The Budget proposes new rules impacting the ability of charities to engage in political activities and requiring new disclosure rules on political activities.
Current rules re political activities
Charities in Canada advocate regularly on many issues of public policy. Much of that activity falls within the realm of charitable activity and is widely recognized as a positive for our communities. The Income Tax Act also permits registered charities to engage in limited non-partisan political activities that are ancillary and incidental to their charitable purposes. “Political activities” are generally understood to include any activities intended to promote the change or retention of any law or policy of any level of government (whether Canadian or foreign), or to encourage the public to contact any public official with a view to promoting changes in the law or policy. However, a charity’s political activities cannot be partisan (directly or indirectly support, or be in opposition to, any political party or candidate for public office).
While the Federal Government acknowledges that charities play a valuable role in the development of public policy in Canada, it indicates that there is a need to ensure that charities respect the limits on political activities which are currently in the Income Tax Act. The Federal Government also sees a need for greater transparency in respect of these activities. These concerns appear to be driven by a perceived increase in foreign funding of charities engaged in advocacy activities, particularly in relation to environmental issues like pipeline approvals.
The Budget proposes a new definition of “political activity” that includes the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee. The definition of “charitable purpose” will also be revised to exclude gifts to qualified donees that constitute political activities under the new definition.
The result of these changes is that grants to qualified donees that can be considered to be made in support of the donee’s political activities will be considered expenditures by the donor charity on political activities and these expenditures will be included in the calculation of the resources of the donor charity devoted to political activities.
The Federal Government is also proposing that the CRA increase the required reporting that charities must make on political activities, including the extent to which such political activities are funded by foreign sources. The Budget does not provide detail on the increased reporting that will be required, but we expect that charities will be required to disclose the amounts received from foreign sources for political activities, and possibly the identities of the foreign donors.
Intermediate sanctions for political activities are introduced by the Budget. These will allow the CRA to penalize Canadian charities or RCAAAs and for excess expenditures on political activities where under the current provisions of the Income Tax Act revocation was the only sanction available.
Further, the CRA will be granted the ability to suspend the tax-receipting privileges of a charity or RCAAA that provides incomplete information in its annual information return until the charity provides the required information. The impetus for this latter provision appears to be to ensure that charities file all required information regarding political activities, but depending on how the legislation is drafted, it could potentially be applied to any incomplete information on a T3010 Return.
These rules raise several issues of concern. In particular, it is unclear when a grant to a qualified donee will be considered to be made with “a purpose” of supporting the political activities of the qualified donee. Many qualified donees engage in small amounts of political activities in support of their charitable mission. Will all gifts to these organizations be considered to have been made with a purpose of supporting these political activities, or only gifts specifically earmarked for political activities? If all gifts are caught, will the entirety of the gift be considered an expenditure on political activities, or only the portion of the gift that corresponds with the proportion of political activities of the donee? Furthermore, how is a charity to know whether and to what extent a qualified donee engages in political activities, and as of when must this be determined (a problem that is only compounded when considering that if the donee is a registered charity, it may itself have made grants to other qualified donees which are deemed to be expenditures on political activities under the new rules)?
Without clarity on these issues, a charity may find itself offside the new restrictions on political activities without knowing it and without an option to avoid it, short of ceasing all funding of qualified donees. At a minimum, the calculation of resources spent on political activities has become dramatically more complicated and difficult. We expect that Canadian grant making charities should begin using granting agreements designed to provide explicit limitations on the recipients’ political activity.
It is difficult to comment on the proposed increased reporting requirements in the absence of specific details on what will now be required to be disclosed. However, such increased disclosure naturally raises potential privacy concerns on the part of foreign donors that have a legitimate interest in not having their donations made public.
We will continue to monitor these rules and any CRA commentary on them. It is hoped that the rules will be revised before being enacted to provide greater clarity on their interpretation and application, and to ensure that charities are not subjected to an unreasonably onerous reporting regime in respect of political activities. Nonetheless, given the political climate and these new rules, foreign charities funding advocacy in Canada and Canadian charities funding or doing advocacy (particularly environmental advocacy) should be very careful.