Bring the Provinces Back In
by Adam Aptowitzer LL.B.
Drache Aptowitzer Professional Corporation

Canadian charities, despite their ubiquity and multi-billion dollar financial power, operate in a regulatory environment where tax bureaucrats decide social policy, regulation is indirect, and charities are often stymied in their creation and development.  The problem stems from the general refusal of the provinces to exercise their constitutional authority to govern the area. On the other hand, the Federal government, which does not have any jurisdiction in the area, has filled the vacuum by taking on the role of regulator. To assume this role, the Federal government relies on its power to levy the income tax, and only allows donors tax credits from donations to charities registered with the government. The government, through the Canada Revenue Agency (the CRA) then requires the charity to comply with regulatory rules masked as requirements for registration.

However, regulating by disguise has its limits, and the growing size and importance of the sector demand that both the provinces and the federal government create a joint Charities Council to regulate the sector effectively. 

There are several problems with the current system. For one, donating to charities entitles the donor to pay reduced taxes but the CRA's primary mandate is maintain the integrity of the tax base. Thus, the CRA has an incentive to minimize the impact of donations through rules regarding donations and by limiting the number of registered charities.

Secondly, a registration system is no substitute for a regulation system. Under our current system, the most severe penalties involve suspending or revoking a charity's registration. On the other hand, a regulatory system could levy financial or criminal penalties against both the charity and its directors. Moreover, a proper regulatory system creates an infinitely more nuanced set of forbidden activities because of its capacity for more nuanced penalties. So for example, directives could be issued which relate to specific fact situations rather than banning all activities and relying on the discretion of the public service to implement them appropriately.

Finally, and perhaps most worrisome, is that the current system requires tax officials to make social policy decisions. In particular, the CRA must make decisions regarding what qualifies as a charity (for example whether a system of belief qualifies as a religion) and whether a charity is engaging in a forbidden political activity. As a rule, governments avoid deciding what qualifies as a religion. Yet here, not only is government actively involved in deciding which religions will have the support of our tax dollars (through the donation tax credit), but the government arm making that decision are tax bureaucrats rather than people specially trained in the area.

There are several consequences of this ill-conceived system. First, new charities are stymied in their registration. Second, registered charities lack a proper regulatory environment. And third, the CRA is forced into a conflicted position to the detriment of all Canadians.

Fundamentally, the best way to fix this problem is to involve the provinces in regulating charities because the provinces have clear authority to do so. The federal government must also be involved, both to help foster a harmonized set of rules across the country and because of its role in collecting the income tax. Both  levels of government  should be brought together soon to form a Canadian Charities Council which would be responsible for registering new charitable organizations, regulating them, and adjudicating  disputes arising from the new system. 

Registration for income tax purposes would be contingent and automatic upon registration as a charity by the Council. As each province would be legally required to delegate authority to the Council, charities in a non-participating province would not be registered for income tax purposes.  This would encourage a harmonized set of rules.

This plan will not create a layer of bureaucracy which was not originally intended by the Constitution. The Council would assume the duties of 'registration' and non-tax duties currently performed by the CRA (but hopefully at the more comprehensive level their jurisdiction would allow). The CRA and the Department of Finance would remain responsible for tax related implications of registration. One also imagines that there is a role for the sector itself in providing input and representation to the Council.

Ultimately, the Council's mandate would be to create and enforce proper regulations which both promote the sector and ensure that Canadians are being well served by their tax dollars.