Read the rest of Blake’s post here.

The fine print in the budget’s Notice of Ways and Means reveals that the government does not want those pennies to be spent on political activities.  Weeks before the budget was announced, Senator Doug Finley made the Conservative Party’s political agenda clear when he told the senate, “it should never be considered a charitable act to attack Canada’s oil sands.”  The government wants to block funding to environmental charities, particularly those that engage in political activities.  Charities play an important role in helping Canadians form value judgments about the merits and flaws of proposed social, economic and environmental plans and solutions. The proposed amendments to the Income Tax Act are intended to reduce the flow of pennies that support these important voices in public discourse.  Canadians need to recognize that the government is much more intent on extinguishing “thought” in the charitable sector than extinguishing the penny in everyday commerce.

It is interesting to note that the proposed changes to the Income Tax Act expand the definition of “political activities” only to the extent that making gifts that fund political activities becomes a political activity.  Apart from funding, there is no further change to the statutory definition of what activities- such as advocacy or fomenting public debate- constitute political activities.

In determining the meaning of acceptable and unacceptable political activities for charities in Canada, the common law draws upon decided cases in England and Australia.  In 2010 the highest court in Australia heard the appeal of a charity that had its registration revoked by the tax authorities because it was critical of the Australian government’s environmental and foreign aid policies. The charity, Aid/Watch, won when the majority judgment concluded that “the generation by lawful means of public debate, in the sense described earlier in these reasons, concerning the efficiency of foreign aid directed to the relief of poverty, itself is a purpose beneficial to the community within the fourth head in Pemsel.”

In 2011, Canada’s Federal Court of Appeal considered that very statement.  The Income Tax Act expressly limits permitted political activities of a Canadian charity to those that “are ancillary and incidental to its charitable purposes”.  The appellant charity lost because its purposes were not charitable. However, the court clearly opened the door to accepting the Aid/Watch decision when it stated: “the public debate carried out by a charity must itself be targeted to a charitable purpose, in that case the relief of poverty in the developing world.”  Any non-partisan debate about the environment meets the Federal Court of Appeal’s test that there be a “focus on public debate concerning a genuinely charitable issue.”

There is no doubt that care for, and preservation of, the environment is “a genuinely charitable issue.” Environmental charities seek to generate, by lawful means, a public debate on environmental issues. Courts interpreting the common law have held that such a debate is itself a charitable purpose and, as such, is not a political activity and is not constrained by the requirement of being “ancillary and incidental.”

However, the government has made it very clear that it does not want environmental charities to engage Canadians in a public debate on this genuinely charitable issue. While the Minister of Finance wants Canadians to send their pennies to charities, he is providing $8 million to Canada Revenue Agency to harass charities that may be engaging in political activities.

Canadians need charities to provide forums for a balanced and intelligent debate on environmental issues. The government does not have the integrity to tell the public that its real agenda is to frustrate debates based upon “thought” rather than ideology. Therefore, it is attacking the expenditure of pennies that is needed to facilitate thoughtful and considered discussion by citizens.

Rather than implement a partisan agenda imposed by a political party, it is the duty of Canada Revenue Agency to administer the law on public debate concerning genuinely charitable issues as set out by the courts.  CRA is being given millions of dollars for new audits whereas charities only have pennies to stand up for their legal rights. Individuals, corporations and foundations must find the courage and fortitude to provide funding to charities to carry on “a public debate concerning a genuinely charitable issue.”

On April 2, the Director General of Charities Directorate published a message making it clear that these provisions do not apply only to environmental charities. She wrote: “As the rules relating to political activity apply to all registered charities, the CRA’s educational and compliance efforts in this regard will extend to the charitable sector as a whole.”

In my opinion, the transparency requirements obligating charities to disclose funding from foreign sources will have a much greater impact on Muslim and other religious charities than on environmental charities. Though the initial focus may be on environmental funding, there is little doubt that in due course the government’s attention will move to transparency with regard to foreign money coming into Canadian mosques and Muslim humanitarian charities.”

Read more here.

This omission is striking because CRA is well-positioned to be on the frontlines of the Canadian counter-terrorism movement.”

Read Blake’s post here.

