charity devote its resources to charitable activities “carried on by the organization itself”.  CRA interprets this section of the ITA as permitting a charity to operate in only two ways: (1) carry out its own charitable activities; and/or (2) make gifts to qualified donees (which include, for the most part, other Canadian registered charities).  Consequently, if a Canadian charity wishes to work with a charity abroad or a Canadian non-profit organization, neither of which are qualified donees, it must establish direction and control over the activities of the partner organization such that they are the charity’s “own activities”.

Why does this present challenges for charities and the organizations they work with?  The charity transferring its funds to carry out charitable work must abide by a laundry list of ill-defined requirements that are inconsistent with the practical reality of how organizations work together.  As a result, the onerous requirements imposed by these rules channel donor dollars away from charitable work towards administrative fees spent on compliance.

The Bill proposes to amend the definitions of “charitable activities” and “charitable organizations” in the ITA to remove the requirement that the activities be the charity’s “own”, and instead enables charities to make transfers to non-charities, so long as the charity takes reasonable steps  to ensure that the transferred resources are used exclusively for a charitable purpose.  To ensure accountability, the proposed legislation requires a charity to conduct due diligence on the organizations it plans to collaborate with.  The charity must collect the information “necessary to satisfy a reasonable person that the resources will be used for a charitable purpose”, including information on the identity, experience and activities of the partner organization.

These amendments would allow charities to operate efficiently, while holding them to an objective standard to ensure that collaboration with other organizations is done in furtherance of charitable purposes.  Importantly, the Bill modernizes the current regime, bringing it in line with the laws of the United States, United Kingdom, Australia, and New Zealand, all countries with comprehensive and robust charities regulation.

The COVID-19 pandemic has highlighted the need for organizations to join efforts to better serve their beneficiaries.  It is time for reform to enable charities to more efficiently and effectively engage in charitable work, both in our own backyards and across the globe.  We look forward to following the development of the Bill as it proceeds through debate.

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