Full text of "Report on the law of charities"

See other formats

REPORT

THE LAW OF CHARITIES

ONTARIO LAW REFORM COMMISSION

Ontario

VOLUME 1

1996

The Ontario Law Reform Commission was established by the Ontario Government in 1964 as an
independent legal research institute. It was the first Law Reform Commission to be created in the
Commonwealth. It recommends reform in statute law, common law, jurisprudence, judicial and
quasi-judicial procedures, and in issues dealing with the administration of justice in Ontario.

Commissioners

John D. McCamus, MA, LLB, LLM, Chair
Nathalie Des Rosiers, LLB, LLM*
Sanda Rodgers, BA, LLB, BCL, LLM*
Judge Vibert Lampkin, LLB, LLM*

Counsel

J.J. Morrison, BA (Hon), LLB, LLM, Senior Counsel
Donald F. Bur, LLB, LLM, BCL, PhD
Barbara J. Hendrickson, MA, LLB, LLM

Chief Administrator

Mary Lasica, BAA

Secretaries

Tina Afonso
Cora Calixterio

These Commissioners served during the deliberations concerning this report. Their appointments expired, however,
prior to its publication.

The Commission's office is located on the Eleventh Floor at 720 Bay Street, Toronto, Ontario,
Canada, M5G 2K1. Telephone (416) 326-4200. FAX (416) 326-4693.

Canadian Cataloguing in Publication Data

Ontario Law Reform Commission. ^.

Report on the law of chaarities

Includes bibliographical references.
ISBN 0-7778-5947-5

1 . Charity laws and legislation-Ontario. I. Title.

KEO704.C5057 1997 346.713'064 C97-964004-0

Ontario
Law Reform
Commission

Ontario

The Honourable Charles Hamick
Attorney General for Ontario

Dear Attorney:

I have the honour to submit the Ontario Law Reform Commission's Report
on the Law of Chanties.

December, 1996

John D. McCamus
Chair

SUMMARY OF TABLE OF CONTENTS

Page

VOLUME 1

Preface xxiii

PART I INTRODUCTION AND BACKGROUND 1

Chapter 1 Introduction and Background 1

Chapter 2 Previous Studies 21

Chapter 3 Sources of Institutional Support and Prospects for Self-Governance 57

Chapter 4 Sources of Empirical Information on the Charity Sector in Canada:

An Opportimity for Government 71

Chapter 5 Overview of the Charity Sector in Ontario 83

PART n PUBLIC POLICY AND THE CHARITY SECTOR 145

Chapter 6 A Working Definition of Charity 145

Chapter 7 The Legal Definition of Charity: The Current Approach and

Proposals for Reform 159

Chapter 8 The Legal Defmition of Charity: Specific Problems with the

Current Definition and Proposals for Reform 185

Chapter 9 Policy Perspectives on die Charity Sector 229

PART m THE INCOME TAX ACT: REFORMING THE PRIMARY

REGIME OF SUPERVISION 249

Chapter 10 Supervision of Charities by Revenue Canada: A Brief History 249

Chapter 1 1 Supervision of Charities by Revenue Canada: Current Law 287

Chapter 12 Supervision of Charities by Revenue Canada: Proposals for Reform 333

VOLUME 2

PART rV THE CURRENT LAW OF ONTARIO AND PROPOSALS

FOR REFORM 385

Chapter 13 The Charitable Purpose Trust 393

Chapter 14 The Purpose Trust: Should It Be Extended to

Non-Charitable Purposes? 435

[V]

