The
Economic Freedom
Network

Public Policy Sources #31: An Alternative View

[Previous] [Contents] [Next]

As discussed above, it appears that the Panel began with the idea that, in order to maximize the effectiveness of the voluntary sector, a central agency of some sort was required to perform a number of functions. The Panel never makes clear why this necessarily should be the case, nor does it examine other possibilities. It is instructive to abandon the Panel’s premise and look specifically at what needs to be achieved.

From the final report, it would appear that the Panel believes that a VSC is required to achieve improvement in four major areas:

modernizing the registration process to provide for more openness
improving accountability in the voluntary sector
improving governance in the voluntary sector
improving public knowledge of the voluntary sector

Determining charitable status

Because of the recent Supreme Court decision Vancouver Society for Immigrant Women and Visible Minority Women v. M.N.R. (1999), the issue of charitable status is presently under review by Parliament, and rightfully so. As the Panel notes:

The determination of which organizations get the full benefits of the federal tax system … and the assignment of privileges and responsibilities associated with it is inherently political, involving tradeoffs in values and expenditures. It therefore should be decided as public policy by legislatures, not by courts. (Building on Strength, p. 53)

The Panel also notes its support for the "charity plus" model for defining charitable status (Building on Strength, p. 54, as advocated by Arthur Drache) which indeed would be a dramatic improvement over current arrangements.

Whatever Parliament decides in this regard will determine, in large part, whether a new body is required to participate in the process of charitable registration. If a statute was promulgated and current arrangements maintained, Revenue Canada would continue to make determinations on charitable status, and the courts would continue to hear appeals. Arrangements might be changed slightly to set up a special appeal body to reduce the cost to applicants of lodging appeals.

If, on the other hand, Revenue Canada were given discretion to interpret the law, with or without statutory guidance, then there would appear to be no need for any other body to become involved. If it were considered that the Charities Division lacked the expertise to make such determinations, a small group of legal advisors could be assembled to assist. This group could be attached to the Department, or set up as an independent quasi-judicial body. Alternatively, the responsibility for determining charitable status could be given over directly to such a body. There would be no need for this body to be involved in any way in charity support, regulation, or oversight.

In the opinion of the Panel, the VSC should play a key role in the registration process:

[W]e propose that the [Voluntary Sector] Commission evaluate and make recommendations to Revenue Canada regarding registration of new applicants. The advantage of evaluation and recommendation for registration by the Commission rather than by Revenue Canada is twofold. First, greater expertise could be applied to the determination of charitable purposes. Admittedly the discretion involved in these decisions would be reduced if the categories of public benefit organizations permissible for registration were laid out in legislation. Second, applications for registration and the reasons for the Commission’s recommendation for either acceptance or denial could be routinely made public. Should an organization wish to challenge Revenue Canada’s decision, it could appeal the decision to the courts, preferably the Tax Court … [in order to make the appeal process more accessible and less expensive]. (Building on Strength, pp. 59-60)

Two observations should be made on this proposal. First, as stated above, establishment of a VSC is not the only means by which decisions on registration could be made public. Revenue Canada could simply be authorized and required to do so. This would be much less expensive than creating a new body for the purpose.

Second, it is by no means clear that the VSC would have greater expertise than Revenue Canada. In discussing the staffing arrangements for the VSC, the Panel mentions only that key personnel would be hired from the charitable sector, but it is debatable whether recommendations on registration should be made by people who have been involved in the sector for a long time, unless they can demonstrate expertise in the area of determining charitable status. This is particularly important given the possible politicization of the registration process.

If interpretation of the law is to be involved in registration decisions, then legal expertise is required. As mentioned above, the Panel recommends no requirement for legal expertise either for the key staff to be hired from the sector, or for the appointed commissioners. Further, if legal expertise is what is required, there is no argument presented that the Department lacks legal expertise or that, if it does, why such expertise could not be developed within or attached directly to the Department. On the other hand, if familiarity with dealing with registration cases is what is required, the Department clearly would be better qualified, at least initially, than would a VSC.

The Panel makes another recommendation related to registration:

We recommend that as a condition for registration under the federal tax system, charitable organizations be required to adopt the ethical fundraising and financial accountability code developed by the Canadian Centre for Philanthropy, or an equivalent code. (Building on Strength, p. v)

It is not clear whether the Panel intends that applicants adopt one particular "ethical" code, or one of a selection of "acceptable" codes. Nor is it clear who would determine which code(s) would be acceptable. Of course, there is nothing wrong with codes of this sort provided they are adopted voluntarily. Organizations should be free to develop and adhere to codes as they see fit, so long as these do not violate legislation. Donors then could use these codes or seals of approval, as they do now, to assist them in taking philanthropic decisions.

