Canada Expert: Arthur B.C.Drache Institutional Affiliation: Drache Aptowitzer LLP Reviewer: Kathi Badertscher. IUPUI Lilly Family School of Philanthropy. With contributions from staff at the Indiana University Lilly Family School of Philanthropy QUICK FACTS Legal forms of philanthropic organizations included in the law: Association, Foundation, Cooperative, Corporation, Benefit Corporation, Trust, and Society Five main social issues addressed by these organizations: Higher Education, Arts and Culture, Religion, Human Rights, Health Average time established by law to register a philanthropic organization: 0-30 days Average cost for registering a philanthropic organization: US $150 Creating a philanthropic organization (PO) is inexpensive and generally swift. There is no fee for a PO to become a registered charity under the Income Tax Act, rather than the cost advisers might charge to assist the PO in the registration process. The average time of the registration process is usually less than two month. However, it may take six month to a year if the application does not contain enough information for the government to determine whether the PO qualifies for charitable registration. Government levels primarily regulating the incorporation of philanthropic organizations: Central/Federal Government, State Government Canadian government consists of ten provinces, three territories, and the federal government. Each has its own set of laws to regulate the incorporation of POs. The legislation is similar, but not identical, in each jurisdiction. Only under federal law can an organization be registered as a charity, though where and how the entity is created does not affect the registration. Philanthropic Environment Scores: Year Ease of Operating Tax Incentives Cross-Border Flows Political Environment Socio-Cultural Environment OVERALL SCORE 2018 4.7 4.5 3.5 4.3 5.0 4.38 1
I. Formation/Registration, Operations, Dissolution of a Philanthropic Organization (PO) The three questions in this section pertain to the laws and regulations governing philanthropic organizations (POs). The scoring questions for this category cover three aspects of regulations: (A) formation and registration, (B) operations, and (C) dissolution. Question 1: To what extent can individuals form and incorporate the organizations defined? Score: 4.5 Creation of an organization may be subject to slightly different rules in each of the ten provinces, three territories, and at the federal level. Nevertheless, there are essentially no restrictions on who can incorporate an organization. The incorporators must be of legal age, usually 18, mentally competent, and not an undischarged bankrupt, though even these vary from jurisdiction to jurisdiction. The process is generally simple and fees are modest. No capitalization is required. Generally, the entity can pursue any activity other than profit, but there may be significant limitations imposed by other legislation depending on the purpose of the organization. However, there may be requirements that are extraneous to the actual process. For example, if a corporation (or an unincorporated entity) wishes to be registered as a charitable organization, it must have objectives consistent with the common law definition of charity. If the corporation is to be a political party, it must conform to requirements set out in the applicable Elections Act. The same is true of a labor union. Thus, the incorporators must have other non-corporate issues in mind, depending upon the overall purpose. Generally, the act of incorporation is simple, but becoming qualified under the provisions of other acts (such as the income tax act) can be onerous. Thus, a corporation may exist but have its registration as a charity refused. In such a case, the process is open in terms of explanation and there is a well set-out appeal process. If a corporation is a nonprofit organization, as opposed to a registered charity, there are no extrinsic requirements beyond not having a profit motive and not being able to distribute income to members. Question 2: To what extent are POs free to operate without excessive government interference? Score: 4.5 Legislation which restricts PO activity and operations is minimal. Some general application laws apply (support of terrorism, activities which are against public policy and money laundering) but, generally, there are no targeted restrictions on activities and operations. There is complete freedom to communicate domestically and with foreign bodies. Registered charities are prohibited from engaging in political activities. Aside and apart from support of a particular political party, the rules as to what is political are vague, and there is currently a consultation under way to clarify the rules on political activity. No such restrictions apply to other types of POs. 2
