The 2014 National Annual Public Administration Case Competition was held on February 1st. Funding for the student prize and the French translation was graciously donated by the Canadian Constitutional Affairs Conference.
Graduate students from 12 public policy and administration schools across Canada gathered in Toronto in February to compete against one another in a case competition. Their challenge was to provide advice to the federal cabinet on how to navigate a political minefield: what is charitable behaviour, and what is political advocacy? The case is fictitious, though the facts describing the charitable sector are accurate. And the issue is a live one. The federal government has declared its intention to further regulate charities, a pledge that some see as an attempt to stifle organizations that cross political swords with the government.
Two charities, one advocating for mothers with a pro-life ethos (Mothers of All [MOA]) and a left-wing think tank providing public research and education (the Bonnival Institute), are pitted against each other. The research group has released a study that takes aim against MOA, accusing it of violating its charitable status by using stealth-like forms of advocacy that fly below the legal spending limit of no more than 10 percent of an organization’s total resources on political activity.
MOA doesn’t spend much of its $2.3-million budget on old-style advocacy. Instead of lobbying politicians, it uses social media and aggressive intervention with expectant mothers to provide support services and counselling against abortion. And it has political clout. MOA has developed a network that goes beyond a base of Christian conservatives to tap into the social conservatism of new Canadians, many of whom share its anti-abortion values.
The Bonnival Institute’s report has shone a light on these practices, and the organization has created a media storm by demanding an end to this “micro-advocacy.” It argues that while MOA is free to advocate against access to abortion services, it cannot do so under the umbrella of charitable status. Meanwhile its attacks on MOA have provoked a political backlash from some political quarters against its own charitable status. The resulting public furor creates unavoidable pressure on the federal government to clear up the murky world of charities and advocacy.
University of Toronto
Jim Elson, Liza Kobrinsky, Dave Marshall, Katie Millan, School of Public Policy and Governance
Memo to cabinet
The issue: How can the Government of Canada increase compliance by charities with the regulations surrounding political activity, without appearing partisan?
Advice: Charities such as Mothers of All and Bonnival do good work for Canadians, and polls show that Canadians overwhelmingly value the work of charitable organizations. In order to maintain that public trust, however, it is imperative that all charities are seen to perform their work — political advocacy and charitable service delivery — within the bounds of the law.
Political advocacy performed by charities, while secondary to their charitable purposes, contributes to public discourse and the evolution of public policy. The government should encourage this practice. But with the growth of so-called “micro-advocacy” that blurs the lines between charity and advocacy, the system requires better compliance. That demands improved education for charities about the rules and strengthened, unbiased systems for uncovering violations. Strengthening supervision is essential to ensuring that the Canada Revenue Agency (CRA) guidelines are consistently and objectively applied to all charities, regardless of their purpose.
Legal and regulatory framework: Constitutionally, the definition of charitable objects is a provincial responsibility. In practice, charities are regulated primarily by the federal government through the Income Tax Act, which establishes rules that charities must comply with to retain tax benefits.
Political activity is regulated by a CRA policy statement that includes the “10 percent rule,” a stipulation that registered charities must devote “substantially all” of their resources toward their charitable purpose. Under the 10 percent rule, the CRA has also defined prohibited activities, including partisan political activity and propaganda. Interestingly, the 10 percent rule is averaged over three years, which permits, in theory, a small charity to devote 0 percent of its resources toward political activity in the first two years, and three times the normally allowed rate in the third year.
Current context: The report by the Bonnival Institute suggests that advocacy by registered charities can subvert government policy, and as a result there is renewed public and media interest regarding charitable advocacy. Charities in Canada are a large industry, and Canadians annually give around $10 billion to charities and nonprofit organizations.
Approximately 500 of the country’s 85,600 charities self-report engagment in political activities each year to the tune of $21 million, a number that some industry experts believe to be a substantial underestimation. Underreporting is a problem, largely attributable to the rules being unclear. And while polls show roughly four in five Canadians express broad confidence in the conduct of charities, the Bonnivale controversy shows it is essential to clarify the rules surrounding political advocacy in order to maintain this high level of trust.
Canadians overwhelmingly value the work of charitable organizations.
The government should continue improving the CRA’s capacity to improve charities’ knowledge of the rules surrounding political advocacy, and their ability to ensure compliance. This initiative improves the capacity of charities while facilitating more regular and systematic compliance initiatives by the CRA.
In 2012, the Government of Canada announced $8 million toward increasing the levels of education on and improving compliance with the limits of political activity carried out by registered charities, funding of which ends in 2014. This recommended option extends those efforts for a further two years and allocates another $8-10 million of CRA funding to the government’s efforts.