Chapter 15 The Nonprofit Corporation: Current Law and Proposals for Reform 45 1

Chapter 16 The Unincorporated Association 507

Chapter 17 The Supervision of Charities 535

Chapter 18 Specific Areas of Regulatory Concern: Fundraismg, Investments,

Political Activity, and Privileges 569

Chapter 19 Current Government Granting Practices and Systems

of Accountability 611

Summary of Recommendations 625

Appendices 637

DETAILED TABLE OF CONTENTS
VOLUME 1

Page

Preface xxiii

PART I: INTRODUCTION AND BACKGROUND 1

CHAPTER 1 INTRODUCTION AND BACKGROUND 1

1 . Introduction 1

2. Background 6

(a) Genesis of the Project 6

(b) History and Methodology of the Project 13

3. Why Regulate Charity? 14

(a) Government's Perspective 14

(b) Charitable Sector's Perspective 18

CHAPTER 2 PREVIOUS STUDIES 21

1 . Introduction 21

2. Government Studies (Canada) 21

(a) Introduction 21

(b) Ontario Government Studies 23

(i) Ontario, Ministry of Consumer and Commercial Relations,

Entertainment Standards Branch 23

(ii) Ontario, Ministry of Community and Social Services,

Provincial-Municipal Social Services Review 24

(iii) Ontario, Ministry of Community and Social Services,

Social Assistance Review Committee 25

(iv) Submissions to Federal/Provincial/Territorial Working Group 26

(v) Ontario Law Reform Commission: Report on the Law of Trusts 27

a. Recommendations Relating to Imperfect Trust Provisions 27

b. Recommendations Relating to the Variation and

Reorganization of Charitable Trusts 29

c. Dispositions of the Unexpended Funds of Public Appeals 30

[vii]

Vlll

(vi) Ontario Law Reform Commission: Report on Mortmain,

Charitable Uses and Religious Institutions 31

(i) Alberta, Instimte of Law Research and Reform 32

(ii) Law Reform Commission of British Columbia 33

(iii) Manitoba Law Reform Commission 34

(iv) Canada, Department of Consimier and Corporate Affairs 34

(v) Federal Tax Reforms: 1975, 1983, and 1990 34

(d) Concluding Observations 36

Studies in Other Jurisdictions 36

(a) The United Kingdom 36

(i) Introduction 36

(ii) The Nadian Report 37

a. Genesis 38

b. Methodology 40

c. Main Recommendations 41

d. Reception 44

(iii) Subsequent Studies 46

a. The Goodman Report 46

b. The Woodfield Report 47

c. The 1989 White Paper 48

(iv) Concluding Observations on the Relevance of the U.K. Studies 49

(b) The United States 50

(i) Introduction 50

(ii) The Peterson Commission 50

(iii) The Filer Commission 52

(iv) Concluding Observations on the Relevance of die U . S . Studies 54

CHAFFER 3 SOURCES OF INSTITUTIONAL SUPPORT

AND PROSPECTS FOR SELF-GOVERNANCE 57

1 . Introduction 57

2 . Private Organizations 57

(a) Canadian Centre for Philanthropy 57

(i) Mission 57

a. PubUc Affairs 58

b. Research 58

c . Awareness 58

d. Professional Development and Information 59

(ii) Funding and Administration 59

(b) Voluntary Sector Management Program, York University 60

for Donations and Public Affairs Research 61

(d) Coalition of National Volimtary Organizations 61

(e) The PhilanthropistlLe Philanthrope 62

(f) Charities Committee of the Wills and Trusts Section,

Canadian Bar Association— Ontario 62

(g) Federated Appeals 62

(i) The United Way of Greater Toronto 64

a. Goals and Organizational Structure 64

b. Fundraising Activities 65

c. Allocation of Funds 65

(ii) Association of Canadian Foundations 66

(iii) Better Business Bureaus 66

3. Public Agencies ^^

(a) Voluntary Action Program, Department of Canadian Heritage, Canada 67

(b) Ministry of Consumer and Commercial Relations/Office of the

Public Trustee , Ontario 68

4 . Concluding Observations and Recommendations 68

CHAPTER 4 SOURCES OF EMPIRICAL ESfFORMATION
ON THE CHARITY SECTOR IN CANADA:
AN OPPORTUNITY FOR GOVERNMENT 71

1 . Introduction 71

2. Survey of Sources of Empirical Information 71

(a) Four Main Sources of Empirical Information 71

(b) Other Sources of Current Data 74

(i) Canadian Centre for Philanthropy -

D. Sharpe, A Portrait of Canada 's Charities 75

(ii) Voluntary Sector Management Program, York University 75

(iii) Longwoods Research Group - General Public Research 75

(iv) Longwoods Research Group - CEOs of Canadian Charities 75

(v) Doreen Duchesne, Giving Freely: Volunteers in Canada 76

(vi) Canadian Centre for Business in the Commimity (CCBC), formerly
Institute of Donations and Public Affairs Research (IDPAR) -
Semi-annual Reports ,...., 77