Question 3: To what extent is there government discretion in shutting down POs? POs can always voluntarily dissolve. Forced dissolution only applies when they consistently fail to meet statutory requirements, such as filing annual corporate returns. Even in such cases, the regulators go to great lengths to allow the organization to become compliant. POs have the right of appeal in the case of involuntary dissolution. II. Domestic Tax and Fiscal Issues The two questions in this section pertain to laws and regulations governing the fiscal constraints of giving and receiving donations domestically. Question 4: To what extent is the tax system favorable to making charitable donations? Two types of POs exist in Canada: registered charities and nonprofit organizations that do not have charitable status. Both are tax-exempt POs, but donors only receive tax deductions for gifts to registered charities (POs that advance religion, education, poverty relief, and other beneficial purposes). For registered charities, the tax provisions are extremely generous for gifts from both individuals and corporations. The same tax provisions apply to a few others such as the United Nations, its agencies, and selected foreign universities which usually have Canadian students in attendance. There is some complexity as the rules take into account such matters as potential capital gains, recapture of depreciation, and the like but ultimately there are functionally no serious limits on tax relief for gifts. If an organization is not a registered charity, there is no general tax relief for donations. However, there are some generous provisions for political donations (to an annual maximum of US $1,500) and members of a trade union can deduct their annual dues from their income. In some cases, payments to trade associations may get tax relief as business expenses. Question 5: To what extent is the tax system favorable to POs in receiving charitable donations? Score: 4.0 All organizations that are covered by the broad term PO are exempt from income tax at both the federal and provincial levels. This is explicit in the legislation. However, property tax exemption is under the provincial and municipal jurisdiction, and there is no comprehensive statement that can be made about whether any particular organization will or will not be exempt from property taxes. The same is true of provincial and federal sales taxes, though there is a regime under which registered charities and some non-charities can get a rebate of net sales taxes paid. The rules are arcane and often result in litigation. The most favorable treatment applies to registered charities, which, according to most estimates, represent about 35 percent of nonprofit organizations. All organizations can receive support from private donors, but tax relief is only available to registered charities (See question 4). 3
III. Cross-Border Philanthropic Flows The two questions in this section concern laws and regulations governing the fiscal constraints of giving and receiving cross-border donations. The scoring for these questions pertains to the donor and receiving entities. Question 6: To what extent is the legal regulatory environment favorable to sending crossborder donations? Score: 2.0 Once again, one must distinguish between organizations that are registered charities and other organizations that do not fit into this category. There are virtually no restrictions on non-charities, individuals, or corporations making transfers to non-canadian organizations, although they will not receive any domestic tax relief. For individuals and corporations, there may be some tax relief for gifts to United States 501c (3) organizations under the Canada-U.S. Tax convention, but there is no similar agreement with any other country. However, registered Canadian charities are prohibited from transferring funds or assets to any non-registered charity, which generally would include any foreign organization. (As noted earlier, there are some narrow exceptions for certain prescribed foreign universities and the United Nations). If a transfer were made to a non-qualifying organization, the result would likely be the loss of registered status. The inability of Canadian charities to transfer funds to non-canadian groups is an ongoing issue for any charity involved in out-of-canada charitable work. Therefore, many tax professionals that advise charities try to focus on developing methods to try to ameliorate the problems involved with this prohibition. Question 7: To what extent is the legal regulatory environment favorable to receiving crossborder donations? Generally, there are no impediments to a Canadian organization receiving funds or property from a foreign source. The only general prohibitions are linked to universal rules relating to moneylaundering and terrorist financing. In the case of political parties, under the federal law and most provincial Election Acts, foreign financing is prohibited. 4
IV. Political and Governance Environment The three indicator questions in the next two sections concern the political and governance context, socio-cultural characteristics, and economic conditions that influence the environment for philanthropy. Question 8: To what extent is the political and governance environment favorable for philanthropy? Score: 4.0 Generally, POs are well regarded in Canada by the public at large, though the current government has shown a certain level of hostility to certain groups, notably environmental charities, which take positions inimical to government policy. This manifests itself in threats of revocation of charitable status by the government for engaging in political activities, which the government interprets more narrowly than other countries. While registered charities (which can give tax receipts for donations) are subject to strict regulation with regard to such activities, these limitations do not apply to most other nonprofit organizations. If an organization that is neither a nonprofit nor a registered charity wishes to be involved in political activities, it can do so. Some registered charities arrange to create sister nonprofit organizations, which are not registered as charities, to take on political work. The Governor General (the deputy head of state after The Queen) annually honors caring Canadians. The award recognizes living