Senator Plett says Bill S-222 is “unquestionably a giant step forward” at its Second Reading
May 25, 2021 (Ottawa, ON) - The Honourable Don Plett, Leader of the Opposition in the Senate, issued the following statement:
Honourable senators, it is my pleasure to rise today to speak to Bill S-222, An Act to amend the Income Tax Act (use of resources), also known as the Effective and Accountable Charities Act.
This bill is long overdue. Although I stand in the role of critic for this bill, you will soon discover that I am very supportive of this legislation. I want to thank Senator Omidvar for her work on this issue and for bringing this bill forward.
In her second reading speech, Senator Omidvar did an excellent job providing this chamber with an overview of the problem that this legislation seeks to address, so I will not take too much of your time to cover the same ground. However, I would like to briefly review why this bill is needed and why I believe this chamber should support it.
In Canada, like many countries, charities are granted a favourable tax status. Donors receive tax-deductible receipts for their contributions and the charities themselves benefit from preferential sales tax treatment. This reflects the long-standing consensus that charitable work is a public service to society that serves the greater good and therefore warrants preferred tax treatment.
As explained by the Canada Revenue Agency:
Registered charities are charitable organizations, public foundations, or private foundations that are created and resident in Canada. They must use their resources for charitable activities and have charitable purposes that fall into one or more of the following categories: the relief of poverty; the advancement of education; the advancement of religion; other purposes that benefit the community.
The rules governing the operation of Canadian charities are established by the Income Tax Act, which are then interpreted by the Canada Revenue Agency. Compliance with the rules is closely monitored and additional guidance is routinely published by the CRA to give additional insight into the application of the law and assist charities in understanding how the law translates practically in their work.
Failure to adhere to the rules can have severe consequences, including the loss of an organization’s charitable status. This is true not only with the statutory requirements but also the directives providing additional guidance published by CRA.
The legislation before us seeks to address challenges that stem from two such policy directives issued by the Canada Revenue Agency. The first is CRA’s Guidance CG-002, “Canadian registered charities carrying on activities outside Canada,” and the second is CRA’s Guidance CG-004, “Using an intermediary to carry on a charity’s activities within Canada.”
Both policies detail the CRA’s interpretation of section 149.1(1)(a.1) of the Income Tax Act, which defines a charitable organization. The entire definition is 359 words long, but these two CRA directives focus on just 16 words, which read as follows: “. . . all the resources of which are devoted to charitable activities carried on by the organization itself.”
In other words, to qualify as a charity, the organization’s resources must be devoted to charitable activities that are “carried on by the organization itself.”
CRA puts it this way:
The Income Tax Act requires a charity to devote all its resources to charitable activities carried on by the organization itself. This requirement is referred to as the own activities test.
The CRA goes on:
To meet the own activities requirement, when a charity transfers resources to its intermediary, it must direct and control the use of those resources. This means the charity must make decisions and set parameters and significant issues related to the activity, on an ongoing basis, such as: how the activities will be carried on; the overall goals of the activity; the area or region where the activity will be carried on; who will benefit from the activity; what goods and services the charity’s money will buy; when the activity will begin and end.
The key words here are “direct” and “control.” Any time a charity wants to work through an intermediary that is not another Canadian charity, it must “direct and control” that organization. This has proven to be extremely problematic for charitable organizations. In a publication prepared for the Pemsel Case Foundation entitled Direction and Control: Current Regime and Alternatives, Theresa Man and Terrance Carter summarize these difficulties and challenges with the following seven points:
Number one: The policy has resulted in an outdated international development approach.
Requiring charities to have a top-down approach to exercise “direction and control” to dictate the charitable activities and how they are carried out . . . is imperialistic, parochial and offensive. This approach is fundamentally at odds with current international development philosophy that recognizes the importance of developing empowering partnerships with local communities and non-governmental organizations (NGOs).
This approach is also inconsistent with the Canadian government’s policies on working with First Nations and international communities.
Number two: The policy has created uncertain CRA requirements. The Pemsel paper says this:
Many of CRA’s requirements do not clarify which requirements are mandatory and which ones are optional. . . . These uncertainties often result in charities erring on the side of caution by treating all of them as mandatory requirements and thereby making compliance even more difficult.
Number three: The direction and control policy is impractical and unrealistic to comply with.
The top-down approach to exercise “direction and control” is undesirable, impractical and unrealistic in many respects, reflecting an environment of micro-management that deters and distracts charities from focusing on delivering the programs. Requiring the charities to know all the details of a project from start to finish before the project begins in order to give “direction and control” is impractical and unrealistic. This approach also ignores the benefit of relying on the expertise of the local partner doing the work on the ground.
Number four, the policy creates high administrative costs.
Compliance with the onerous CRA requirements often require high administrative costs, even in situations where the charity otherwise has no concerns with a trusted foreign partner, where efforts undertaken are ineffective and of little or no value to identify non-compliance issues by the partner. This in turn draws precious and scarce resources away from charitable work and represents a poor expenditure of charitable resources.