G2A was established as an American charity in 1991.  In 2003, I incorporated and registered G2A as a Canadian charity in response to growing interest from members of Canada’s Asian Diaspora.  In order to benefit from established infrastructure and expertise and avoid duplicating overhead costs, Give2Asia’s Canadian charity gifted money across the border to their American counterpart.  The Tax Treaty between Canada and the U.S. has specific provisions that authorize the mutual recognition of each other’s charities. The intent of these provisions is to encourage Canadians to donate to charities in the U.S. and vice versa.

Unfortunately for G2A, while CRA acknowledges that Canadian individuals can give to U.S. charities under the Tax Treaty, it has an administrative policy of denying that provisions enabling cross-border giving apply to Canadian charities. There is no court case that definitively addresses this grey area.  G2A provided a comprehensive, tightly reasoned defense of its interpretation of the provisions in the Tax Treaty but CRA refused to substantively engage with them on their legal analysis. Rather than spend many tens of thousands of dollars taking the issue to the Federal Court of Appeal, the Canadian G2A agreed to immediately cease making gifts to the U.S. charity and asked to voluntarily revoke its registration.

The Director General of Charities Directorate responded: “It is the Canada Revenue Agency’s position that it is in the public’s interest that the Charity’s registration be revoked for cause given that the Charity has operated solely for the non-charitable purpose of gifting funds to a non-qualified donee, Give2Asia, a U.S. 501(c)(3) non-profit organization.”

Not confident enough to defend its position on either a legal or policy basis in any significant way, CRA simply claimed it was right in its interpretation and didn’t worry about the lack of administrative fairness demonstrated by such an approach.

Given the circumstances, it is especially vindictive for CRA to have chosen to revoke G2A Canada’s registration “for cause”. There is no statutory standard for when a charity should be revoked for cause.  Such decisions lie entirely within the discretion of bureaucrats in Charities Directorate. Nor is there any legal avenue to appeal the type of revocation imposed by CRA because the Income Tax Act does not contemplate the possibility that Charities Directorate would revoke the registration of any charity without cause.

It saddens me that CRA took such a punitive approach with G2A’s Canadian charity. In my opinion, engaging the Canadian Diaspora in charitable giving is a legitimate and valuable charitable purpose and providing Canadian donors with easy access to some of the international expertise based at G2A’s San Francisco headquarters enhances the result of that charitable purpose. Based on decades of personal experience with the practices of Canadian charities that CRA considers to be compliant with their administrative policies on foreign charitable activities, I believe projects run through the G2A process provide better results to both donors and overseas recipients.

When I travel in China, I am constantly made aware of how much good is accomplished by funding provided by G2A. It is a tragedy that when members of Asia’s Diaspora search on the web to learn about G2A, they read about its role in providing innovative leadership to increasing Diaspora philanthropy but when they read CRA’s website, they see that Canadian officials revoked the organization’s registration for cause because it purportedly operated for a non-charitable purpose. Most people would think that gifting funds to promote a charitable purpose remains charitable even if the funds are handled by a U.S. charity. It is a shame that CRA’s harsh treatment of the Canadian entity stands in such stark contrast to G2A’s reputation as an innovative and effective charity that consistently supports remarkable work being done throughout Asia.

In 1991, G2A was incubated by Asia Foundation to seek private sector funding for worthy projects. However, while G2A’s origins may be rooted in the desire to reduce dependence on government funding, it quickly established itself as an innovative leader in the world of international philanthropy.  Since its inception, G2A has spent a considerable amount of time and money fostering expertise and developing programming to assist in project design, due diligence and fund management, the purpose of which is to increase the effectiveness and impact of social programs based in Asia.

Much of G2A’s success has come from working with people who came to the U.S. from Asia to get an education or who emigrated due to political and social unrest in their native countries. Many of these immigrants, collectively referred to as the Asian Diaspora, have become successful and wealthy entrepreneurs who wish to contribute to social and educational programs in their countries of origin.  Over dinner, Barnett repeatedly emphasized to me that G2A had no future unless it genuinely added value to the process of translating the philanthropic ideas of the Asian Diaspora into meaningful projects in Asia. We talked about how much value successful immigrants bring to designing philanthropic programs back in their countries of origin because they understand the nuances and challenges of their cultures so much better than foreigners do.  G2A is a major innovator not only in providing alternatives to the Asia Foundation’s government funding but also in mobilizing the minds and the money of the successful Diaspora.