(vii) Canadian Centre for Business in the Community (CCBC), formerly
Institute of Donations and Public Affairs Research (IDPAR) -
Policy and Attimde Studies 77

(viii) A. Arlett, P. Bell, and R. W. Thompson, Canada Gives 78

(ix) Canadian Centre for Philanthropy, Law, Tax and Charities 78

(x) Josephine Rekart, Voluntary Sector Social Services in the 1980s 79

(xi) Samuel Martin, Financing of Humanistic Services and

An Essential Grace 79

3 . Conclusion and Recommendations 79

CHAPTER 5 OVERVIEW OF THE CHARITY SECTOR IN ONTARIO 83

1 . Introduction 83

2. Patterns of Giving (Individual and Corporate) 83

(a) Introduction 83

(b) Individuals: Donations and Volunteering 86

(i) Historical Patterns of Individual Donations , 1 946- 1 980 86

a. Magnitude 86

b. Generosity 89

c. Direction , 91

(ii) Donations : Current Patterns of Individual Donations 92

a. Introduction 92

b. Ontario in General 94

( 1 ) Magnitude 94

(2) Generosity 95

(3) Direction 96

(4) Conclusion 96

c. Donations as a Function of Province of Donor 97

(1) Magnitude 97

(2) Generosity 99

(3) Direction 100

(4) Conclusion 101

d. Donations as a Function of Income 101

(1) MagniUide 101

(2) Generosity 103

(3) Direction 104

(4) Conclusion 105

e. Donations as a Function of Age 105

(1) Magnitude 105

(2) Generosity 107

(3) Direction 109

(4) Conclusion 110

f. Donations as a Function of Occupation 110

(iii) Volunteering: Current Patterns 113

(iv) Corporate Giving 118

a . Magnitude 118

b. Generosity 120

c . Direction 121

Profiles of Charitable Organizations 122

(a) Registration Statistics 122

Xll

(b) Sources of Revenue of Canadian Charities 127

4. Foundations 132

(a) Introduction 132

(i) General Profile 132

(ii) Geographic Distribution of Foundations, 1994 133

(iii) Distribution of Grants by Region, 1988 133

(iv) Destination of Grants by Charitable Sector, 1988 134

(v) Top Fifty and Top Ten 134

a. By Assets 134

b. By Grants 136

(b) Classification of Foundations 138

(i) Family Foundations 138

(ii) Community Foundations 139

(iii) Corporate Foundations 139

(iv) Special Interest Foundations 140

(v) Government Foundations 140

5. Levels of Ontario Government Support for the Charity Sector 141

6. Conclusions and Recommendations 142

PART H: PUBLIC POLICY AND THE CHARITY SECTOR 145

CHAPTER 6 A WORKING DEFESTnON OF CHARITY 145

1 . Introduction 145

2 . Definition of Charity 145

(a) The Connotations of "Charity" , Philanthropy" , and "Altruism" 145

(b) The Meaning of "Doing Good" 147

3. Policy Implications of the Real Definition 152

4. Conclusion 155

Xlll

CHAFFER 7 THE LEGAL DEFIMTION OF CHARITY: THE CURRENT

APPROACH AND PROPOSALS FOR REFORM 159

1 . Introduction 159

2. Definition and Function I59

3. The Common-Law Definition I55

(a) Introduction I55

(b) What Purposes Are Charitable? 167

(i) Introduction 167

(ii) Statute of Elizabeth Test 167

(iii) ''Pemser Test. 171

