By: Arthur Drache
In mid-July, Mr. Justice Ed Morgan of the Ontario Superior Court of Justice determined that the Income Tax Act legislation and the CRA’s administrative practices relating to political activities of charities was contrary to the Charter of Rights when restrictions were applied to the (non-party partisan) political activities of charities.
The decision creates some huge problems for the federal government which is now faced with (a) lodging an appeal or (b) amending the Income Tax provisions which relate to political activities. The decision also means that those charities which are still subject to revocation for such activities may be in the clear. If there is an appeal, the process could take literally years during which time the restrictions of charity political activities will be non-operative.
The background is this.
The decision Justice is a reprieve for the tiny Ottawa group that launched the challenge Canada Without Poverty which has been under formal notice of losing its charitable status since 2016.
CRA auditors claimed that 98.5 per cent of the group’s work is political, violating a section of the Income Tax Act in force since 1985 restricting such activity to 10 per cent.
Morgan set out the core issue as follows:
THE CONSTITUTIONAL CHALLENGE
[Section 149.1(6.2) of the Income Tax Act, RSC 1985, c. I (5th Supp) (“ITA”) defines the extent to which a registered charity may devote its resources to “political activities”. The section provides limited room for such activities:
(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 Applicant challenges the interpretation given by Canada Revenue Agency (“CRA”) to the “substantially all” requirement in the opening lines of s. 149.1(6.2). In doing so, it also challenges the overall distinction between “charitable activities” and “political activities” that is embodied in ss. 149.1(6.2)(a) and (b). As drafted, the section requires that “substantially all” of the charity’s resources be devoted to “charitable activities”, and to the extent that some of those resources are devoted to “political activities” – which are conceived in the section as being separate and apart from “charitable activities” – that is permitted under s. 149.1(6.2)(a). As long as the “political activities” are done under the conditions set out in ss. 149.1(6.2)(b) and (c) i.e. are ancillary to the charitable activities and are non-partisan the political activities are considered to be charitable.”
Morgan’s decision does not alter the prohibition against charities engaging in partisan activities — that is, supporting particular candidates or political parties. Charities have not challenged that section of the Act.
But he did rule the 10 per cent rule was an arbitrary and unjustified infringement of freedom of expression as guaranteed in Section 2 of the Charter of Rights and Freedoms. And he said Canada Without Poverty needs to engage in political activity, such as buttonholing ministers and encouraging Canadians to contact their MPs, to carry out its charitable purpose.
Simply put, there is no way to pursue the Applicant’s charitable purpose using methodology that is recognized by Parliament itself while restricting its politically expressive activity to 10% of its resources,” the judge wrote.
Canada Without Poverty’s legal challenge was argued pro bono by the Toronto law firm McCarthy Tetrault LLP, which suggested the court could issue a “suspended declaration,” giving the federal government 12 months to bring the act into compliance with Section 2 of the Charter.
Instead, the judge declared that the offending sections of the Income Tax Act have “no force and effect” as of Monday’s ruling.
The decision raises questions about a $13.4-million political-activities audit program launched by the former Conservative government in 2012, which targeted 60 charities, some of whom are still caught.
Toronto-based Environmental Defence, for example, was among the first to be targeted, and has been issued notice that its charitable status will be revoked because it exceeds the 10 per cent rule. The group has spent $200,000 in legal fees alone to navigate the audit process.
The decision comes are time when the whole issue of charities’ political activities has become a hot issue. Morgan specifically cites the report of the Consultation Panel on Political activities…a report not yet acted upon by the CRA after almost two years.
Specifically, in the Report of the Consultation Panel on the Political Activities of Charities, March 31, 2017 (“Consultation Report”), the Consultation Panel recognized that a key principle with respect to charitable activities is that public advocacy and charitable works go hand-in-hand in a modem democracy: “The participation of charities in public policy dialogue and development should be recognized and valued, and seen as an essential part of the democratic process”: Consultation Report, p. 6.
[More to the point, the Consultation Panel specifically found that the restrictions on political participation in Section 149.1 (6.2) of the ITA were outmoded and required legislative change:
Legislative change is required to broaden and simplify the requirements for charities and to remove other obstacles to their contribution to society that are unnecessary and counterproductive”: Consultation Report, at p. 5.
The Consultation Report then recommended, at p. 6, that the ITA be amended in much the same way as the Applicant seeks here:
… deleting any reference to non-partisan “political activities” to expressly allow charities to fully engage, without limitation, in non-partisan public policy, dialogue and development, provided that it is subordinate to and furthers their charitable purposes.”
In a nutshell, Morgan reviewed virtually all the contemporary literature on the issue of political activities…most of which was highly critical of the Canadian position. (Canada’s approach is much more restrictive than that of other common law countries such as Great Britain and the United States.)
The interpretation and enforcement by CRA of the “substantially all” requirement in s. 149.1(6.2) of the ITA by limiting to 10% a charitable organization’s use of its resources for political activities, as set out in the CRA Policy Statement, violates s. 2(b) of the Charter and is not saved by s. 1. There shall be a Declaration to that effect and an Order that CRA cease interpreting and enforcing s. 149.1(6.2) in that way.
There shall be a further Order that the phrase “charitable activities” used in s. 149.1(6.2) be read to include political activities, without quantum limitation, in furtherance of the organization’s charitable purposes.
The Declaration and Orders described above render meaningless ss. 149.1(6.2)(a) and (b) of the ITA. As part of the protection of freedom of expression encompassed by the above Declaration and Orders, there shall therefore be a further Declaration that ss. 149.1(6.2)(a) and (b) are of no force and effect pursuant to s. 52(1) of the Constitution Act, 1982.
[The exclusion from “charitable activities” of partisan political activities contained in subsection 149.1(6.2)(c) of the ITA remains in force.”
That’s where we stand now but the story is far from over. But this was a great win for the charity community and should, one way or the other, change the landscape as charities can use be much more direct in following their stated objectives without fearing the CRA auditors.
Canada without Poverty v. A.G, 2018 ONSC 4147.
 We argued the same point twice before the Federal Court of Appeal twenty years ago in Alliance for Life and Human Life International and received short shrift from the court both times.