First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

On modernizing the definition of “charity”

charity-donationCanadian charity law, being largely based on that of the United Kingdom, traces its roots directly back to the preamble of the English Charitable Uses Act of 1601, known as the “Statute of Elizabeth I”. Although the Statute itself was repealed in the 19th century, the preamble was legally preserved and still forms the basis of the line of case law running right to the modern day that defines what is legally charitable. The preamble contains a list of charitable purposes, including things like relief of the aged and the poor, support of schools, and repair of churches. Modern expansions of the definition of charity have largely been drawn by analogy from items on that list. This practice still continues, even though the Statute is now rarely mentioned directly in modern court judgments.

Sometimes the analogies stretch to things that could certainly never have been imagined by the Elizabethan drafters. For example, the preamble mentions as being charitable “the repair of bridges, ports, havens, causeways…sea banks, and highways”. From this came the concept that making a gift to the government is inherently charitable. In the United States, which also has an English common law tradition, the IRS has specifically developed the doctrine that it is charitable to do things that “lessen the burden of government” even if that’s achieved by making a gift to an entity other than the government. This in turn led to the tax-exempt status of the Prairie Meadows Racetrack and Casino in Des Moines, Iowa, on the basis that it was established by the local county to generate funds for the area. Indeed, this “non-profit casino” (one of only two in the United States) has been providing millions of dollars each year to the county and to local public school districts since it began operations in 1989. Now, however, Prairie Meadows has become embroiled in litigation with the IRS over whether it has been operating as a non-profit or as a commercial enterprise. The outcome of this case could well rest on Prairie Meadows’ ability to prove that it meets the federal regulations based on the 400-year-old Statute.

This is of course an American example, but Canadian charity law is also still heavily dependent on this long line of legal reasoning. The legal definition of “charity” in Canada is entirely based on case law, which in practice is also filtered through the Canada Revenue Agency’s interpretations and policies. This reliance on general principles and novel analogies is why there is no exhaustive list available of everything the CRA might consider to be “charitable”. Besides the main headings of reliving poverty, advancing education, or advancing religions, charities can be registered for purposes that are “beneficial to the community in a way the law regards as charitable”. This consists of anything the common law courts have identified as being beneficial to the community, such as protecting the environment or promoting the arts.

The problem with this is that any truly novel charitable purposes can only be introduced to Canadian law through court cases, which is a time-consuming and unpredictable process that requires charities to take on considerable financial burdens. The reason the CRA relies so heavily on the courts to define charity still is because the CRA is not constitutionally responsible for charities; the provinces are. The CRA has merely stepped in as the tax regulator to fill the vacuum left by delinquent provincial governments and the lack of any other coherent federal scheme. Its power to actually change charity law is therefore severely curtailed.

Compare this to the IRS in the United States, which makes its own regulations, or to the United Kingdom, where the Charities Commission was established specifically to administer charities in England and Wales. The Charities Commission has explicit legal authority to recognise new charitable purposes (or even do away with old purposes) just as the courts do. In doing so the Commission is free to take into account changing social and economic circumstances, creating a flexible legal framework that Canada is sorely lacking.

Instead of allowing the long line of legal reasoning a flexible new forum in which to continue to evolve, Canada is stuck with a regulator that has its hands legally tied. Not having the power of the courts, the CRA is instead given to a kind of creeping regulatory overreach that leads to things like the recent massive public kerfuffle about the CRA’s authority to define and restrict charities’ “political activities”. Until Canada performs a massive overhaul of its charitable regulation system, which is not likely to happen any time soon, it is difficult to see how we could come to benefit from the same evolutionary flexibility as our ideological neighbours in something as civically central as the definition of charity.

By Alexandra Tzannidakis

Follow me

Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLP is 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 here
Follow me

Latest posts by Drache Aptowitzer LLP (see all)

, , , , , , , ,

Comments are currently closed.