The question of what "political activities" charities can and cannot engage in has long been a source of debate and confusion in the sector.
A surprising decision in Canada Without Poverty v AG Canada[1] added a new constitutional dimension to the debate. On July 16, 2018, the Ontario Superior Court of Justice struck down parts of the Income Tax Act (the "Act") that limit non-partisan political activities of registered charities as unconstitutional limitations on the right to freedom of expression under the Canadian Charter of Rights and Freedoms (the "Charter").
The decision came into effect immediately, so, from that date, there are no quantitative restrictions on the amount of non-partisan political activity that charities can engage in as long as these activities further their charitable purposes. Examples of such activities include: facilitating and engaging in non-partisan policy dialogue, advocacy, and calls to action that further the charity's charitable purposes. There is no change to the prohibition against charities engaging in partisan political activities—i.e. direct or indirect support of, or opposition to, any political party or candidate for public office.
On August 15, 2018, the government announced that it would respond in the Fall with amendments to the Act to remove the quantitative restrictions on non-partisan political activities. Meanwhile, it is appealing the Canada Without Poverty decision, citing concerns about the legal reasoning in the decision and, presumably, the constitutional precedent it would set.
Background
Common Law - What is Charitable?
In order to be charitable at law, an organization must be established and operated for only charitable purposes. The courts have determined that political purposes are not charitable at law. The courts have defined "political purposes" to include those that:
- seek to further the interests of a particular political party; or
- seek a change or reversal in laws, policies or decisions of government authorities, either within or outside of Canada.[2]
This does not mean that charities can never engage in political activities. Charities can use certain political means to advance their charitable purposes; but political activities cannot, in themselves, become one of the purposes of the charity.
In practice, of course, it is often be difficult to clearly make this distinction.
Income Tax Act - Restrictions on Political Activities of Registered Charities
The restrictions in the Act on political activities of registered charities are set out in sections 149.1(6.1) and (6.2). The sections provide that a "charitable foundation" or "charitable organization"[3] must "devote substantially all of its resources" to its charitable purposes or activities, respectively, and can devote part of its resources to "political activities" only if:
- (A) those activities "are ancillary and incidental" to its charitable purposes or activities (respectively); and
- (B) "those political activities do not include the direct or indirect support of, or opposition to, any political party or candidate for public office" (the latter are considered partisan political activities).
In its administrative policies, CRA interpreted "substantially all" to mean 90%—meaning that generally, a maximum of 10% of a registered charity's resources can be spent on non-partisan political activities. This allowance can go up to 20% for smaller charities.[4] To account for short-term, intensive political activities CRA allowed registered charities to, in a given year, look back and 'claim' unspent amounts from the previous two years.
The consequence of failing to adhere to these limits would include revocation of charitable registration.
Debate
The "political activities" restrictions in the Act (and administrative policies of CRA) have a controversial history, stretching back decades.
More recently, in the 2012 Federal Budget, CRA was given significant new resources to audit registered charities engaging in political activities (the "Audit Program"). More than 50 audits were undertaken. The Audit Program generated criticism, as some argued the audits were politically motivated. The Trudeau government confirmed in its 2016 Federal Budget that it would wind down the Audit Program. It directed CRA to engage in consultations with the charities sector on the rules governing political activities. The consultation took place in late 2016 and the consultation panel released its final report in March 2017 (the "Report").[5]
The Report highlights concerns in the Act itself, including a lack of definitions (including, critically, of the term "political activities"), and confusion about CRA's policies and audit and compliance activities. The authors reported that charities were self-censoring as a result of the uncertainty.
The Report made four recommendations:
- Revise the CRA's administrative position and policy (including its policy guidance, CPS -022 Political Activities) to enable charities to fully engage in public policy dialogue and development.
- Implement changes to the CRA's administration of the ITA in the following areas: compliance and appeals, audits, and communication and collaboration to enhance clarity and consistency.
- Amend the [Act] by deleting any reference to non-partisan "political activities" to explicitly allow charities to fully engage, without limitation, in non-partisan public policy dialogue and development, provided that it is subordinate to and furthers their charitable purposes.
- Modernize the legislative framework governing the charitable sector ([the Act]) to ensure a focus on charitable purposes rather than activities, and adopt an inclusive list of acceptable charitable purposes to reflect current social and environmental issues and approaches.
