Introduction
The federal budget was tabled by Finance Minister Chrystia Freeland on April 19, 2021 (the “2021 Budget”). This is the first federal budget in two years and the first during the COVID-19 pandemic. The 2021 Budget focuses on the government’s spending priorities for 2021 in response to the COVID-19. The 2021 Budget contains massive proposed spending and investments that will create new funding opportunities for charities and non-profit organizations working in nearly every sector, including the early learning and child care, the environment, Indigenous and racialized communities, research, and the green economy. The 2021 Budget also proposes opportunities for organizations and entrepreneurs engaged in the growing field of social enterprise.
The technical tax measures in the 2021 Budget that affect the charitable and non-profit sector are limited. The most significant changes are consultation with the charitable sector to potentially increase the disbursement quota, exploring the potential for social bonds, the development of the social finance market, and supporting community service organizations. The 2021 Budget also amends the rules of revocation of charitable registration related to terrorist organizations or for making false statements to maintain registration.
We are pleased to provide a summary of the highlights in the 2021 Budget affecting the charitable and non-profit sector:
Boosting charitable spending in our communities: the Disbursement Quota
Before the Government tabled the 2021 Budget there was significant speculation in the charitable sector about a possible change to the Disbursement Quota (the “DQ”) – being the minimum amount a registered charity in Canada must spend or devote in a year to furthering its charitable purpose directly or on grant making to qualified donees.
Throughout the pandemic there have been various campaigns supported by different groups about increasing the spending by registered charities in each year. Why? The issue is whether charities are using or spending enough of the assets they hold on delivering on their mission. Some say registered charities are not. As stated in the 2021 Budget, the value of assets under investment in charities has grown at a pace that is much higher than the growth in spending on activities or grant-making.
These campaigns had an impact and were heard. The Government announced in the 2021 Budget that it will be launching a public consultation with charities over the coming months to consider the possibility of increasing the DQ. The consultations will also be about updating the tools at Canada Revenue Agency’s (the “CRA”) disposal. In response to a question about this second part of the consultation, government officials confirmed that they want to ensure that compliance with the DQ is a priority and consider further tools for CRA to enforce the DQ requirements.
Such a consultation process will be met with a variety of responses. Endowment funds and gift agreements often impose restrictions on encroachment on capital and only permit charities to spend the income earned. It was not that long ago that the DQ was set at 4.5% and charities could not meet the requirement because investment returns were low and their funds were subject to encroachment restrictions. Any change to disbursement requirements will need to recognize these restrictions. It was also not long ago that charities were required to spend 80 cents of every unrestricted dollar received in the prior year on charitable activities or grant making. When that requirement was removed the government cautioned that it would monitor whether spending kept up with the growth of assets in the sector.
The reality is that this is a complex and difficult issue from a legal perspective. The other reality is that during times like these, any evidence that charities are minimizing spending in favour of investment will create great pressure on the government to implement a change. Hopefully these public consultations will be thoughtful and instructive. The last thing registered charities need are new rules that impose disbursement requirements that are impossible to meet or that lead organizations to choose riskier investments with a view to creating higher returns.
The fact that this discussion is happening today when many charities that directly provide services are struggling and when many Canadians are in need is no surprise. In its Report “Catalyst for Change: A Roadmap to a Stronger Charitable Sector”, the Special Senate Committee on the Charitable Sector asked that the Advisory Committee on the Charitable Sector (the “ACCS”) examine possible amendments to the Disbursement Quota (Recommendation 36). In its response, the Federal Government confirmed it would ask the ACCS to consider this issue.
Interestingly, Canada is not alone in considering an increased spend by charities. In the UK, proposals were recently introduced which would permit charities to set aside the encroachment on capital restrictions in certain instances. This is a significant development in light of the long standing case law in common law jurisdictions and in Quebec that make it quite difficult for a charity to alter the terms of a charitable gift. A movement away from these restrictions to providing trustees or directors with discretion to further access capital and increase their spend is a further sign of the pressure to see charity’s in all parts of the world contribute direct spending in addition to investing their endowments. Of course, any such movement in Canada would touch upon provincial jurisdiction and therefore require coordination with the provinces.
Ultimately any amendments to the DQ must only be implemented after careful consideration of all the relevant legal and operational issues. While the size of the assets under investment in the charitable sector is an attractive source of funding, the investment signifies a level of stability and it being there is one of the strengths of the charitable sector. Any changes to be made need to carefully consider not only the needs of communities today, but also the needs of communities tomorrow.
