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Tax Exempt Status: The Paradox of Sector Reform and Perceived Privilege

Tuesday, September 5, 2017
Notes from the CEO
Public Policy

“How wonderful that we have met with a paradox. Now we have some hope of making progress.” – Niels Bohr

With the optimism of a new relationship that was heralded by arrival of the new government in Ottawa now shifting into the more mundane, day-to-day work of attempting to realize that potential, the charitable sector is finding itself in the midst of a fascinating, yet troubling, paradox.

On one hand is the desire to move forward on the commitments made in the 2015 ministerial mandate letters, particularly those related to the modernization of the regulatory environment in which the sector operates.  On the other hand is a growing awareness that the ability of registered charities to issue tax deductible receipts (and are therefore a cost to the federal treasury) is being seen as an enormous barrier to change.

And yet, the resistance goes beyond dollars.  It is one of perception and perceived privilege.

In our ongoing work at Imagine Canada, we are witnessing a growing sense that the attitudes of key influencers – elected officials, civil servants, members of the media – are coalescing around a belief that the sector’s desire for change and reform cannot be realized because organizations are supported by taxpayers through the charitable tax credit system. 

In particular, we are seeing three areas being illuminated.

The Raw Numbers

Time and time again, the cost to Canadians is raised whenever sector reform is discussed.  We gratefully acknowledge that Canada is a generous nation in providing tax benefits for charitable organizations and most fundraisers would agree that having the ability to offer tax credits to prospective donors is an important tool in the toolbox. But is that the only lens on this issue? We don’t think so. We believe that important issue needs a more nuanced and layered analysis.

While $3 billion is a significant subsidy of one sector of the economy, using this one metric alone paints an incomplete picture. For this, Canada gets a sector which accounts for 8% of GDP (that is $160 billion in an economy worth about $ 2 trillion) and 2 million high-quality social mission driven jobs. We also get delivery of high-value services which government cannot deliver as well or as inexpensively. More than this, there is the intangible value of the contribution to a sense of community where volunteers and charity employees can work together to make a difference

The cost to Canadians for the provision of important services would skyrocket if charities were not in place to deliver them at a price far lower than government could do itself.  In addition, if the idea of ‘subsidization’ and cost to tax payers is being introduced into the discussion, it is only fair that we examine the support of private sector entities as well.   

Voice and Advocacy

While Canadians have traditionally supported the idea that charitable organizations should speak on policy issues, we believe there is a growing sense among decision makers that public opinion no longer support this. In 2013, when the last major public opinion polling was done through the Muttart Foundation’s ‘Talking About Charities’ report, 62% of Canadians believed that charities prioritize the public interest, not their own. Further, 61% of respondents want charities to engage and speak out on issues.

Unless something has drastically changed, Canadians believe that this country is better served when organizations activate their voices and engage on issues.

And yet, in recent months we have seen respected leaders such as National Post journalist Andrew Coyne and former Finance Minister Joe Oliver, use their public platforms to call into question the issue of participation in public policy debates because of the subsidization coming from taxpayers.

Competitive Advantage

As the lines between charities and the social entrepreneurship area continue to blur, concern has been raised that a competitive advantage exists for the earned income areas operated by charities.

In theory, this could definitely be true.  If all the factors involved in bringing goods and services to market were identical and one party didn’t pay tax, they could then use the lower cost structure to undercut the price and create a competitive advantage.

When, however, did the private sector and charitable sector compete on a level playing field in bringing products and services to market?  From government programs supporting start-ups and innovation – where charities aren’t eligible to apply – to the ability to raise capital, the argument can be made that the tax advantage offered to charities is quickly offset by marketplace factors that tilt the playing field in favour of the private sector.

With earned income becoming a larger slice of the social good pie, it will be critical to examine the full spectrum of structures operating within the civil society and social impact area to ensure that an enabling regulatory environment is created to support this growing variety of business models.

In the coming months, Imagine Canada will be producing a series of short discussion papers on the topic of Implications of Tax Exempt Status.

The time has come to have more fulsome knowledge and data on this important topic if sector leaders are hoping to succeed in overcoming a significant barrier to sector reform.


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