To date, the government has not introduced amendments to the Act and this was noted by the court in Canada Without Poverty.
The Decision
Canada Without Poverty ("CWP") is a relatively small charity.[6] Its charitable purposes relate to the relief of poverty in Canada. In a CRA audit under the Audit Program, CWP was found to have used more than the permissible 10% of its resources on political activities. In fact, it appears that CRA had concluded that virtually all of CWP's activities involved political activities in the form of advocating policy changes (law reform and other issues related to relief of poverty) through communications to the public. It also organized policy summits, offered a course on human rights, formulated a national strategy for the elimination of poverty, and other activities—all of which CRA found to be "political activities" subject to the 10% limit.
In challenging the audit, CWP argued that public advocacy for policy change was fundamental to be able to advance its charitable purpose of poverty relief. It also argued that there was significant ambiguity in the distinction between charitable activities and non-partisan political activities. CWP argued and the court agreed that:
- the CRA's administrative 10% rule should no longer be applied on the basis that it was an unconstitutional limit on the Charter-protected right to freedom of expression; and
- there was no logical distinction between non-partisan political activities and charitable activities, and thus no reason that political activities must be "ancillary or incidental" to charitable activities. Accordingly, the restrictions in sections 149.1(6.2)(a) and 149.1(6.2)(b) of the Act were also unconstitutional limits on the Charter-protected right to freedom of expression.[7]
Effect and Limits of the Decision
The decision took effect immediately.
This means that, from July 16, 2018, there are no quantitative restrictions on the amount of non-partisan political activity that charities can engage in as long as these further their charitable purposes.[8] The decision does not alter the prohibition against charities engaging in partisan political activities—i.e. direct or indirect support of, or opposition to, any political party or candidate for public office. CWP did not challenge that restriction.
Next Steps
When it was released, we had concerns about the reasoning in the Canada Without Poverty decision. For example, there is almost no reflection on the underlying common law of charities and how that body of law interacts with and informs the rules that apply to charities that register and receive tax-advantaged status under the Act.
Though the legal reasoning in the decision is problematic, many in the charities sector support changes to the current "political activities" framework, so it is encouraging that the government has committed to making legislative changes. The decision certainly seems to have sped up the government's response to the Report of the Consultation Panel on the Political Activities of Charities.
In its news release, the government stated that:
"As a matter of good public policy, and to move forward with this commitment, our Government intends to amend the Income Tax Act to implement changes consistent with recommendation no. 3 of the Report of the Consultation Panel on the Political Activities of Charities. The intended amendments will allow charities to pursue their charitable purposes by engaging in non-partisan political activities and in the development of public policy. Charities will still be required to have exclusively charitable purposes, and restrictions against partisan political activities will remain.
Our Government intends to present legislation to this effect in the Fall. The Canada Revenue Agency will develop supporting guidance in collaboration with the charitable sector. The legislation will be drafted to apply retroactively, including to the audits and objections that are currently suspended. This suspension will be lifted when the legislation is passed by Parliament, when we intend to fully respond to the Report of the Consultation Panel on the Political Activities of Charities."
We will continue to monitor as the consultation progresses and provide an update when the legislative amendments are introduced.
[1] 2018 ONSC 4147.
[2] McGovern v. Attorney General (1980), [1981] 3 All ER 493.
[3] Each, a category of registered charity.
[4] CRA Policy Statement CPS-022, Political Activities.
[5] Report of the Consultation Panel on the Political Activities of Charities (31 March 2017).
[6] Its reported annual revenues for the financial year ending March 31 were $422,326 (based on its T3010 published in the CRA Charities Listing).
[7] The court found the sections and CRA's 10% rule infringed the right to freedom of expression under s. 2(b) of the Charter. Section 1 of the Charter limits the absoluteness of Charter rights by providing that: "The [Charter] guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society." However, the court found the relevant sections of the Act and CRA policies were not 'reasonable limits'.
[8] The Canada Without Poverty case only relates to sections 149.1(6.2)(a) and 149.1(6.2)(b) of the Act, as CWP is a charitable organization, as defined in subsection 149.1(1) of the Act. If this decision is not overturned, presumably the same result would apply to charitable foundations, as defined in subsection 149.1(1) of the Act, such that sections 149.1(6.1)(a) and 149.1(6.1)(b) of the Act would also be rendered unconstitutional.