Social finance measures
The 2021 Budget includes measures designed to boost social finance. Social finance is a broad concept that refers generally to attracting private investment capital in support of initiatives that advance the public good. These investments generate not only private returns for investors, but also directly further social and environmental goals. This is a steadily growing field in Canada, and there are a wide range of investment structures and vehicles available, including structures that rely on government funding to provide returns to investors based on the success of a social intervention. Investors in social finance vehicles can include private investors, investment funds, as well as registered charities.
The 2021 Budget announces that the Federal Government proposes to launch previously planned disbursements from the $755 million Social Finance Fund, including the deployment of $220 million in the next two years. The Social Finance Fund was initially proposed in the 2018 Fall Economic Statement and was included in the 2019 federal budget. Funding through the Social Finance Fund is intended to be managed by a professional fund manager and invested in social finance intermediary organizations that will leverage private co-investment capital to make social investments in the charitable and non-profit sector. New and existing social finance funds will be able to access capital available through the Social Finance Fund.
In the 2021 Budget, the Federal Government estimates that the Social Finance Fund could attract up to $1.5 billion in private sector capital to support the development of the social finance market, create jobs and drive positive social change.
The 2021 Budget also announces the renewal of the Investment Readiness Program (the “IRP”) for $50 million, starting in 2021-2022. The IRP was initially established in 2019, and provides capacity-building support for charities, non-profits and social purpose organizations to enable them to participate in Canada’s social finance market. It is also intended to lay the groundwork for social investment through the Social Finance Fund.
Charities, non-profits, social enterprises and other organizations involved or interested in social finance should take note of these developments. As donation revenue declines, social finance offers an alternative source of capital to support charitable and social projects. Many who are active in the social finance space have also noted a steadily increasing appetite for impact investment and social finance opportunities. The IRP will be valuable in enabling more organizations to develop the capacity to engage effectively in social finance and potentially receive funding through the Social Finance Fund. It is hoped that the Social Finance Fund, once deployed, will be as successful as projected and that this sector will continue to grow in Canada.
Registration and revocation rules applicable to charities and other qualified donees
The 2021 Budget contains three draft amendments to the Income Tax Act (Canada) (the “Act”) to expand the ability for the Minister of National Revenue (the “Minister”) to revoke a charity or other qualified donee’s registration. Two of these measures are targeted at entities where there is a risk that their registration as a qualified donee may be abused for financing terrorism. The third measure is applicable to all charities.
Listed terrorist entities
The 2021 Budget proposes an amendment to the Act that would mean that, if a qualified donee becomes a “listed terrorist entity”, its registration as a qualified donee is revoked as of the date it became a listed terrorist entity. A listed terrorist entity is an entity the Minister of Public Safety and Emergency Preparedness has listed as a terrorist entity under the Criminal Code. In order to be listed as a terrorist entity, the Minister of Public Safety and Emergency Preparedness must be satisfied that there are reasonable grounds to believe the entity knowingly (i) carried out, attempted to carry out, participated in, or facilitated a terrorist activity; or (ii) acted on behalf of, at the direction of, or in association with an entity that was carrying out terrorist activities.
The amendment is proposed so the revocation of the qualified donee happens immediately if it becomes a listed terrorist entity, without going through the usual revocation process for non-compliance with the rules for qualified donees. The rationale is that the process for listing an organization as a terrorist entity under the Criminal Code already requires a certain administrative process to be followed and includes a process for the organization to appeal the decision. If an organization is successful in its appeal, it will be treated as though it never ceased to be a qualified donee under the Act.
Ineligible individuals
If an “ineligible individual” is a director, trustee, officer or like official, or otherwise controls or manages a charity or registered Canadian amateur athletic association (“RCAAA”), the Minister may refuse to register, revoke registration, or suspend the organization’s ability to issue official donation receipts. Ineligible individuals are individuals who have been convicted of certain offences or were involved with a charity or RCAAA whose registration was revoked for a serious breach of the registration requirements. Except for certain criminal offences, the general rule is that the event causing an individual to be ineligible must have occurred within the past five years.
The 2021 Budget proposes to add to the list of ineligible individuals the following:
- an individual that is, or is a member of, a listed terrorist entity; and
- an individual who was, during a period in which a listed terrorist entity supported or engaged in terrorist activities, (i) a director, trustee, officer or like official of the entity; or (ii) an individual that controlled or managed, directly or indirectly, in any manner whatever the entity.