The legal relationships referred to in the CRA policies are very restrictive and impractical. They do not reflect the diversity of relationships that charities need to enter into when carrying out programs outside Canada in different contexts.
Number six: The policy is inconsistent with other jurisdictions.
The direction and control mechanism requiring the programs to be the “own activities” of the funding Canadian charity is an outlier in the world and not easily understood. It is inconsistent with successful mechanisms utilized by other countries, such as the U.S. and England and Wales.
Number 7: The direction and control policy is conflated with the financing of terrorist organizations.
. . . there is a perception that any alternative solution to solve the “direction and Control” problem might become an impediment to the government’s efforts to prevent terrorist activities and financiering by taking away the enforcement tool of direction and control.
The Canadian Council for International Cooperation has noted that the direction and control policy harms charities regardless of whether they are working domestically or internationally. For example, in the international arena, the policy prevents Canadian charities from donating to emergency pooled funds. They cannot be part of a rapid response intervention which pools funds from multiple charitable sources, because to do so would require the Canadian charity to directly control and fully account for the use of all the funds. Furthermore, they cannot donate to the advocacy campaigns and they cannot donate to non-charitable institutions such as hospitals.
Domestically, the CCIC notes that direction and control policy undermines partnerships, weakens sustainability and hinders coordination. Canadian charities cannot work horizontally with Indigenous partners and communities, and instead have to come in as the boss, directing and controlling everything. They cannot support community facilities like youth or art centres unless they take over control of all their activities, and they cannot donate to shared non-profit platforms.
Honourable senators, the purpose behind direction and control is well-intentioned. The government cannot permit tax receipts for charitable donations without ensuring that these donations are actually for charitable purposes. To do so would be to provide a tax advantage for activities that may not be in the broader public interest. However, in practice, this policy has been a significant hindrance to the efforts of charities to carry out their work.
Last fall, my office was on a Zoom call with representatives from Samaritan’s Purse and Canada Foodgrains Bank. They underscored how difficult the direction and control policy was making it for them to respond to the immense needs presented globally by the pandemic. At a time when the need for speed, efficiency and international cooperation could not be greater, the efforts of Canadian charities have been hobbled by an outdated bureaucratic invention which hinders the work of over 1.5 million people working in the charitable sector in Canada.
Honourable senators, that is what this is; the direction and the control policy is a construct of the Canada Revenue Agency, as noted by the Pemsel Case Foundation:
There is no requirement in the ITA for charities to exercise direction and control on their activities. This is an administrative policy of CRA based on an interpretation on the ITA requirement that charities operate their “own activities” when not making gifts to qualified donees.
Honourable senators, Bill S-222 is somewhat of an outlier approach to the legislative process because it proposes a statutory solution to deal with a regulatory problem. This is not the normal way to develop public policy. However, in this case it is necessary.
The work of the Canada Revenue Agency is important and yet often thankless. I have no doubt that they have done their best over the years to faithfully interpret and implement what the Income Tax Act legislates on this matter, but in this case it has clearly missed the mark.
In discussing this issue with Canadian charities, we questioned them about why the policy has not simply been changed by the CRA. Why has it persisted for so long in spite of the obvious problems it causes? They chalked it up to bureaucratic inertia. After decades of interpreting the Income Tax Act a certain way, the CRA is reluctant to change their approach.
Honourable senators, this is understandable, but it is not acceptable. By amending the Income Tax Act, we will ensure that a better framework is provided, which will be similar to the regulatory requirements in other countries and provides an opportunity for greater efficiency, effectiveness and coherence in our charitable sector, while maintaining accountability and protecting public safety.
As you know, this view has received widespread support, not just from Canadian charities but from parliamentarians as well. In its 2019 report, the Special Senate Committee on the Charitable Sector highlighted this issue as one of the many that need to be addressed and made recommendations about how it could be corrected.
In 2020, the House of Commons Standing Committee on Foreign Affairs and International Development also flagged this issue and unanimously recommended:
That the Government of Canada take immediate steps to fix the serious problems with the current direction and control regime as it pertains to international development, recognizing that this regime impedes important international development work and perpetuates colonial structures of donor control.
Honourable senators, there is broad agreement that this issue needs to be fixed. Bill S-222 offers us an opportunity to do just that.
As noted by the Pemsel Case Foundation’s report on direction and control:
. . . an ideal solution for the charitable sector in this regard would be to undertake a thorough revamp of the income tax regime governing registered charities to come up with a modern, coherent and empowering framework, including an efficient mechanism for charities to engage in international charitable work or work in Canada with nonqualified donees. However, such a reform would likely take years to accomplish. Instead, it is hoped that the proposed changes suggested in this paper would require as little legislative changes as possible, in providing an interim practical solution to the dilemma faced by charities while leaving the broader restructuring of the framework to be accomplished at a later time.
Honourable senators, no one is suggesting that this bill is perfect, but it is unquestionably a giant step forward. As critic of the bill, I again commend Senator Omidvar for bringing this forward. I strongly support sending this bill to committee for further study and hope you will as well. Thank you, colleagues.