Ten Percent Rules Offers Poor Protection for Political Activities
Arthur Drache, October 19, 2006
A couple of months ago we were speaking with somebody who commented that in his view, the so-called “10%” rule pretty much ensures that few if any charities will be threatened because of political activity. We were surprised by this observation because in our view the “rule”, which is embedded in the Income Tax Act has never offered any level of protection except at the whim of the taxing authorities.
We were surprised to find that the fellow we were talking to was under the impression that this rule was relatively new, enacted in the past several years to respond to the sector’s concern about the problems of identifying activities on the continuum of education-advocacy-political. In fact, the original version of the rule appeared for the first time in tax amendments effective in 1985.
The provision relating to charitable organizations (subsection 6.1 deals with foundations) reads as follows: “149.1 (6.2) For the purposes of the definition “charitable organization” in subsection (1), where an organization devotes substantially all of its resources to charitable activities carried on by it and
(a) it devotes part of its resources to political activities,
(b) those political activities are ancillary and incidental to its charitable activities, and
(c) those political activities do not include the direct or indirect support of, or opposition to, any political party or candidate for public office, the organization shall be considered to be devoting that part of its resources to charitable activities carried on by it. ”
The first thing to note is that the final words in effect deemed qualifying expenditures to be a devotion of resources to charitable activity. This means that the organization is not threatened for using its resources for non-charitable purposes. But there is a trap for the unwary. Under a separate provision of the Act , the expenditure will not count towards meeting the organization’s disbursement quote. The effect of course is that while the expenditure may be sanctioned by statute, a charity can be jeopardizing its status if the expenditure means that it cannot meet its disbursement quota. When the CRA issued CPS-022, it gave a comprehensive and reasonable interpretation as to what “political activities” were to be considered acceptable and what activities were not acceptable.
While we do not necessarily buy into each jot and tittle of the document, having it is a vast improvement over the situation in Canada prior to its having been issued.though the Canadian position remains much more restrictive than that of the U.K., not to mention the United States. Returning to the statute, you’ll note that the key measurement is “resources”. One cannot determine whether or not a charity is onside unless one can not only identify what its resources are but determine the value of resources. For years as a matter of friendly trouble-making, we have asked charity accountants to value the resources of a charity so that we could estimate how much the charity could spent and still fir within 149.1 (6.2). Of course, no accountant could do so because the term is not an accounting (or legal) term and there is no way to quantify resources with a dollar figure. In CPS-022 Paragraph 9, the Charities Directorate has this to say:
“When a charity takes part in political activities, the Act requires that substantially all of its resources must be devoted to charitable activities. The term resources is not defined in the Act, but we consider it to include the total of a charity’s financial assets, as well as everything the charity can use to further its purposes, such as its staff, volunteers, directors, and its premises and equipment.” The fact of the matter is that there is not an iota of case law, statute or any other basis for this assertion. Indeed, though it has not happened as yet, we truly believe that at some point, the validity of the provision will be challenged in court on the basis of its vagueness. Suppose you run a small charity. An issue has arisen within your community and though you only spend perhaps $500 doing so, you mobilize a thousand people to march on city hall to let their displeasure be known. If the CRA challenges you on the issue, do you have to assign a “value” to each of those individuals who answered the call to arms, so to speak? If so, how do you value them? Are they “your” volunteers?
The simple answer is of course that you cannot assign a dollar value to the time of the “volunteers”, you can’t even be sure that their time is in fact somehow a “resource” of the charity.and more to the point, what authority would the CRA have to assert their position? The truth of the matter is that the ten percent rule is one which gives both charities and the CRA a level of administrative comfort.allowing a huge array of advocacy activity to be carried on without serious challenge. And that, in our view, is all to the good.
But that having been said, it would be foolish for an organization to undertake any political activity based solely on the “protection” offered by this provision. If your activity is relatively insignificant in terms of you income and assets (not resources), the provision will offer de facto protection. But if you move into serious expenditures, reliance on the rule will be a thin reed,
That fact, and the fact that you can’t claim the expenditures for disbursement quota purposes should be “on the table” when decisions are made about undertaking serious advocacy which the CRA categorizes as political.