(iv) "Purposes Beneficial to the Public" Test 173

(v) Conclusion I74

(i) Introduction 175

(ii) Confusion Over the "Public Benefit" Test 177

a. "Section of the Public 177

(1) "Personal RelationsMp to a Named Propositus'' 178

(2) Size of the Class 179

b. "Benefit" 182

(iii) Clarification 184

CHAPTER 8 THE LEGAL DEFINITION OF CHARITY: SPECIFIC

PROBLEMS WITH THE CURRENT DEFINITION AND
PROPOSALS FOR REFORM 185

1 . Introduction 185

2. "Relief of Poverty" 186

(a) Content 186

(b) The " Poor Relations " Exception to the Distance Requirement 189

3. Religion 191

(a) Introduction 191

(b) Definition 191

XIV

(i) The Problem of " Private Benefit" or Lack of Distance 1 98

(ii) The Practical Utility Problem 199

4. Education 202

(a) Introduction 202

(b) The First Problem: The Narrow Scope of "Education" 203

(c) The Second Problem: Status of the Goods of Play, Practical
Reasonableness, Friendship, and Aesthetic Experience , 204

(i) The Underinclusiveness of " Education" in Older Case Law 204

(ii) The Overinclusiveness of " Education" in Some Case Law 205

(iii) Conclusion 206

(d) The Third Problem: The Uncertain Meaning of "Knowledge" and
"Dissemination of Knowledge" 207

(i) The Meaning of "Knowledge" 207

(ii) The Practical Utility of Projects Advancing the Good of Knowledge 208

5. Public Policy and Public Works 208

(a) Whether a Charitable Purpose Can Be Contrary to Public Policy 208

(b) Whether All Elements of Public Policy are Necessarily Charitable 209

(i) The Non-Charitable Status of Organizations Foimded to Promote

Government Policies 209

(ii) The Intersection of Public Policy and Charitable Purposes 210

a. Charitable Status of Public Works Projects 210

b. Government Purposes as a Test for Charitable Purposes 211

6. International Charity 218

7. Political Purposes 219

8. Friendship 222

9. Sports and Recreation 224

10. Aesthetic Experience 224

11. Life and Work '. 224

12. The "Exclusively Charitable" Condition 225

13. Conclusions and Summary of Recommendations 227

CHAPTER 9 POLICY PERSPECTIVES ON THE CHARITY SECTOR 229

1 . Introduction 229

2. Four Taxonomies of the Nonprofit Sector 230

(a) First Taxonomy: Locus of Control and Sources of Financing 230

(b) Second Taxonomy: The First Taxonomy Plus Destination of Benefits 231

(d) Fourth Taxonomy: The Particular Nonprofit Purpose as the

Primary Consideration 234

3. Theories Explaining the Existence of the Third Sector 238

(a) Introduction 238

(b) Economic Theories 239

(i) The "Public Good" Argument 239

(ii) The " Contract Failure " and " Agency Cost " Arguments 240

(iii) The "Donor Control" Argument 242

(iv) The "Donative Fmancing" Argument 243

(d) Conclusion 244

4. Theories Explaining Tax Privileges 245

(a) The Tax Exemption 245

(b) The Tax Deduction or Tax Credit 246

PART IE THE INCOME TAX ACT: REFORMING THE PRIMARY

REGIME OF SUPERVISION 249

CHAPTER 10 SUPERVISION OF CHARITIES BY REVENUE CANADA:

A BRIEF HISTORY 249

1 . Introduction 249

2. The Pre- 1967 Federal Tax Regime 251

(a) The Tax Treatment of Charitable Donations 25 1

(i) World War 1 251

(ii) 1920 253

(iii) 1930 254

XVI

(iv) World War II 256

(v) 1957 256

(b) The Tax Treatment of Charitable Organizations 257

Federal Tax Regime 258

(i) World War 1 258

(ii) World War II to 1967 259

a. Administrative Practice 259

b. Legislation 259

(d) Concluding Observations on the Pre-1967 Federal Law 261

The History of Federal Tax Legislation from 1967 to 1983 262

(a) 1967 262

(b) The Carter Commission 265

(i) Tax-Exempt Status 265

(ii) Busmess Income 266

(iii) The Federal Administration 266

(iv) The Charitable Deduction 267

(d) 1973: Gifts in Kind 268

(e) The 1976-77 Tax Reform 269

(i) Background 269

(ii) The 1975 Green Paper 271

a. Background 271

b. Private Foimdations 273

c. Business Income 274

d. Accumulation 275

e. Public Accountability 275

f. Fundraising : 275

(iii) The 1976-77 Legislation 276

(f) The 1984 Reform 277

(i) The MacEachen Budget, 1981 277

XVll

(ii) The April 1982 Press Release 279

(iii) The May 1983 Discussion Paper 280

(iv) The Economic Statement of November 8, 1984. 284

(g) The 1988 Reform 284

(h) The 1990 Reform Effort 285

(i) Conclusion 285

CHAPTER 11 SUPERVISION OF CHARITIES BY REVENUE CANADA:

CURRENT LAW 287

1 . Introduction 287

2. The Current Federal Regime 287

(a) Definition of Basic Terms 287

(b) The Registration Requirement 290

(i) Business Activities 293

(ii) Investment Activities 296

a. Control of Corporations 296

b. Investment "Businesses" 296

c. The Non-arm's Length Investments of Private Foundations 297

(iii) Political Activities 299

a. "Ancillary and Incidental" 299

b. The Disbursement Quota 302

(iv) Borrowing Activities 302

(v) Granting Activities 303

(vi) International Charity 304

(d) Disbursement Quotas 304

(i) The Quota for Charitable Organizations 305

(ii) The Quota for Public Foundations 306

(iii) The Quota for Private Foundations 307

(iv) Quota Shopping and Disbursement Avoidance 307

(e) Donations 307

(f) Compliance 308

XVlll

(i) The Annual Disclosure Requirement 308

(ii) Penalties 309

a. Administration 310

b. Revocation of Registrations 312

3 . The Tax Treatment of Charitable Organizations in the United States 313

(a) History 313

(b) The Current Regime 315

(i) Overview 315

a. The Exemption 315

b. Classifications 316

(ii) The Donation Deduction 317

(iii) Regulation of Charities Generally: Section 501(c)(3) of the

Internal Revenue Code 317

(iv) The Treatment of Business Income of Charities 321

(v) The Treatment of Private Foundations 322

a. Record-Keeping and Returns 322

b. The Two Percent Tax on Investment Income 323

c. Related Party Transactions 323

d. Minimum Distribution Requirements 324

e. Excess Business Holdings 324

f . Jeopardizing Investments 325

g. Taxable Expenditures, Political Activities, and Lobbying 325

(vi) Conclusion 326

4. The Tax Treatment of Charitable Organizations in the United Kingdom 327

(a) History 327

(b) The Current Reghne 327

(i) Donations 327

(ii) Exemptions 328

a. Exemption from Tax for Income from Land 328

b. Exemption from Tax for Investment Income 328

c Exemption from Tax for Business Profits 329

XIX

d. Exemption from Tax for Income from Fundraising Events 330

e. Exemption from Tax on Capital Gains 330

f. Exemption from Rates 330

g. Other Exemptions 330

(iii) Regulation of the Activities of Charities 331

(iv) Conclusion 332

CHAPTER 12 THE SUPERVISION OF CHARITIES BY REVENUE CANADA:

