Government Should Change Outmoded Fundraising Rules for Charities

But for the last two weeks the opposite has been true for one charity at least. We wake up to a daily dose of headlines about WE charity, its founders, their relationships to Prime Minister Justin Trudeau and how they deliver their mission.

Along with this steady drip-drip-drip of details that are emerging on the politics and process of the decision by the Trudeau government, there is also a steady rise of concern about charities and questions about how they operate. Should charities own real estate? Should they run for-profit enterprises to fund their charitable work? How much money do they really need?

The answer to some of these questions can be found in the first report ever put out by the Senate on the contributions and challenges faced by the Canadian non-profit sector. Not many Canadians have heard of this report for good reason: even though it was widely consumed by the close to 175,009 charities and not-for-profits in Canada, not a single mainstream news outlet reported on it. This is just another sign of the benign neglect that the charitable sector has suffered from even though it contributes eight percent to the GDP and employs close to two million Canadians.

However, Canadians need to know that charities are governed by outmoded laws and regulations that hinder their ability to deliver on their charitable mission. This is because no government has paid any attention to the sector as a whole. The Income Tax Act which provides the legal framework under which charities operated has not been comprehensively reviewed for 50 years. Instead, a piecemeal approach to reform has created a labyrinth of regulations and guidelines which keep too many lawyers gainfully employed.

As one example, let’s consider the complexities around the WE model. Within it, there are at least five or six different organizations that have been setup to do distinctly different but associated things. The most significant are the We charity and the ME to We Social enterprise. The WE charity, formerly known as Free the Children, supports and engages more than four-million young people and their families in service learning. Me to We generates revenue through the sale of products, experiences and services to financially support We charity.

It is understandable why this is confusing. Why create two or more separate organizations that are closely aligned, have the same leadership and share many other features? While this may be appropriate for corporate structures, for charities it is a remarkably clunky solution to a problem in the law. Registered charities are only able to engage in revenue generating efforts if they are directly related to their business or if they are predominantly run by volunteers. Therefore, it is legal for hospitals and museums to run gift shops in their institutions, but not for charities like WE to raise money from the sale of unrelated goods and services.

In order to stay within the law, charities like WE, which hope to generate more earned income, must set up a separate arms-length organization, usually a not-for-profit, to generate revenue and flow this through to the charity. But the rules governing this flow of funds are strict, and the costs of setting up and maintaining separate entities often act as a deterrent to charities looking for new sources of revenue.

There are only three sources of revenue for charities: charitable donations, government grants and earned revenue. Of the three, only earned revenue is forecasted to grow. It is not realistic for us to starve charities of the only revenue stream that can stabilize their financial future.

There is a simple solution. The Income Tax Act must be amended to enable charities to generate revenue from unrelated businesses, as long as they use all the revenue to fund their charitable endeavors and the business remains ancillary to the charitable purposes of the charity. In other words, charities running summer camps for the disabled could legally generate revenue by running on-line craft centres for a paying public, as long as all the revenue was used to fund the charitable summer camps. This is called the “destination of funds test” and has been successfully adopted in Australia and New Zealand.

There are concerns that charities would lose sight of their goals and become dominated by their revenue generating arm. There are also concerns that tax exempt organizations would compete with taxable businesses at a considerable advantage. The YMCAs are a good example to refute these arguments. They run gyms in many of their facilities, raising significant revenue for the work they do with kids. They have not lost sight of their mission and continue to provide valuable services to Canadians. In 2019, revenues from Habitat for Humanity Restores contributed almost $6.8 million to the charity to cover operational costs, build homes and provide services related to home ownership.

In a rapidly evolving world, traditional norms are being challenged. It is time for Canada to take a serious look at the outdated rules inhibiting charities from sustaining themselves so they can fulfill their missions.

The trouble with most charities in Canada right now, are the laws that govern them.