Charities’ cash — and the special tax breaks it enjoys — warrants the new scrutiny proposed in federal budget

As governments signal a shift in public policy away from wealth accumulation to favouring distribution and equality, the framing of a proposal in the most recent federal budget for consultations with registered charities on the subject of increasing their disbursement quota was encouraging, if also puzzling.

For those not familiar with the arcane manner in which Canadian charities are regulated (by Canada Revenue Agency), the current (3.5 per cent) disbursement quota is the minimum amount of its funds that a public or private foundation or charitable organization is required to spend each year in pursuit of its charitable objects.

This requirement is intended to ensure that funds raised for charitable purposes are so used, to curtail administrative costs and limit capital accumulation. It has been substantially relaxed and simplified several times since the concept of disbursement quotas for charitable organizations was introduced as part of a broader tax reform in 1976.

Hence the oddity — that the budget proposal contemplates consultation with the charitable sector about increasing the requirement. Their consistent response has been to reduce disbursement quotas. While one might expect operating charities to favour increasing the disbursement quota, it is not surprising that foundations and endowments seek to preserve and grow their capital.

Hopefully the consultation will be broader, acknowledging the considerable public subsidy from which charitable organizations benefit. This arises both from their ability to issue tax receipts for donations and to accumulate capital on a tax-free basis.

Edward Waitzer is a lawyer and chair emeritus at Osgoode Hall Law School and the Schulich School of Business, York University.

The policy justification for such public expenditures is embedded in the common law definition of charitable activity — that an organization must not only engage in activities that are intended to achieve its charitable purpose but that such activities must result in a benefit to the public.

It is the public (who bear the costs and are intended to benefit) that should be consulted on the extent to which tax subsidies that encourage the accumulation of charitable “wealth” in perpetuity should be conferred. In seeking such input, an obvious question should be whether, when and how the preservation of such private wealth results in a public benefit.

The traditional response — that without generous tax subsidies people would lack the incentive to be charitable — misses the point. For example, one might still provide tax incentives for charitable giving without also subsidizing the tax-free accumulation of wealth in charitable organizations.

One should ask under what circumstances there exists a “public benefit” in providing substantial and continuing public subsidies for capital accumulation where the primary objective is to preserve a donor’s name, legacy and control over significant assets in perpetuity.

One would expect that those with responsibility for the disbursement of charitable funds would be subject to at least the same discipline as the market typically imposes on the allocation of private capital. Very few business enterprises accumulate capital for its own sake. Assuming an organization has a clear mission and strategy, a dollar deployed today is likely to have more impact than one spent at some future date.

This level of accountability should be expected of any organization that manages other people’s money — and even more so when a substantial portion of the assets reflect public subsidies in the form of generous tax credits for donations and foregone taxes on ongoing investment income and gains.

At a time when the public benefits (and costs) of private wealth accumulation is under increasing scrutiny, an even higher level of scrutiny should apply to charitable wealth accumulation. Directors or trustees of such organizations should be required to demonstrate compliance with the “public benefit” test in their management of assets and use of capital.

This logic suggests that the presumption in favour of increasing disbursement quotas should be more than symbolic. Doing so should serve to increase the strategic focus, intentionality and accountability of those with stewardship responsibility for charitable wealth.



There remain other long-outstanding issues that merit renewed public consultation. Because the federal government lacks the constitutional authority to directly regulate charities, it has done so historically through the administration of the Income Tax Act by the Canada Revenue Agency.

In contrast, other jurisdictions (except the U.S.) have dedicated charities regulators with a more holistic focus on the societal role and impact of the charitable sector.

While a dedicated regulator that focuses on promoting the charitable sector (rather than on registration/revocation decisions for tax purposes) would be ideal, at minimum there has been a long-standing consensus in the sector favouring more transparency and accountability by the CRA’s charities directorate. It would be timely for this policy concern to be revisited.

Edward Waitzer is a lawyer and chair emeritus at Osgoode Hall Law School and the Schulich School of Business, York University.