PROPOSALS FOR REFORM 333

1 . Introduction 333

(a) The Basic Premise of the Federal Regulation of Charity 333

(b) The Use of Qualitative Versus Quantitative Standards 335

2. Critique and Suggestions for Reform of Specific Provisions 337

(a) Defmition of Basic Terms 337

(i) "Charity" 337

(ii) Tripartite Division of Charities 338

(iii) Organizational Form 338

(iv) The Exclusively Charitable Test 339

(b) The Registration Requirement 340

(i) The Process 340

(ii) A Provincial Right of Participation in the Decision-Making Process 342

(iii) Third Party Rights 343

(i) Regulation of Commercial Activity 343

a. The Qualitative Standard 343

(1) Related Commercial Activity 346

(2) Subordinate Commercial Activity 346

A. Ancillary Commercial Activity 346

B. Incidental Activity 347

C. Businesses 347

b. Quantitative and Other Approximate but Certain Standards 349

(ii) Regulation of Investment Activities 350

a. Introduction 350

b. The First Objective: Capital Preservation and Enforcing the
Charitable Fiduciary's Duty to Invest Prudently 352

c. The Second Objective: Preventing Charities from Becoming
"Investment Businesses" 354

(iii) The Third Objective: Enforcing the Charitable Fiduciary's

Duty of Loyalty 354

a. Introduction 354

b. A Taxonomy 355

c. The Proper Approach 355

(1) Transactions or Situations Involving the Possibility

of Direct Harm to the Charity 356

A. The Formulation of the Non-Distribution Constraint 357

B. Specific Transactions 357

(2) Transactions or Situations Involving the Possibility

of Indirect Harm to the Charity 359

d. Conclusions 361

(iv) Regulation of Political Activities 362

(v) Regulation of Borrowing Activities 364

(vi) Regulation of Granting Activities 364

a. Current Objectives 364

b. A Fourth Objective 366

(vii) Regulation of International Charity 366

(d) Disbursement Quotas 367

(i) Introduction 367

(ii) Regulation of Fundraising and Administrative Costs at the

Federal Level 368

a. Definitions 368

b. Regulation 370

(iii) What are the Proper Elements of a Disbursement Quota? 372

a. Donations 372

b. Revenue from Capital Properties 373

XXI

c. Government Grants 374

d. Grants from Other Charities 374

e. Loan Proceeds 375

f. Revenue from Permissible Commercial Activity 375

(e) Donations 376

(f) The Tax Exemption 376

(g) Compliance , 377

(i) The Annual Disclosure Requirement 377

(ii) Penalties 378

(iii) Administration 378

PREFACE

This comprehensive Report on the Law of Charities responds to a reference on this topic to
the Commission by the Attorney General. The terms of the reference are set out as Appendix A
to this Report.

The publication of this Report brings to completion a lengthy and arduous process. At a
relatively early stage in the Commission's work on this reference, the Commission decided that
the importance of the subject required a thorough examination of the available evidence
concerning the fiinctioning of the charities sector, a careful examination of the history of the
public and private law regimes regulating the sector, a survey of research and reform activity in
other jurisdictions and the preparation of a comprehensive and detailed set of proposals for
modernization of the law in this field.

So ambitious a plan could not have been fashioned or attempted without the involvement
of a highly expert and dedicated researcher to act as Project Director. The Commission was most
fortunate to attract the talents and energies of Professor David Stevens of the Faculty of Law of
McGill University to serve in this capacity. Professor Stevens devoted an extraordinary amount
of time and effort to this project. He assisted the Commission in developing its project plan. He
carried the major burden of the actual research. He prepared a Director's Report for
consideration by the Commission and played a principal role in the making of necessary
revisions to incorporate decisions of the Commission and editorial changes necessary for
publication of the Commission's final Report. The Commission is extremely grateful to
Professor Stevens for his indispensable contribution to this project.

The Commission's research plan required the preparation of a series of background
research papers. These were prepaied by Professor Bruce Chapman of the Faculty of Law of the
University of Toronto, Eugene Meehan, tlien a member of the Faculty of Law of the University
of Ottawa and now a member of the Ontario Bar, and Professor Stevens himself The
Commission profited fi-om the endeavours of these scholars and we wish to express our
appreciation to them. We also profited fi-om the advice of the twenty-four members of an
advisory panel whose involvement was very helpful, especially in the early stages of this work,
in strengthening our resolve to conduct an extensive and thorough examination of this subject.
The members of the Project Advisory Group, to whom we are very grateful, are listed in
Appendix C-2. We also benefitted fi-om and much appreciate the encouragement and advice of
the members of the consultative groups listed in Appendix C-3 and the members of the Special
Committee on Charities of the Canadian Bar Association-Ontario listed in Appendix C-4.