Soon after G2A was established in the U.S., members of the Asian Diaspora in Canada became aware of the sophisticated programs and services offered by the organization.  In response to this increased awareness and interest, in February of 2003, I incorporated and registered G2A as a charity in Canada. The Canadian entity could have adopted one of two different operating models.  One option was to spend the time and money necessary to replicate in Canada all of the knowledge and infrastructure developed by G2A’s American charity.  While this option would be more consistent with CRA’s administrative policies on foreign activities, it would also divert valuable resources from charitable projects in Asia.  The alternative was to take advantage of the knowledge and infrastructure already in place at G2A’s San Francisco headquarters and rely on the reciprocal provisions in the Canada – U.S. Tax Treaty that allow Canadians to give to American charities and vice versa. The Canadian entity chose the second model because it enabled donors to benefit from the American charity’s expertise and maximized the on-the-ground impact of each donated dollar by minimizing overhead in Canada.

In the benevolent sector, this type of strategic decision should be encouraged.  Charities should be allowed to streamline their operations and optimize donated dollars, especially in an economic climate that consistently pushes for charities to reduce overhead costs.  Unfortunately for G2A’s Canadian charity, Canada Revenue Agency does not allow that the reciprocal provisions in the Canada-U.S. Tax Treaty apply to charities despite the efficiency and innovation that it would bring to our own charitable sector.

David Arnold, who became president of The Asia Foundation in 2011, is both comfortable and fluent in the benevolent space. Established in 1954, The Asia Foundation operates in 17 different countries and distributes about $17 million a year.

I first knew David in the 1980’s when he was Ford Foundation’s first program officer in the field of governance. In 1989, he recommended that Ford Foundation retain me to provide advice to the drafting committee of the law of charity in China. Peter Geithner, then head of Ford Foundation in China, hired me. My conversation with David took place 22 years to the day since I was first in Beijing working with the Ministry of Civil Affairs. Given his familiarity with China, we could talk about why this draft law is not yet enacted decades later. We could even speculate on heresies such as why it is better that the law has not yet passed. With the political climate in China, it is possible that only a repressive law could receive the approval of the National People’s Congress. Consequently, no law may be better than a law that fails to liberalize and empower China’s civil society. It is doubtful that the law will move ahead until the new General Secretary of the Central Committee of the Communist Party is settled into office and related changes in other positions of political leadership are completed.

Our conversation was not restricted to Asia. More recently, David spent seven years as the president of the American University in Cairo (AUC).  We talked about the pioneering research of Middle Eastern philanthropy that was initiated during his presidency. Exactly one year prior to our meeting I had been walking with Shi’ite pilgrims from Najaf to Karbala in Iraq. It was stimulating to talk to someone who understands what a phenomenal exercise in grassroots charity the people of Iraq provided to the pilgrims.

It was also thought-provoking to be able to talk about the “Arab Spring” with someone who understands its significance for events in Asia. Certainly, many of my conversations with senior leaders in China last year were dominated by speculation as to the impact of the military actions and street demonstrations in the Middle East on future developments in China. I made some heretical observations about the extent to which the movement towards “democracy” in Egypt is adversely impacting the movement towards “democracy” in China.

The Asia Foundation receives almost its entire budget from a Congressional apportionment. In an economic and political climate in which the U.S. government is seeking to cut its budget deficit, this is problematic. Funding foreign philanthropic activities is always vulnerable to a Congress focused on cost cutting. Fortunately, in the last decade Asia Foundation has incubated a new charity, Give2Asia, which seeks private sector funding for worthy projects in Asia. Last year Give2Asia raised $30 million from private donors, primarily from the Asian diaspora; the child is producing more funding than the parent. More importantly, Give2Asia provides valuable advice in vetting the projects, preventing corruption and administering the programs. But the Canada Revenue Agency says that Give2Asia’s Canadian charity operates with “no charitable purpose”. Controversial? Heresy? More on Give2Asia in my next blog.

It is always difficult to know how much ideology informs societal decisions in China. At one level Mark MacKinnon, the author of the article, is correct to say that the concepts of charity, philanthropy and civil society “have long been anathema to the ruling Communist Party”.  At another level, China and the Chinese people have for centuries exemplified visceral charity, responding with generosity and compassion to the multitude of earth quakes and other natural disasters that have occurred in their country.

