The Canadian Income Tax Act and the Concepts of Charitable Purposes and Activities

Recent high profile debate over regulation of registered charities’ political activities is only part of broader sector concern about onerous Canada Revenue Agency (CRA) requirements with respect to other aspects of registered charities’ operations, such as reporting obligations, and constraints over foreign activities or on operating through intermediaries.  Additionally, what is required and reviewed under current registration protocols can be an issue. Many of these requirements, and the regulatory burden associated with them, are rooted in the language found in the Income Tax Act (ITA) dealing with registered charities – most notably use of the term “activities” in the definition of a charitable organization and elsewhere.

Notionally, appeal to the courts is available to clarify the common law meaning of charity (on which the Income Tax Act relies) and resolve any discrepancies between that meaning and specific statutory provisions.  In practice, the cost of accessing the courts, the CRA’s tactical approach to what it litigates, the propensity of the courts to rule on matters of settled law rather than venture into uncharted legal waters, and the deference of the courts to Parliament has mired the sector’s capacity to address contemporary social problems in a kind of desiccating conservatism.  The current framework militates against those who are best positioned – directors, trustees, or like officials of registered charities – having the flexibility to make reasonable decisions about the optimal use of organizational resources within clear and consistent regulatory parameters.

Repealing or amending the statutory language that focuses on activities (effectively, removing the current irregularities), and returning to the common law as the arbiter of what qualifies as charitable would, it is argued here, remove some of the contradictions and confusion found in current administration of the legislation.  This would entail a re-emphasizing of purposes – the traditional focus of the enquiry as to whether or not an endeavour is charitable.

A review of the history of the sections of the ITA provisions dealing with registered charities reveals an often overlooked evolution in the provisions that offers an insight into their original meaning.  Seemingly, language intended to distinguish between active (operational) charities and passive (funder) charities has been conflated with the common law requirement that charities confine themselves to exclusively charitable pursuits.  In the context of registration decisions, the confusion of these two considerations has resulted in the application of a substantive “activities” test as well as the traditional “purposes” test.  Read this way, the language of the ITA is contradictory on its own, as well as difficult, if not impossible, to reconcile with common law requirements.

The courts, in such cases as Scarborough Legal Services and the Queen, Toronto Volgograd Committee v. M.N.R. and Everywoman’s Health Centre v. M.N.R., have worked around, rather than satisfactorily resolving, the purposes/activities dilemma.  Justice Iacobucci in the majority opinion in the Supreme Court of Canada case Vancouver Society of Immigrant and Visible Minority Women v. M.N.R. grappled with the question and fell back on the common law rule: activities are charitable to the extent they aim at achieving a charitable purpose.  Justice Iacobucci didn’t, however, deal with how this dictum should apply to funder charities as well as operational charities, and how this ought to be reconciled with the language in the ITA.

The flaw marring the conceptual underpinnings of the registered charities provisions of the ITA, combined with the requirement that all the resources of a charitable organization be devoted to charitable activities carried on by the organization itself, has been exacerbated over the years by ITA amendments that fail to give sufficient heed to maintaining consistency with the common law.  Resorting to an activities test with respect to the regulation of political activities by registered charities, rather than reliance on the common law examination of whether the predominant purpose of an entity is political, is a case in point.  It requires both the regulator and the charity to delve into minutiae and make highly subjective decisions as to the nature of this or that action.

Nevertheless, there is merit in considering an entity’s planned or actual activities in determining its eligibility for registration, in particular with respect to two concerns: (1) mission drift; and, (2) inadvertent overstepping of bounds when an entity is constituted for purposes that are generally worded, rather than specific.  In both these instances, consideration of activities can help to clarify and define the scope of what is, or ought to be, undertaken.  However, reference to activities should be used only where warranted and not as a routine test.  CRA deeming an activity non-charitable, without on-point judicial precedent, is highly problematic.

That said, as a practical matter, and in light of the possible relevance of supplementary information to charitable status or to other potential legal constraints that may be applicable, it is certainly legitimate to examine whether planned or actual activities are reasonably connected to stated purposes. However, except in the case of related business or similar provisions which entail meeting specific statutory requirements, the applicable test should be reasonableness and prudence, not efficacy.  This is in keeping with the charity law presumption that in the absence of evidence to the contrary, the governing officials of a charitable entity are presumed to act in a lawful manner and fulfil their responsibilities.

Finally, an enquiry into activities may also be grounded in the potential to identify an unstated collateral (non-charitable) purpose or purposes.  Among other matters, this may include examining whether activities are a means-to-an-end or an-end-in-themselves. It may also turn on whether private benefit generated by the group’s work is incidental to advancing the charitable purpose(s). Assessment of questions such as: the relative importance of purposes; where activity becomes sufficient to be characterized as a purpose; and whether or not something is subordinate to, or a consequence of, something else, are often a matter of degree and a judgement call.  The courts, through the Supreme Court of Canada case Guaranty Trust v. M.N.R., and other decisions, have provided limited guidance in this area.

Two overarching policy considerations ought to inform oversight of registered charities under the ITA:  freeing charities so they can function effectively within society and regulating and monitoring tax abuse.  Re-shaping the current rules – with attention in particular to the distorting effect of activities as a component of the definition of charitable organizations and similar distortions elsewhere in the ITA provisions regulating registered charities – would have several benefits. These include providing underlying consistency within the statute and eliminating any contradictions; bringing the legislation into closer harmony with the common law; allowing for simpler and less confusing guidance from the regulator; improving and clarifying the rules applied to registration, to political activities, foreign activities and certain other aspects of registered charities’ activities; and freeing the courts to make more use of the common law in developing Canadian charity law in keeping with contemporary values.

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Now retired, but formerly with the Quebec Bar as well as an executive in the Canada Revenue Agency, Carl Juneau has more than 28 years’ experience in the regulation of charities through the Canadian Income Tax Act. This includes experience both in the Agency’s Charities Directorate and in the Tax Policy Branch of the Department of Finance, in the areas of policy development, registration and revocation of charities, legislative amendments, and appeals to the courts.