Much had been accomplished on this project by the time of the decision by the
Government of Ontario, in the late spring of this year, to close down the operations of the
Commission. Nonetheless, much work remained to be done if the project was to achieve
completion before the projected date for sunsetting the Commission on December 31st, 1996.
This Herculean task simply could not have been accomplished without the extensive
involvement of Professor Stevens. Importantly, however, the Commission staff, in what the
reader will appreciate was not the easiest of circumstances, devoted themselves conscientiously

xxni

XXIV

to the task of completing this project as well as a number of other Commission works in
progress. In particular, Commission Counsel, Donald Bur, assumed principal responsibility for
Commission input into the preparation of the final version of this report. Another of our
Commission Counsel, Barbara Hendrickson, assumed this responsibility with respect to the
series of chapters dealing with the treatment of the charities sector by Revenue Canada and the
federal income tax legislation. We are also indebted to my Osgoode Hall Law School colleague,
Professor Neil Brooks, who reviewed and commented on these chapters.

As well, we wish to express our appreciation to those who provided editorial and
secretarial assistance. Editorial and proofi*eading responsibilities were assumed by Doreen
Potter, who has now proved herself invaluable in this respect in a long list of Commission
projects, and by Sarah Pearce, a recent graduate of Osgoode Hall Law School of York
University. Secretarial assistance was provided very effectively by Tina Afonso, secretary to the
Commission Chair, and by Heldne Lajeunesse, a member of the secretarial staff of the Faculty of
Law of McGill University. Finally, Cora Calixterio discharged with her usual finesse the task of
transforming a very lengthy manuscript into publishable form. The Commission is very grateful
to all of these individuals.

A lengthy and complex report on as difficult a subject as that addressed in these pages
poses, of course, a considerable challenge for the reader. The Report contains literally hundreds
of recommendations on topics of some complexity. In order to make the substance of the
Report's recommendations more readily accessible. Professor Stevens kindly assisted in the
preparation of a Summary of Recommendations. This Summary does not, however, literally
repeat word for word the detailed recommendations set out on the various topics covered in the
report. Rather, the Summary attempts to synthesize and describe the general thrust of the
recommendations made in each chapter of the report.

Accordingly, this Summary of Recommendations, which is set out at the end of the Report
beginning at page 625 will serve, we hope, as a form of executive summary of the Report for the
reader in haste. Readers who wish to peruse in full detail the various aspects of the proposals
fashioned by the Commission may then turn to the relevant chapter where the detailed proposals
and the justifications for them are set out at length.

December, 1996 John D. McCamus

Chair

PART I: INTRODUCTION AND BACKGROUND
CHAPTER 1

INTRODUCTION AND
BACKGROUND

1. INTRODUCTION

This report results from a reference to the Ontario Law Reform Commission in June
1989, by the Attorney General, pursuant to section 2 of the Commission's constituting
statute. The Attorney General asked the Commission to study the law governing charitable
organizations and to make recommendations respecting "the appropriate laws to govern
charities in modem times". In particular, the terms of reference asked the Commission to
examine the status, the legal form, the sources, and the uses of revenue of charitable
organizations, as well as the form of government supervision appropriate to the charitable
sector as a whole. Among the specific issues identified were the following:

(1) What type of activity should benefit from the advantages accorded to charities?

(2) Should organizations aimed at accomplishing political purposes be considered
charitable?

Ontario Law Reform Commission Act, R.S.O. 1990, c. O. 24.