However, risks arise when any particular ethical code is made mandatory. Imposing such a code would place an additional administrative burden on charities and, depending on the stipulations in the code, might unnecessarily restrict the activities of some charities. An example from the CCP code mentioned above will demonstrate this.

Paid fundraisers, whether staff or consultants, will be compensated by a salary, retainer, or fee, and will not be paid finders’ fees, commissions or other payments based on either the number of gifts received or the value of funds raised. Compensation policies for fundraisers, including performance-based compensation practices (such as salary increases or bonuses) will be consistent with the charity’s policies and practices that apply to non-fundraising personnel.39

The problems with this particular clause are twofold. First, it would restrict the ability of smaller organizations to expand their fundraising efforts, particularly if a short fundraising campaign were desired. Smaller organizations often lack sufficient resources to invest in fundraising, and it is more important to them that investment in fundraising provide a positive return. Tying fees paid to the returns received allows smaller organizations to minimize their exposure to loss, and facilitates their fundraising efforts.

Second, it is not clear why the payment of commissions to fundraisers is so different in ethical terms from performance-related compensation practices such as salary increases and bonuses, as to disqualify an organization paying commissions from being granted charitable status. Commission-based sales are legal in this country, and many Canadians would not consider commission-based fundraising to be objectionable. This being the case, why should the subjective judgement of a particular group be imposed upon all charities? Potential donors objecting to the practice could take individual charities’ practices in this regard into consideration. Charity legislation should not discriminate merely on the basis of subjective morality, however well-meaning, because disastrous consequences could result from a failure to be guided by reason rather than emotion.

Together with the restrictions on fundraising, the CCP code includes a section on ethical financial accountability. Here again, there is nothing inherently wrong with such standards, so long as adherence to them is voluntary. Donors may prefer to give to organizations with some such code, voluntary organizations may consider it worthwhile to promulgate their own codes, and intermediary organizations may wish to include a code as part of their accreditation process. In some cases, however, the above may not apply, and making such codes mandatory merely would increase the administrative burden on the sector.

In any case, merely promulgating or adhering to an ethical code will not prevent determined wrongdoing. Indeed, the voluntary accounting codes that currently exist in Canada, most importantly that of the Canadian Institute of Chartered Accountants, are far more effective in checking abuse than any "ethical" code could expect to be.

There is one final point to be mentioned here. The CCP’s ethical fundraising and financial accountability code was posted onto its internet site on June 2, 1998. According to the web site, as of June 23, 1999, 52 charities had indicated to the CCP that they had adopted the code.40 This does not indicate a high degree of interest in this particular model.

Voluntary intermediary organizations

The example of the United States, and indeed of Canada itself, demonstrates that voluntary intermediary organizations are very capable of successfully improving governance and accountability in the voluntary sector, and of providing information and improving accessibility. The final report does recognize the important role played by voluntary intermediary organizations:

In the interests of building capacity in the sector, we propose that governments reinstitute and increase a modest core funding of intermediary organizations in order to support their important work in promoting and enhancing improved governance and accountability by their member and grassroots organizations (Building on Strength, p. 19).

The report also recognizes that the VSC should not

have the major responsibility for education or capacity building in the sector. These important tasks would remain the fundamental responsibility of voluntary sector organizations. The mandate of the [VSC] would be to enable and work with them. (Building on Strength, p. 61)

Voluntary intermediaries, such as the United Way, are a vital component of the charitable sector. They act as a critical link between donors and agencies providing an important source of self-regulation as well as a conduit through which individuals are able to donate.

The self-regulation of non-profit organizations is achieved voluntarily through both the accreditation process as well as through the on-going grant process. Intermediaries accredit independent organizations according to a number of factors including mandated mission, community responsiveness, financial management, accountability, transparency, financial resources, and board governance. Agencies wishing to receive financial support and/or accredited status with a particular intermediary must achieve, on an on-going basis, certain operational and financial standards.

The accreditation process is an important source of self-regulation that should not be underestimated. The process frequently involves multiple levels of accreditation. The analysis involved in seeking and attaining accreditation is quite detailed often involving not only quantitative details such as financial statistics but also qualitative details such as the agency’s mission, the community served, the value-added, and necessity of services provided.

