UN Takes Issue With Rules In Canadian Income Tax Act

Is the federal government silencing human rights organizations and advocacy groups through restrictive provisions in the Income Tax Act?

The United Nations thinks so, and has asked Canada to make sure that the application of section 149.1 does not unnecessarily restrict the activities of non-government organizations that are charitable foundations, when they are defending and advocating for human rights.

In its sixth periodic report, adopted by the Human Rights Committee at its 114th session (June 29 to July 24, 2014), 14 principal matters of concern were cited, and specific recommendations made. The report makes for an interesting read, especially if you are interested in political issues in advance of the federal election, and in taxes in general.

Section 149.1 was noted as a concern under the heading, “Freedoms of expression, peaceful assembly and association.” Specifically, the Committee expressed concerns about “the ambit of section 149.1 of the Income Tax Act in relation to donations of non-government organisations (NGOs) registered as charities whose activities are considered as political activities when they relate to the promotion of human rights.”

The Committee recommended that Canada “take measures to ensure that the application of section 149.1 . . . does not result in unnecessary restrictions on the activities of NGOs defending human rights.” 

Section 149.1 was, in fact, recently changed with respect to the level of resources that charities are allowed to allocate to political activities. The changes took effect on January 1, 2013. Broadly, political activities are not considered to be charitable activities for the purposes of a charitable donation tax credit.

Charities must be operated exclusively for charitable purposes to be a charitable foundation. But the Act does allow charitable foundations to be engaged “incidentally in non-partisan political activities,” and the new rules quantify the amount of resources that can be devoted to political activities. In determining charitable status, an auditor will look at whether the corporation or trust:

• devotes “substantially all” of its resources to charitable purposes (not including the part of those resources devoted to political activities);

• political activities are ancillary and incidental to its charitable purposes; and

• political activities do not include the direct or indirect support of, or opposition to, any political party or candidate for public office.

This is where the UN and several charitable foundations have taken issue. The definition of “substantially all” typically means 90% or more when applied to other sections of the Act.  This means that only 10% of the charitable organization’s total resources for any given year may be used towards political activities.

The term “resources” is not defined in the Act, but, on the CRA website in Policy Statement 022, it is considered for audit purposes to include “the total of a charity’s financial assets, as well as everything the charity can use to further its purposes, such as its staff, volunteers, directors, and its premises and equipment.”

CRA’s administrative policies, however, offer recognition of the negative impact that these rules may have, particularly on smaller charities. As a result, auditors will be allowed to exercise discretion in determining whether to revoke smaller charities for the excessive use of their resources on political activities. The following administrative guidelines have been set for smaller charities, according to the CRA website:

• Registered charities with less than $50,000 annual income in the previous year can devote up to 20% of their resources to political activities in the current year.

• Registered charities whose annual income in the previous year was between $50,000 and $100,000 can devote up to 15% of their resources to political activities in the current year.

• Registered charities whose annual income in the previous year was between $100,000 and $200,000 can devote up to 12% of their resources to political activities in the current year.

In a world fraught with difficult and dangerous politics, and with a federal election now on the horizon in Canada, taxpayers will be asked to determine, by their choice of leadership, the level of taxation they find acceptable and the types of taxpayer-funded supports they agree should be provided under the Income Tax Act. Understanding income tax rules and administrative procedures are an important component of civil liberties in Canada, and a reflection of our society’s views on advocating for the rights of others.

What’s your view? Should the Canadian tax system support to a broader extent political activities by charitable foundations?