A Step in a Charitable Direction (or, How the Supreme Court Got It Right)

The Supreme Court’s rejection of charitable status for the Vancouver Society of Immigrant & Visible Minority Women effectively maintains the current definition of what is a charity. While the decision is laudable for its resistance to judicial activism, it is assailable for upholding an ancient and flawed definition of charity.

Under our current tax code, there are two types of non-profit organizations: “non-profits” and “charities.” Non-profits pay no income tax, and have no “owners” in the traditional sense. Foundations are prohibited by Revenue Canada from giving money to non-profits, as the receiving organization must be a registered charity.

Like non-profits, charities don’t pay income taxes and don’t have owners. However, unlike non-profits, charities can issue tax-deductible receipts to their donors. In return, charities are subject to Revenue Canada guidelines and regulations regarding their activities and objectives.

Charitable status is a powerful resource because of our Byzantine tax code. Individuals who donate to charities receive a tax credit that reduces their tax bill. So charities have an inherent competitive advantage over non-profit agencies in their ability to raise money from individuals.

Anyone sufficiently masochistic to read the federal tax code will not find in its pages a definition of what a charity is, for the simple reason that there isn’t one. Rather, the definition of a charity has evolved from the Preamble to the Statute of Elizabeth, better known as the Statute of Charitable Uses, passed in England in 1601. The Act lists acceptable charitable activities.

In addition, the English Pemsel case of 1891 provides more specific parameters for defining a charity. It specifies four broad purposes for which a charity may be established: religion, relief of the poor, education, and other purposes beneficial to the community.

The fourth category is the one that poses definitional problems. What is “beneficial”? What constitutes “community”? Our inability to modernize our definition of charity has resulted in broad and substantial criticism, especially given both American and British reforms.

Although the Canadian definition of charity remains archaic, one must applaud the Supreme Court in its recent decision for fulfilling its true mandate, namely to interpret, not to expand, the law. It is not the proper role of the judiciary to create new laws. The judiciary’s true mandate is to adopt a clarifying, interpretative role. The creation of laws is the exclusive purview of elected, and thus accountable, representatives, namely, federal, provincial, and municipal governments.

In large part, the reluctance by those active in the sector to allow governments to legislate what constitutes charitable activities reflects a general suspicion of politics. Their most frequent argument focuses upon protecting charities from the whims of political parties, which come and go, as well as maintaining at least a theoretical separation between charities and government.

But there is a simple solution to this regulatory dilemma—a solution that would allow local responses to local problems, remove the government from active participation in the charitable sector, and devolve responsibility and control both to communities and individuals. This solution is called tax reform.

After all, charities are a result of tax definitions rather than any particular structural or inherent differences from non-profit organizations. The overhaul of the current tax system and the implementation of a flat rate of taxation, with a high personal exemption, would eliminate the very need to define what a charity is, since there would be no more deductions and no more tax credits to bestow upon favoured interest groups.

Under a flat tax, people would keep a significantly greater portion of their income. Hence, they would have more disposable income available to donate to charity.

The standard argument against such tax reform is that individuals donate to charities because of the tax implications. However, the empirical evidence contradicts this assertion. Historically, the strength of the relationship between tax credits and charitable donations is weak, at best. Evidence from the US, as recently documented by Alan Reynolds in his ground-breaking report, Death, Taxes and the Independent Sector, suggests that the level of disposable income is what determines the extent of charitable giving, not the peculiar vagaries of the tax code.

By eliminating the differentiation between charities and non-profits, a reformed tax system would eliminate government’s power to choose tax winners and losers in the non-profit sector. Instead, individual Canadians would allocate more of their own money to community organizations successfully working to solve local problems.

Now that would constitute a dramatic step in a charitable direction. u

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Last Modified: Wednesday, October 20, 1999.