Time for reform of charitable donations?Posted: November 20, 2012
Posted in: Strategic Thinking, Distinguished Practices, Tax Filing and Planning
The Canada Revenue Agency (CRA) is on the warpath over charitable gifting tax shelters. But is it time for a broader review of Canada’s charitable donation rules?
Earlier in November, the CRA — to discourage taxpayers from participating in charitable gifting schemes — announced it would not issue tax refunds to participants in these schemes until the tax shelter itsef had been audited, potentially a two-year process (Knowledge Bureau Report, Nov. 7). While tax shelters rarely survive the audit process, it is not clear that the CRA’s latest tactic is legal. Registered tax shelter Global Learning Gifting Initiative thinks not — it has sponsored an action in the Federal Court of Canada. A court date should be set soon.
Charitable donations are big business in Canada. Even though participation in the schemes has declined in recent years, to about 10,000 from a high of around 50,000 in 2006, they still account for an estimated $85 million in federal tax refunds annually. For a fiscally constrained government, closing the holes in donation schemes could add to revenues.
In Canada, a registered charity is a tax-exempt organization. This means the tax subsidy is double-barreled: the charity is tax-exempt and its benefactors also obtain a tax deduction or credit. This proves very costly to the Canadian purse, but is justified on the basis that it encourages private organizations to engage in philanthropic activities that would otherwise have to be covered by the public sector.
An organization qualifies as a charity under section 149.1 of the Income Tax Act (ITA) if its purposes are charitable and it devotes all of its resources to these activities. In the seminal 1891 decision Pemsel’s Case, Britain’s House of Lords developed the test that has been used ever since to determine what is “charitable.” It was decided that charity comprised four general areas: relief of poverty, advancement of education, advancement of religion and “other purposes beneficial to the community.”
Perhaps it is time this 120-year-old list is updated.
What strikes the modern-day reader of these charitable criteria is the heavy correlation with church and charity, religion and benevolence. Yet, these terms are no longer synonymous: religious observance in Canada, much like other Western nations, has declined steadily in recent decades. Giving churches favourable tax treatment seems inconsistent with rules that withhold charitable exemptions from organizations that have a political agenda or that are for members only. Yes, churches may redistribute donations, but many of the benefactors are members of the specific church. Or the funds go toward causes that promote the church’s views, which are increasingly political. (Think same-sex marriage). The question to be asked: is the net effect of the charitable exemption for churches positive or negative for Canada?
To date, increased transparency of charitable financial records have revealed many tax-motivated schemes. It is very likely that increased scrutiny of charitable donations in general, and religious donations in particular, will reveal a large amount of currently untraced revenue for Canada, which could mitigate calls for aggressive tax increases as governments struggle to balance their budgets.
So, how much is missing from the public purse? Only the CRA’s efforts at continuing transparency will tell us. With the recent revelation of rampant abuse of tax shelters, however, it is likely the CRA will invoke more stringent registration and documentation measures. The call to reform the religious aspect of charity represents the logical reality of the age.
Greer Jacks is updating jurisprudence in EverGreen Explanatory, an online research library of assistance to tax and financial professionals in working with their clients.