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Some observers believe that Canada’s system of charitable tax policy has caused a situation where foundations deprive the government of resources to meet public needs.
In truth however, foundations underpin Canada’s charitable sector, the fundamental backbone of quality of life in Canada. They are transparently regulated by the Canada Revenue Agency (CRA) and allow for Canada’s progressive system of charity tax incentives and policy to enable private wealth to be put to work for important public causes in a myriad of important ways. But to ensure their impact, an effective regulatory framework is essential.
Charities, foundations and taxes – the connection
Charities are groups that bring together people who care about a cause so that they can make a difference. And Canadians need them. According to a recent poll of Canadians, 81 per cent believe that the services delivered by charities and nonprofits in Canada are essential to the well-being of the country and its citizens.
Canada is an advanced country with a durable social safety net. But it’s also a country made up of bighearted individuals who support and depend on one another, in ways the government could never do alone. So it’s no wonder that our tax regime for charities is among the most generous in the world.
A crucial element of Canada’s nonprofit sector is charitable foundations, a type of charity that operates to support charitable activities. Typically, foundations receive gifts from generous individuals or organizations, invest the assets, and then allocate earnings to charitable activities. Donors give their assets to a foundation and receive a tax benefit that allows them to pay less tax, with their contributions being used to support the critical work of charities. As registered charities themselves, foundations have tax-exempt status and so they do not to pay income tax.
Foundation regulation
In order to issue tax receipts and not pay tax, foundations, like all charities, must demonstrate to the CRA that their activities provide a measurable benefit to the public, as decreed in law and regulated by the CRA.
They are monitored and required to meet stringent reporting obligations, with comprehensive information on their activities made available publicly. In addition to submitting to audit, compliance and educational activities carried out by CRA, foundations and other charities must file an annual return called the T3010, which is akin to individual income tax returns Canadians are familiar with filing each year. For transparency, detailed information captured by the government on every charity in Canada is available to the public online.
The impact of foundations on Canadians
Recent data shows that:
- Canada’s foundations allocate more than $10 billion to charitable initiatives annually
- Their assets grew from $35 billion 2008 to approximately $135 billion in 2021
- Their disbursements are also increasing: Between 2018 and 2021, annual funding contributions grew by 23 per cent for public foundations and 72 per cent for private foundations
When a gift is made to a foundation, the financial impact to society is multiplied in ways that would have never been realized without the gift. For one, foundation assets don’t just sit in shoe boxes under beds. They are invested in the economy, with earnings from the invested assets directed to support charitable activities – today that must be at least five per cent every single year for assets over $1 million. To be clear, this annual five per cent disbursement quota is just the required minimum. Often foundations allocate much more.
But the real power of foundations goes beyond just funding charitable activities and investing in the economy. Because they typically work across sectors with many diverse partners, foundations are able to see and track broader trends and needs in society. And since their only responsibility is to advance charitable causes, they can respond in ways that others can’t or won’t.
Being more agile than government and more informed than individual donors, foundations regularly provide flexible start-up funding or support long-term engagement on critical cultural, social, or environmental problems that may not be apparent to the public, or a priority for politicians who are more fixated on the electorate’s latest preferences. One example is Fondation Beati’s micro-bursary program which provides seed support for non-profit leaders to develop socially innovative programs. Another example is Lawson Foundation’s long-term support of diabetes – one of the most common chronic diseases affecting children and youth, particularly Indigenous youth, but one that receives little government or media attention.
Foundations’ dexterity also help them take on more difficult, intricate challenges that others are not interested in or are unable to prioritize, such as important capacity-building roles. For instance, the Max Bell Foundation’s Public Policy Training Institute helps nonprofit professionals develop public policy and advocacy acumen – a skillset that is crucial for advancing charitable missions in today’s complex and competitive world. Max Bell is ideally suited to provide this programming because of its own institutional expertise and long involvement in public policy development.
In addition to grants, traditional investments, and programming, foundations have been adding innovative methods of growing and using their assets for social good. One such strategy is impact investment, which generates not just financial returns but also positive social returns, such as affordable housing or providing loans to newcomer entrepreneurs.
Organizations increasing their commitment to impact investment include Inspirit Foundation, McConnell Foundation, and Houssian Foundation, to name a few. The most recent survey by Philanthropic Foundations Canada showed that nearly half of all respondents devote at least a portion of their assets to impact investing. We can expect even higher participation levels when PFC completes its next survey in 2026.
Advancing Canada’s tax policy regime for greater impact
At a time when the multitude of charities’ contributions are needed more than ever, and today’s policymakers are governing in an era of unprecedented challenges, the government should consider employing tax policy measures that foster and uphold charities’ effectiveness.
The minimum disbursement quota for charities was recently increased to five per cent and that’s a good thing. It is an important public policy that should be reviewed regularly by government to ensure it is not too high so that that charities’ capital is eroded, nor too low so that capital is permitted to build up.
Another policy advocated by many experts in the field of charity law, such as Pemsel Case Foundation, is for policymakers to designate the Tax Court of Canada (rather than the current Federal Court of Appeal) as the primary reviewer of any CRA decisions that refuse registration of a charity or revoke the registration of existing charities. Advocates say this would advance the judicial examination process of potential charities and increase the development of charity case law – which would go a long way to ensure charities are meeting needs of Canadians.
The bulk of charity law is based on the common law, which is meant to grow and evolve in ways that reflect societal change. But this evolution can only happen if there are court cases and rulings that move the law forward.
The Federal Court of Appeal is an expensive, onerous process which hears cases based on documentation alone; there is no opportunity to present other evidence. However, the Tax Court sits in more locations across Canada and hears from witnesses who can be cross-examined before any decision is reached. This provides more substantial records, and more opportunities to develop law that helps the concept of charity evolve to best serve communities across the country.
Canada’s government and charities are essential partners in advancing social good. An integral responsibility of the government in that partnership is to ensure that foundations and other charities have useful regulatory and legal frameworks that help them do their important work effectively.