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engage in political activities to the extent of other unregistered entities, calling Canadian charity law archaic or outdated.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.
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.