Canadians and permanent residents who have made a significant, sustained, unpaid contribution to their community, in Canada or abroad. More than 3,300 Canadians have received the honor since its inception in 1995. Question 9: To what extent are public policies and practices favorable for philanthropy? Score: 4.5 Both federal and provincial governments are strong supporters of philanthropy, and there is a constant flow of encouragement and recognition of philanthropic activities. The government plays an important role in financially supporting nonprofits in Canada, especially in the health, education, and social services fields. Nonprofit hospitals, residential care facilities, colleges, and universities receive approximately 75 percent of total revenue from government transfers, as POs provide the majority of services in government-sponsored universal health and social welfare systems (Anheier 2014; Statistics Canada, 2009). Salamon (1995) describes this relationship as third-party government, or the comprehensive pattern of government contracting for service delivery to nonprofit providers, which is highly pronounced in Canada. All other nonprofits, sometimes referred to as the core, receive approximately 15 percent of total revenue from government transfers (Statistics Canada, 2009). 5
V. Socio-Cultural Environment Question 10: To what extent are socio-cultural values and practices favorable for philanthropy? A significant percentage of taxpayers donate to charities each year, and surveys indicate that charities have a high degree of trust among the public, usually polling much higher than politicians or political parties. It is difficult to quantify the percentage of donors because the main method of tracking is based on claims for tax relief on annual returns. It is abundantly clear, however, that there are significant number of donors who give money, as well as time through volunteer work, without making claims for tax relief. The media often publicizes major donations and work of volunteers, usually positively. Data indicate that Canadian socio-cultural values sustain the country s philanthropic tradition. For example, Canada is a member of the G20, or Group of Twenty, international forum that represents 85 percent of the Gross World Product. Canada is one of only five G20 countries that appear in the Top 20 countries on the 2016 World Giving Index. This index ranks participation in giving behaviors by five-year average scores: helping a stranger, donating money, and volunteering time. Statistics Canada similarly reports that, in 2010, 85 percent of the population aged 15 and over, donated money to a charitable or nonprofit organization, and 47 percent volunteered their time through a group or organization. This pro-social behavior seems to be deeply rooted in indigenous cultures, continuing with formal forms of philanthropy in the 17 th century under the Roman Catholic Church (Lasby & Barr, 2015). Communities gradually took on charity work in the late 18 th century, Canada s early colonial period, and philanthropy has increasingly secularized to the present day (Anheier, 2014). VI. Future of Philanthropy These questions are used to provide a general picture of the future of philanthropy in this country as well as recommendations to improve the philanthropic environment. Current state of the philanthropic sector The philanthropic sector in Canada is well developed and POs fill vital roles in society. To the extent that there may be problems, they are comparatively minor, such as delays in registering charities or uncertainty about certain administrative practices. It has been estimated that 170,000 charities are registered (Lasby & Barr, 2015), and the National Nonprofit Survey of Nonprofit and Voluntary Organizations (2004) found that nonprofit and voluntary organizations are vehicles for citizen engagement for Canadians through voluntary giving. The nonprofit sector has an important presence in the Canadian economy with a value added of 7 percent to the total Canadian GDP in 2010 when the contribution of hospitals, universities and colleges is added (Statistics Canada, 2009) 6
Three major recent events affecting the philanthropic landscape between January 2014 and December 2016 Under Justin Trudeau, elected as Prime Minister in October 2015, the federal government appears more sympathetic to the charitable sector than the previous one; The federal government convened an expert panel to evaluate the legislative framework for charities and issue recommendations; and The federal government s decision to abandon "political charity audits," which had been creating a certain level of fear for activist charities, following the 2017 recommendations of the Consultation Panel on the Political Activities of Charities. Future development trends in the philanthropic landscape There is an emerging trend toward facilitating arrangements between charities and for-profit entities to generate socially desirable results. There is a need for more specific legislation to facilitate this trend. Three key recommendations to improve the environment for philanthropy Clarification and codification of the new rules relating to "political activities" to allow charities to engage in public policy dialogue and development (partisan politics remains prohibited); A review of the rules that inhibit the transfer of funds to foreign charities, and the implementation of simplification of those rules to eliminate artificial barriers; and Clarification of tax benefits for charitable donations and simplification of property and sales tax exemptions. 7