The past year has seen no shortage of articles suggesting that the Canada Revenue Agency ("CRA") selectively targets charities that engage in political activities. Many of these articles suggest it is unfair that charities cannot engage in political activities to the extent of other unregistered entities, calling Canadian charity law archaic or outdated. Although the Canadian legal system as it pertains to charity law is not perfect, there are sound reasons behind the mechanisms which it chooses to employ and some options available for charities wishing to engage in some political activities.
Reasons for Limiting Political Activities
The courts have historically limited the objects that an
organization can undertake to qualify as a charity. These
include relief of poverty, advancement of education, advancement of
religion, or certain other purposes beneficial to the
community.
The main reason why courts do not permit political purposes to be
considered charitable is because a purpose is only charitable if it
generates a public benefit. Relief of poverty, advancement of
education and advancement of religion are presumed to benefit the
public. A political purpose, such as seeking a prohibition on
possession of firearms, requires a charitable organization to
engage in a debate about whether such prohibition is of public
benefit, rather than pursuing a public benefit that is broadly
acceptable. A contrary approach could lead to the
establishment of lobbyist entities advocating certain views, no
matter how unpopular, all while enjoying significant tax
advantages. For example, using this approach, a weapons
manufacturer could potentially be allowed to establish a charity to
lobby government officials for the sale of weapons in every
convenience store.
Moreover, if we were to unwind the current restrictions on who can
become a charity or what activities charities can undertake, the
Canadian tax base could significantly erode.
Incidental Political Activities are Permitted
It is important to remember that charities are not completely
prohibited from partaking in political activities. The Income
Tax Act (Canada) provides that a charitable organization or a
charitable foundation can continue to maintain its registered
status as long as no more than 10% of its resources are devoted to
political activities that are related to its charitable purpose.
This permits a charity to engage in political
activities that are ancillary to its charitable purpose. This
is appropriate, as there may be circumstances when a charity needs
to engage in incidental political activities as part of its
ongoing operations.
Failure to adhere to this established threshold may subject a
charity to CRA audits and sanctions, including the revocation of
the registered charity status, financial penalties and suspension
of charity's ability to issue charitable receipts. Since these
are undesirable outcomes, there are planning mechanisms that
charities can turn to if they believe they will be engaging in
political activities beyond the permitted threshold. One
option is to establish a separate entity to carry out such
political activities.
Using Other Structures to Carry Out Political Activities
A charity that anticipates that it will devote more than 10% of
its resources to political activities may establish a separate
entity in order to do so. The type of entity (not-for-profit
organization, for-profit organization, trust, etc.) established
will be driven by various goals, not the least of which is tax
minimization.
For example, a charity may establish a not-for-profit
organization. A not-for-profit organization is exempt from
income tax, similar to a charity. There are differences
between these types of entities, however, not the least of which is
the fact that a not-for-profit organization cannot issue charitable
receipts. In addition, a not-for-profit organization cannot
operate with a profit purpose or pay out income to its members.
Finally a charity cannot simply transfer its resources to a
not-for-profit organization. Thus, the not-for-profit organization
will need to engage in its own fundraising activities or enter into
a partnership, joint venture or agency agreement with a charity.
Although lack of funding may be difficult at first, a
not-for-profit organization can prove to be a helpful partner to a
charity that wants to be involved in political activities.
Conclusion
Given the recent scrutiny of charities by CRA, charities need to be very careful and should not engage in political activities beyond the permitted limits. If a charity wishes to devote more than 10% of its resources to political activities, it should consult with a tax professional to explore what options are available for doing so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