- The CRA has successfully led education and compliance initiatives on previous occasions. While the data regarding the impact of the initial investment (2012-14) are not yet available, the CRA has previously demonstrated success in improving compliance through similar initiatives, for example, through the elimination of charitable tax shelter schemes.
- Charities are certainly not the only entities that have demonstrated difficulties with tax compliance. The CRA is working on programs to assist small businesses with tax compliance, many of which may be similarly modelled to assist registered charities.
- The recommended option is scalable. It leaves open the possibility of additional measures, including the adoption of legal sanctions (which may require modification of the Income Tax Act) for registered charities that do not comply with their reporting obligations.
- A risk with this option is that some may continue to call for greater reform of the charities sector. In particular, given the valuable work done by charities for Canadians, any changes to regulations or CRA policy should be done in a deliberate manner so as not to bring about a “chill” in the sector. This option represents a moderate change while leaving open the possibility of the Government undertaking a review in the medium term of the sector overall, with an eye to potentially changing legislation and policy surrounding all areas of charities, including the role of advocacy.
- This option best mitigates the potential reporting burden on small charities of any increased compliance efforts, and therefore minimizes the likelihood of opposition from charities that do not immediately have the capacity to meet a higher reporting standard. Interestingly, the data suggest that only 500 out of the approximately 86,000 registered charities report political activities, while industry experts suggest the number should be much higher. These figures point to a reporting gap, which may represent a disproportionate burden on small charities of understanding, quantifying and reporting their political activity. This option seeks to approach education and compliance in a principled way, targeted based on organizational size, such that reporting (and engaging in political activity itself) will not be disproportionately more difficult for smaller charities.
Allow “public policy advocacy”
This option maintains the CRA’s “10 percent rule” on political advocacy but revises and clarifies CRA policy to rename “political activity” as “public policy advocacy.”
- This option positively reframes tax reporting for greater clarity with the goal of increasing accurate data collection. “Public policy advocacy” encourages advocacy that is objective, evidence-based and well-meaning, and re-frames the category of “Political activity” into an objectively “good” contribution to public discourse.
- Clear terminology may also ease the reporting burden on smaller registered charities.
- This option requires opening up the CRA’s political activity policy statement (CPS-022), so it is likely to be unpopular with charities and to be a multi-actor, prolonged process. While the cost of this option to the Government of Canada is likely on par with the recommended option, there may be long-term cost savings as a result of more accurate quantification of political activity.
- This option would include an education campaign that would (a) reiterate the existing regulatory framework (along with reminders about the way the 10 percent rule operates) and clarify the changes associated with the renaming; and (b) help smaller registered charities work through any changes to tax forms and existing regulations.
Eliminate advocacy by charities
This option revises CRA policy to prohibit any direct political activity by charities.
- Charities would respond by legally separating into charitable and non-charitable advocacy wings.
- This option would require heavy regulation of this organizational structure. Charitable wings would have all the tax benefits charities currently possess but would be barred from spending any resources on advocacy, other than transfers of resources to their advocacy wings. Advocacy wings would be incorporated as for-profit or not-for-profit entities with no ability to issue tax receipts. Advocacy wings would be subject to federally regulated logo, naming and advertising rules to maximize public awareness of their function and the use of public donations.
- While the savings to the federal government would potentially be large, this is likely to be an unpopular option with registered charities, particularly because of the disproportionate burden placed on small charitable organizations. It would require modification of multiple acts and CRA policy statements, and would likely involve additional costs for the federal government.
The government should improve charities’ knowledge of the rules surrounding political advocacy and their ability to ensure compliance.
Future actions: A full review of the charitable sector
Regardless of the option selected, the government should initiate a full review of the Canadian charitable sector. A formal federal review could address the definition of registered charities, investigate expanding the scope of permissible charitable activity and investigate how to improve the efficiency and integration of service delivery in the sector as a whole.
This option would require a multi-year plan and considerable stakeholder consultation. While recent reforms to the charitable sector undertaken in Australia and the United Kingdom may provide interesting models for study, Canada’s distribution of constitutional responsibilities means that modernization and harmonization would require a truly “made-in-Canada” solution undertaken in consultation with the provinces and territories and the charities.
The government’s message should be clear.
- The Government of Canada values the role of registered charities and is committed to supporting the good work that they do within our communities.
- The Government of Canada has a responsibility to citizens to make sure that there are appropriate transparency and accountability mechanisms in place to ensure that charities are using funds primarily for charitable activity.
The Government of Canada will continue to support registered charities by strengthening efforts to clarify the regulations and provide educational support to registered charities and donors. All parties — donors, charities, the public, the CRA and the sector as a whole — benefit when charities meet their regulatory obligations.