China has no difficulty with charity when it is a generous response of innate compassion to help a neighbour in need during a time of crisis. Chinese citizens are encouraged to assist those who suffer as a result of a natural disaster. However, when it comes to acknowledging the inability of the state to systemically provide assistance to those suffering as a result of economic deprivation, China is sensitive. Chinese political ideology aspires to the provision of the necessities of life to those in need as a matter of right. While pride may cause the government to deny its economic inability to provide as much social assistance it would like, it is not opposed to charity as that term is understood in its original biblical context.

If philanthropy is understood as enabling the mega-wealthy to create private foundations and direct immense donations to promote their personal social agendas, China is hesitant in its support. For the Chinese government, problems with this kind of charity begin with ascertaining whether or not the sources of wealth from which these donations flow are the fruits of the corruption of government officials. It was only in 1978 that Deng Xiao-Ping authorized market reforms and the acquisition of private wealth. In a communist country, when people become billionaires in a short period of time, there is naturally some scepticism as to how much of their wealth is the honest fruit of capitalist business endeavours.

Moreover, when the term “civil society” is framed primarily as a manifestation of democracy and liberal political ideology, China has its concerns. In the mouths of some activists, “civil society” is an unabashed challenge to the Party. In the mouths of others, it represents an ambition to help China find a less statist pathway to a society that not only provides sustenance to those in physical need but also allows education and artistic expression to flourish. China knows that market reforms will result in a drive towards liberalism but the Party wants to control the timing.

If charity and philanthropy are to succeed in China, they must necessarily be expressed and nurtured within the cultural, economic and political realities of China. If charity is defined exclusively by those who trumpet the term “civil society” in New York and London, the concept and its manifestations will not be rooted in Chinese soil and will not flourish. China is very much aware that “promoting freedom and democracy and protecting human rights around the world are central to U.S. foreign policy” and that donations from U.S. charities are supposed to conform with U.S. foreign policy. It has reasons to be concerned about whether the agenda of “civil society” is political or charitable.

I have spent some years consulting with the Ministry of Civil Affairs as they draft a national Charities Act to provide an enabling environment for charity and philanthropy in China. In an effort to develop a more concrete understanding of how foundations and social organizations should operate in a genuinely Chinese way, the national government has allowed experimentation in regions such as Shenzhen and Zhejiang. It is watching these experiments in order to learn how best to develop and implement a national law in the future. In some ways, the growth and evolution of Chinese civil society could be seen as a battle. However, we in Canada should realize that part of the battle is to ensure that “charity, philanthropy and civil society” evolve in China in a way that is genuinely Chinese and is not just an unaltered adoption or imposition of these concepts as they have evolved in other countries.

The genius of successful charity law and systems is that they reflect the cultural, religious, ideological and economic realities of the society and country in which they operate. If China’s civil society is to succeed and be embraced by the local citizens, it will necessarily be significantly different from charity law and systems in Canada.

Canada is being asked to look beyond its borders for models of change for the charitable sector. The federal government’s point person for bringing in these changes is Diane Finley, the Minister for Human Resources and Skills Development. She has visited Great Britain and was inspired by David Cameron’s Big Society experiment which seeks to download onto charities many social programs traditionally provided by the state. Under this model, ordinary citizens and corporations volunteer time and money so that the government can reduce its role in caring for the social needs of its citizens. If Canadians are slow to fund this model of care for the needy, we will be vigorously reminded of how much more the United States’ private sector contributes to charities than Canada’s.

As we each consider our personal position on these issues, we need to understand that the real, but only subliminally argued, debate is about redefining the fundamental social contract that Canadians have with our government and with each other. The quantum of donations and tax subsidies, problems with the nanny state and unions, and questions and concerns about “charity” becoming an industry are all important things to consider. These issues, as well as the level of taxation that Canadians are willing to support, are all part of the ideological decisions our society must face in a time when economic constraints coincide with increased social need.

Canadians must decide what services we want the state to provide and to which citizens we want these services provided as a matter of right and entitlement. When making this decision, it is absolutely necessary that we be honest with ourselves and our politicians about what level of taxation we will accept to pay for the quality of life that we aspire to for all Canadians. It is not a legitimate social contract if it does not have a legitimate source of financing. Nor is it reasonable or sufficient to adopt a financing formula that shifts all the costs of social programs onto someone else. If this becomes simply an ideological game of chicken, the government will win and we will be left with an amalgam of Big Society from England and Big Donor from the US.