There is no time limit on these criteria, meaning that the individual will be ineligible even if the circumstance occurred more than five years ago.
False statements
Currently, the Act allows for the Minister to revoke the registration of a charity where a false statement amounting to culpable conduct is made for the purpose of obtaining registration. The 2021 Budget proposes amendments to the Act to permit the Minister to penalize a charity if it makes a false statement amounting to culpable conduct for the purpose of maintaining registration by suspending its authority to issue official donation receipts for one year or revoke its registration.
Increased audit authority of the CRA
We have previously discussed a decision of the Federal Court of Appeal (read the article) in which CRA’s investigative powers under the Act were reviewed and found that a taxpayer was not required to answer inquiries directed towards understanding the facts, assumptions, and considerations of the taxpayer in preparing its tax return. In response to this decision, the 2021 Budget proposes amendments to the Act, amongst other legislation. to require persons to answer all proper questions, and to provide all reasonable assistance to the relevant CRA official for any purpose related to the administration or enforcement of the relevant statutes. The proposed amendments would also provide CRA officials with the authority to require persons to respond to questions orally or in writing, including in any form specified by the relevant CRA official.
While CRA auditors are almost always reasonable in dealing with charities, we have seen occasional situations where this has not been the case. It is already the law that failure to cooperate with a CRA auditor is grounds for revocation of charitable registration. It is difficult to show whether a charity has provided all relevant documents to a CRA auditor – it will be even more difficult for a charity to show that it has been appropriately cooperative in dealing with oral questions from an auditor.
Arts, culture, entertainment, heritage, sports, and tourism
New funding
The 2021 Budget contains a promise to support the recovery of workers and businesses in tourism, arts, and culture by making available a package of supports totalling $1 billion over three years, starting in 2021-2022. No details were provided with respect to what these package of supports will contain or whether registered charities and not-for-profits will be eligible to benefit from such supports.
The 2021 Budget proposes the following new funding to Heritage Canada starting in 2012-2022: $300M over two years to establish a recovery fund for heritage, arts, culture, and sports sectors; $49.6M over three years for the Building Communities Through Arts and Heritage Program; $70 over three years for the Canada Music Fund; and $15M in 2021-2022 for the Canada Cultural Spaces Fund.
The 2021 Budget also contemplates approximately $22M in direct support for the National Arts Centre.
A further new investment of $200M to be made available through regional development agencies to support major arts and culture festivals is also proposed by the 2021 Budget.
No additional details of these new measures were provided.
Impact of COVID-19 pandemic
It is worth mentioning that the 2021 Budget does confirm and acknowledge, on the basis of data collected by Statistics Canada over the past year, that the pandemic has had an uneven economic impact on the arts, entertainment, and recreation sectors. This data shows that these sectors are either continuing to decline, remain stagnant, or only slightly recovering compared to all other key sectors of the economy which appear to be on track to rebound to relatively healthy levels (based on government data current to March 2021).
The 2021 Budget also indicates that job losses in the arts, entertainment, and recreation sectors continue to be a serious problem, in particular for small organizations and businesses, many of which remain closed.
The 2021 Budget further states that the government views its extension until September 2021 of all federal support programs, such as the Canada Emergency Wage Subsidy, the Canada Emergency Commercial Subsidy Rent Assistance, and the Canada Emergency Rent Subsidy, as well as other programs, as providing support for the arts, entertainment, and recreation sectors since according to government data, these sectors relied very heavily on these programs as compared to other key sectors and industries.
Additional funding opportunities
The 2021 Budget includes funding opportunities specific to charities, non-profit organizations, and social enterprises as well as other funding for which these organizations may be eligible. The following are among the various funding opportunities proposed in the 2021 Budget:
Funding for charities, non-profit organizations, and social enterprises
- $400 million in 2021-22 to create a temporary Community Services Recovery Fund to help charities and non-profits adapt and modernize
- Expansion of the borrower eligibility in the Canada Small Business Financing Program to include non-profit and charitable social enterprises
Other funding
- Funding to improve food security, including $140 million in 2021-22 to top up the Emergency Food Security Fund and Local Food Infrastructure Fund
- Support for Black Canadian communities, including $200 million in 2021-22 to establish a Black-led Philanthropic Endowment Fund
- Creation of the Canada Recovery Hiring Program to provide eligible employers, including non-profit organizations and registered charities, with a subsidy of up to 50 per cent on the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021
We will be providing more detailed review of many of these funding opportunities in the coming days.
