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Indian experiment would have interesting implications in Canada

One of the advantages of being part of the commonwealth is that we share commonalities in methods of taxation and governance with a variety of different countries. So when one of these countries experiments with a different way of doing things we should examine the attempt for lessons which can be learned here. So it is with great interest that we note a recent attempt by India to mandate gifts back to the community in the name of corporate social responsibility.

Different traditions view gifts to charity through a lens which correlates with their particular history, religion and culture. In India, supporting the community is apparently not considered ‘giving back’ it is considered a social obligation. So it was in that vein that India legislated a requirement to their corporate rules requiring that corporations with a certain level of profit to spend 2% of their average net profit over the three preceding years on corporate social responsibility (CSR) activities. While non-compliance will not be penalized, companies will be required to disclose reasons for this, effectively making non-compliance hazardous to the delinquent company’s reputation. Apparently, the clause relating to CSR was a key provision in the long-pending legislation to overhaul the Companies Act of 1956, which controls businesses in the country.

From a tax perspective India has a similar system to Canada in that deductions are available from taxable income for expenses incurred (in the Indian context) for “business processes”. Deductions are also available for donations to charity. Interestingly, it seems that donations to CSR projects which are not also charities would therefore not result in a deduction to the corporation. One would imagine that this would inherently skew donations to charitable projects. Of course, the Canadian system of allowing for corporate deductions to charities also tends to direct funds to registered charities and away from other projects. But given that there is a clear Indian policy to direct funds to CSR projects generally one has to wonder if the lack of a general deduction for such expenditures is not counter productive.

It is a truism that it is more costly for the government to redistribute wealth than it is for the private sector to do it. (This is one argument levelled by classic liberals against the more left wing argument that the government is better at such redistribution than is the private sector). Economists have developed a measurement for the extra cost involved in a collection of a dollar by the government and then the spending of it elsewhere. So this Indian initative is also interesting for the relative efficiency by which it redistributes wealth without relying on government interference.

While some would argue that mandating such payments conflicts with the overriding purpose of the corporation being to earn wealth and redistribute it to the shareholders. And as such, it should fall to the shareholders to decide whether to make the contribution, and if so where to direct it. However, as stated above, the Indian context is different in the sense that participation in the social fabric of the country by economic actors is part of their expected role and so the expenditure by corporations of their shareholder’s wealth is apparently an accepted outcome.

Clearly, the Indian context is somewhat different than the Canadian one, but both countries aim to redistribute wealth in a variety of ways. For Canadians the thought that this could be accomplished without the significant waste that occurs when the money passes through the government’s hands is very intriguing. We already have this idea implicit in our registered charity system, perhaps the time has come to see if there is merit in creating further incentives to accomplishing Canadian policy goals without involving the government.

Drache Aptowitzer LLP

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more
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