Rather than wait until the welfare state has been dismantled, the question for Canadians to consider right now is whether we want those who rely upon food banks- and soon those who want a university education and ultimately those who need health care- to receive a quality of service that in the final analysis depends on the voluntary donations of time and money by private sector individuals and corporations. While governments will always throw something in the pot, their contributions will be determined by political payback in ways that will come to mimic the donation processes of mega-donors.

We are living in a time of global revulsion to paying taxes and we are correct to challenge whether the government is delivering adequate value for the number of tax dollars collected. However, this question is not answered by simply reducing the tax dollars given to charity. Charities are as capable of wasting private sector dollars as they are of wasting government dollars.

Before deciding that charity is a better or sufficient substitute for government funded social programs, we need to realistically examine how much more it costs a charity to raise a donated dollar than it does a government to raise a tax dollar. We must also challenge the assumption that an individual with a lower tax rate will give more of the dollars he retains to charity. Having worked with many hundreds of large donors over the past three decades, my experience is that it was much easier to convince someone to donate large sums to charity when his or her marginal tax rate was 56% than it is now that it is 44%.

Canadians must determine which of our social priorities we want donors to set because no priority is meaningful if there are no funds to pay to make them happen. A necessary but difficult part of setting those priorities is determining how they will be funded and by whom. It is not adequate to simply say “tax the rich”. Nor is it realistic to expect the rich who refuse to pay those involuntary taxes to instead donate the money simply because we call this imputed voluntary tax “charity”.

We must all begin to grapple with these difficult issues. Once they are in the forefront of our minds we can better utilize the Globe and Mail’s articles to help us to debate the issues. However, these articles need to go further to help us understand both the extent to which Prime Minister David Cameron’s vision of a Big Society is failing to take hold and succeed in Great Britain and whether it can be held up as an inspirational model for Canada. If Canadians do not engage in this debate, the state will mesmerize us with tales of Big Society from England and Big Donor from the US and Canadian society will end up opting for a quality of life ultimately determined by the capriciousness of the donated dollar.

The Income Tax Act defines “charitable purposes” as “the disbursement of funds to qualified donees,” and most “qualified donees” are registered charities.

From 2005 through 2011, the five participating foundations disbursed a total of $38,499,996 to qualified donees, and the disputed transactions accounted for only about $1 million of this. The $38.5 million total excludes the $1.9 million described by Baines as going between the participating foundations to fund the share purchase, because those transfers were intentionally made in a way that did not count as disbursements to qualified donees.

What does it teach us about CRA’s attitude to a struggling charitable sector that it would choose to revoke registrations in the most hostile manner available to it rather than seek to preserve these generous sources of funding?

It is “obvious” to any operating charity, struggling to find funding in this difficult economic climate, that CRA should be able to find some “charitable purpose” in disbursements of $38.5 million to operating charities. However, when CRA auditors look at the same $38.5 million, they can see “no obvious charitable purpose.” I assume that they only see a loss to tax revenues of $17 million.

Also “obvious” are the deteriorating financial resources of operating charities. Qualified donees should be concerned that CRA’s only legal justification for the revocations publicized by Baines is that complex funding initiatives have “no obvious charitable purpose”.  In addition to having no basis in the Income Tax Act, the language of the charge is Orwellian.

In a time of budget deficits, when the government is reducing funding for social programs, it cannot expect charities to pick up the slack if CRA denies them the opportunity to be innovative in seeking new funding.

David Baines can pore over the T3010 Public Information Returns filed by charities to find the cost of four hockey tickets and professional fees. However, he makes no attempt to balance the negative spin he can put on this data with a positive report on the total funds paid out to charities.

One of the untold stories of CRA’s hostile audits is that the professional fees paid to deal with CRA auditors were much greater than those paid to generate the funding. CRA’s audit of all of these foundations established that Benefic was paid a total of $20,000 in fees for its role in planning and reviewing the impugned transactions. Given the size and complexity of the transactions, even Baines did not criticize these fees as unreasonable.

CRA audits are necessary and can even be helpful. However, they should focus on disallowing transactions that contravene the provisions of the Income Tax Act, not those that are just innovative.