Accrediting agencies, such as the United Way or other voluntary intermediary "alternative funds" in the US, place their reputations in jeopardy when they accredit agencies. The voluntary intermediary, through the accreditation process, validates the productivity and usefulness of accredited agencies. Such accreditation processes inevitably also place pressure on non-accredited agencies to conform to a particular set of standards and operational practices. The voluntary accreditation process must, therefore, be viewed as a valid and productive alternative to mandatory regulatory and governance codes.

A second function of voluntary intermediaries is donation collection. Intermediaries are able to achieve economies of scale by collecting workplace and general donations from individuals, corporations, and foundations and then re-distributing them to their member agencies. The key point here is the ability to arrange deductions directly from payrolls. Intermediaries thereby reduce the search costs of donors by providing a standard for charitable donations as well as assuming the responsibility for monitoring and control of recipient agencies. Thus, voluntary intermediaries reduce the transaction costs associated with the non-profit sector, namely donation granting, donation acquisition, and agency monitoring. Intermediaries typically also provide a plethora of information regarding their funded and accredited agencies.

Unfortunately, Canada has not experienced the rapid growth in voluntary intermediaries the United States has witnessed. Since the 1970s, when alternative funds41 were introduced in the United States on a national scale, the number of funds has grown by 40 percent to a total of 208 funds.42 In Canada, apart from the United Way, there are very few voluntary intermediaries and none with a comparable national presence. This does not, however, imply that such voluntary intermediaries cannot develop, and indeed, flourish in Canada.

The alternative funds in the US vary in both form and focus (see Appendix C). For instance, some alternative funds, like America’s Charities (Web site: www.charities.org) and the Independent Charities of America (Web site: www.independentcharities.org) attempt to replicate the general nature of the United Way by supporting a broad range of agencies with differing needs and focuses. Other alternative funds, such as the National Voluntary Health Agencies (Web site: www.nvha.org), Earth Share (Web site: www.earthshare.org), and Animal Funds of America focus on specific segments of the charitable sector, such as health and the environment. Still other alternative funds, like the National Black United Federation of Charities (Web site: www.usbol.com/nbufc), Christian Service Organizations of America, Women’s Charities of America and Children’s Charities of America focus on a particular demographic group, whether it is women, children, or African-Americans.

An alternative fund that focuses solely on local charities is the Local Independent Charities (Web site: www.lic.org) organization. Local Independent Charities networks local organizations to enable them to participate in national fund raising campaigns while retaining their local character.

The US also maintains a number of locally-based intermediary organizations such as the Black United Funds, the Asian and Hispanic Funds, Social Action Funds, Women’s Federation, Environmental Funds, and United Arts Funds. All of these local funds are restricted to specific municipalities or regions. For instance, the Black United Funds operate in 20 separate locales in the US and distribute grants to non-profit organizations assisting African-Americans and other minority groups. However, unlike the national funds, there is no national presence for local intermediary funds. Similarly, the Environmental Funds operate in 19 localities, the United Arts Funds have 34 separate campaigns, and the Social Action Funds maintain 44 city and state agencies.43

The competition between national and local intermediaries facilitates the efficient allocation of donated resources and the maintenance of sound governance systems. That is, competition between voluntary intermediaries for donations and resources ensures that the maximum amount of monies are re-distributed (that is, administrative costs are constrained) to worthwhile and productive non-profit agencies. It also provides donors with greater information and choice regarding the direction and nature of their donations. In fact, most voluntary intermediaries maintain extensive web site and published materials. Finally, competition provides an additional source of specialization in the management and operation of alternative funds given their particular focus and emphasis.

In Canada, voluntary intermediaries predominantly take the form of local United Ways. Canada lacks any serious alternative national or local intermediary to the United Way. Based on a population comparison with the United States, Canada should have approximately 20 intermediaries. Nonetheless, voluntary intermediary organizations represent a plausible and efficient alternative to government regulation and accreditation. The evidence from the United States suggests that competition between intermediaries and specialization can encourage sound management and promote increased provision of information of the type desired by donors. This being the case, there would seem to be little justification for the involvement of a VSC in these roles.

[Previous] [Contents] [Next]

info@fraserinstitute.ca

You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

Last Modified: Thursday, August 5, 1999.