CD Howe Institute Publishes Paper by Adam Aptowitzer on Charity Regulation
Adam Aptowitzer, December 17, 2009
Most charities accept the fact that regulation is necessary to ensure that the sector operates in a reasonably acceptable manner. That this regulation should be undertaken by the CRA has basically become unquestioned by the vast majority of Canadians. However, the CRA’s involvement in this role is actually more a product of necessity rather than a deliberate act in accordance with Canada’s constitution. A paper written by the author, and published by the CD Howe Institute earlier this year, describes these issues and proposes a new way forward for the sector. To see a copy of the paper click here.
When the federal government gave preferential tax treatment to charities in the 1930’s there was considerable incentive for the proliferation of groups which called themselves charities. In response, and to protect the integrity of the tax base, the Minister of National Revenue (as the CRA then was) began the process of registering charities. Then, as it became clear that the provinces were not going to exercise the constitutional authority that was theirs alone to regulate charities, the Federal government began legislating requirements for registration which were really of a regulatory nature. As the CRA was responsible for registering charities (itself as a consequence of its role to manage the tax base), the additional ‘registration requirements’ naturally fell within its purview. In this way, the CRA gradually became the national charities regulator.
Fundamentally, because the Federal government does not have the necessary jurisdiction to regulate charities it is forced to use the registration system to try and enforce regulations more generally. As a result, we have a system where the rules in place do not necessarily punish the appropriate parties. For example, a charity is subject to revocation for bestowing an ‘undue benefit’ on the directors – even if it is the directors causing the charity to bestow the benefit in the first place. Another major problem is that regulatory laws often contain nuanced and complicated rules that are meant to apply policy in specific areas. On the other hand, a registration system uses rules which are far broader and intended to apply to all situations regardless of the more minute details.
There are other problems with the current regulatory system as well, but fundamentally most of these can be traced to the general structure (or lack thereof) of the regulatory structure in Canada. The most comprehensive way to fix the system is to involve the provinces in charity regulation. This could be done through a joint Federal Provincial charity council. Each province would be entitled to appoint a representative to the council, as would the federal government. A representative of the sector generally may also be appointed. The council would be responsible for registering new charities, regulating them and being a first level adjudicator for disputes in either of those two areas. Moreover, registration under the Income Tax Act would be automatic but contingent upon registration by the council. Thus, provincial participation on the council would be required to ensure that charities in that province get the benefit of the federal donation tax credit.
While these changes are extensive, they are also compelling in that Canada’s third sector accounts for hundreds of billions of dollars, a massive number of employees and huge portion of the country’s collective consciousness. We need proper regulation in order to promote the health of the sector and ensure that our charities will continue to serve the public and Canada’s image abroad in an effective and responsible manner.