By MakeWay’s Policy and Research team
In May, the CRA Charities Directorate released a new version of Form T3010, the document that every charity in Canada submits to the federal government annually as the primary reporting requirement for maintaining charitable status. Normally, changes to a form would not garner much interest outside of some small circles; however, the updated T3010 incorporates, for the first time, recent changes to the Income Tax Act that allow charities to issue “qualifying disbursements” to non-charities.
These regulatory changes were intended to enable grassroots groups to receive philanthropic funds, increasing equitable access to charitable dollars. Previously, charitable status was a prerequisite to receiving funding from public and private foundations; however, obtaining charitable status is difficult, especially for groups without the resources to navigate the CRA’s registration process. This created a two-tiered system for community work, where organizations recognized by the CRA could access charitable dollars, while others were left out. Sector advocates have noted that this exclusionary system disproportionately impacted Black-led, Indigenous-led, and low-income groups.
Even though much of the advocacy leading up to the changes to the Income Tax Act focused on the need to amend the rules so that non-profits could access charitable funds, legislators took an expansive view of this request, implementing changes that also allow individuals and for-profit companies to receive charitable dollars. Although the CRA has yet to finalize its guidance regarding these changes, the new T3010 highlights some of the possible issues with this broader deregulation approach.
1. Lack of data about gifts
First, the revised T3010 reveals that it will be challenging, and perhaps even impossible, to determine if the new regulatory changes are contributing to a more equitable social sector. The CRA is gathering limited data on gifts to “non-qualified donees,” with only annual contributions over $5,000 subject to individual reporting. Even in these cases, the CRA only requires charities to report the grantee’s name, the amounts provided, the purpose of the grant, and, for work outside Canada, the location. There are significant gaps in the reporting requirements, including information about the leadership, staffing, expenditures, and governance structures of grantees. Without this information and more disaggregated data on grant recipients (e.g., the populations they serve), any efforts to evaluate funding equity—the stated goal of the regulatory changes—will be laborious and imperfect.
In fairness, this lack of data is not exclusive to these new gifts. A movement calling for disaggregated data related to registered charities has built good momentum in recent years. But the absence of data regarding non-qualified donees is particularly worrisome due to their minimal reporting obligations compared to registered charities who provide publicly available information on their boards of directors and financials. Without access to this kind of data on non-qualified donees, it will be challenging to determine whether the new regulatory changes are truly increasing equity. The only way to capture this information would be through a more comprehensive T3010.
2. Increased labour precarity
As MakeWay noted in our submission to the CRA, the changes to the Income Tax Act introduced a new type of financial relationship between charities and individuals. Previously, to deliver charitable programming, charities would hire staff, and in cases where they used contractors, the charities were legally responsible for the “employee vs. self-employed determination.” But under the new rules, charities are free to provide funding directly to individuals outside of an employment relationship, seemingly bypassing the employee vs. self-employed determination. The government and sector may have neglected the potential ramifications of these changes on workers.
In a sector that already has a precarity problem due to the prevalence of project-based and contract work, removing the employment responsibility may further exacerbate inequality for workers. The sector’s paid labour force generally consists of two groups: employees and self-employed workers. Employees have access to benefits and protections, such as workplace safety insurance, regulated compensation (including minimum wage and pay equity laws), and employment insurance. Self-employed workers operate in a different legal structure and do not, for the most part, have access to such benefits and protections.
The new non-qualified donee regulations may lead to a significant increase in the number of self-employed workers delivering charitable programming. As charities face dwindling budgets and deal with inflation, precarious gig-work may grow at the expense of employment positions, a move made more possible by these new regulations.
3. Competition between charities and for-profits
It is unclear if grants to for-profit corporations will displace gifts to charities. While some argue for increased participation of for-profits in charitable programming, we must consider any claims of increased efficiency or effectiveness in light of the private sector’s relative lack of accountability and transparency and the inherent inequity of profit-making. The recent legislative changes allow funders to choose between granting to charities, which are legally required to dedicate their resources to serve the public good, or for-profit corporations with no such restrictions. The financial costs associated with accountability, transparency, and governance can put charities at a disadvantage in some funding streams where this will create direct and unequal competition between companies and charities.
4. Privatization of public services
The Grants to Non-Qualified Donees worksheet (Form T1441) includes some examples of why a funder might provide a grant to a non-qualified donee: “To pay for teachers’ salaries; To purchase equipment and material for a new medical centre.” There are many good instances where charities could provide gifts for such purposes, for example, in the case of a foundation providing funding for a new piece of medical equipment to a First Nation that did not have qualified donee status. However, because the underlying legislation does not make distinctions between types of grant recipients, we should be aware of the possibility of for-profit education and healthcare companies accessing charitable dollars. Consider that the original contribution to the granting charity reduces government revenues that pay for things like public education and healthcare, and it seems the gifts to non-qualified donee regime may be used to further undermine public services.
5. Using charitable dollars for private benefit
The actions of charities operating in other regions should heighten attention to the under-examined possibilities of private benefit that may emerge under the new regulatory regime. A notable example is the United States, a jurisdiction in which researchers uncovered a pattern of foundations providing gifts to large for-profit corporations.
To understand the potential private benefit implications of the new regulations, we need to look at how the new rules could open up pathways for abuse. First, wealthy private foundations can now provide gifts to corporations in which they themselves may hold financial interests. To put it another way, foundations can use their tax-exempt dollars to improve the profitability of corporations in which they, or maybe friends and family, hold stocks. In the case of privately held companies, where there is very little public accountability and transparency, the possibilities for abuse increase. Foundations could provide grants to privately held companies, thereby increasing the financial returns for private (and anonymous) investors.1
Without stricter guidelines and proper monitoring, the changes to the Income Tax Act could invertedly increase private wealth at the expense of public dollars.
Concluding thoughts: the sector and federal government’s responsibility to mitigate unintended consequences
The potential negative implications of the regulatory changes to the Income Tax Act should not be ignored, and they demonstrate the need for the federal government and the sector to closely monitor how these changes play out. As part of CRA’s commitment to transparency, civil society ought to be able to see how much charitable funding is going to for profits, non-profits, and individuals as distinct categories—this new T3010 doesn’t allow for such transparency.
Data visibility won’t solve all the problems described above, but it will at least help us, as a sector and public, monitor the flow of charitable dollars and identify broader trends and any transaction-level issues. This falls in line with further calls to the government for disaggregated data. In light of the new regulations, data regarding “gifts to grantees” should be disaggregated by grantee legal structure.
At MakeWay, we will be tracking the legal categories separately, and we intend to include this disaggregated information in our transparent Open Data grant reporting on our website. We encourage our colleagues in the sector to do the same.
We also ask our sector colleagues to engage in an open and public dialogue about these possible harms, and to stay vigilant in monitoring activities across the sector associated with the updated Income Act Tax.