Unless the context suggests otherwise, "charity" is used in this report in its traditional common law sense. The
definition formulated by Lord Macnaghten in Commissioners for Special Purposes of the Income Tax Act v.
Pemsel, [1891] A.C. 531 at 583, [1891-1894] All E.R. Rep. 28 at 55 (H.L.), is its most concise expression:

'Charity' in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the
advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial
to the community, not falling under any of the preceding heads.

The term "nonprofit" will be used to identify the larger set of organizations whose purposes — like those of
charitable organizations — are other than the pursuit of profit. A more extensive effort at definition and
classification is presented infra, chs. 6, 7, and 8.

These are fully set out infra. Appendix A.

[1]

(3) Is it appropriate that charities be created by means of different legal forms, that
is, trusts, corporations, and unincorporated associations?

(4) Should the investment powers of charities be subject to restriction, and if so, in
what way?

(5) Should charities be entitled to own for-profit organizations or to carry on
business directly?

(6) Should charitable fund raising activities be controlled?

(7) Who should be responsible for regulating charities and by what means?

There are many federal and provincial statutes that affect the activities of charitable
organizations. The federal government, however, plays the dominant regulatory role in the
sector through its administration of sections 110, 118.1, 149 and 149.1 of the Income Tea
Act. These statutory provisions govern the tax-exempt status of nonprofit and charitable
organizations, in addition to the tax credits and to tax deductions available to individuals and
corporations, respectively, for donations to charitable organizations. The federal government
also plays a significant role in the sector through its incorporating power and, to a lesser
degree, its spending power.

The provincial government's involvement in the sector has been grounded in the
traditional parens patriae jurisdiction of the Crown over charity and the jurisdiction of
courts of equity over charitable purpose trusts and charitable purpose corporations. This
traditional provincial focus is now manifested in two statutes of central importance to this

7 8

Study, the Charities Accounting Act and the Charitable Gifts Act. The law governing charity
and charitable organizations in Ontario, however, has many other facets. In addition to the
law of charitable purpose trusts and charitable purpose corporations, some of the most

R.S.C. 1985, c. 1 (5th Supp.), ss. 110, as am. by S.C. 1994, c. 7, Sch. II (1991, c. 49), s. 78; 1994, c. 21, s. 49;
1 18.1, as am. by S.C. 1994, c. 7, Sch. II (1991, c. 49), s. 88, Sch. VIII (1993, c. 24), s. 53; 1995, c. 3, s. 34; 149 as
am. by S.C. 1994, c. 7, Sch. II (1991, c. 49), s. 122; 1994, c. 7, Sch.VIII (1993, c. 24), s. 88; 1995, c. 3, s. 45;
149.1, as am. by S.C. 1994, c. 7, Sch. II (1991, c. 49), s. 123; 1994, c. 21, s. 74.

See Canada Corporations Act, R.S.C. 1970, c. C-32. There are over 3,000 federally incorporated nonprofit
corporations. Many of these have been incorporated by special Acts. See, for example. An Act to incorporate the
Governing Council of the Salvation Army in Canada, 1909, 8-9 Edw. 7, c. 132 (Can.), as am. by S.C. 1916, c. 63
and c. 64; S.C. 1957, c. 55; and S.C. 1962, c. 40. Other federal statutes of interest are listed infra. Appendix B-1
(public statutes) and Appendix B-2 (recent private Acts).

Ludlow Corp. v. Greenhouse (1827), 1 Bli. N.S. 17, 4 E.R. 780 (H.L.).

R.S.O. 1990, c. CIO.

R.S.O. 1990, c. C.8.

important laws are: (1) the law governing unincorporated associations; (2) the general
nonprofit corporations law; (3) the law of mortmain and charitable uses; (4) the provincial
income, property, and sales tax laws; (5) the laws governing the licensing of gambling events;
and (6) the many laws establishing supervisory and discretionary granting powers in
numerous government ministries and agencies, especially the Ministry of Community and
Social Services and the Ministry of Citizenship, Culture and Recreation.

The Commission's task — ^to suggest the design of appropriate contemporary laws to
govern modem charities — is made difficult by a unique set of factors. Primary among these is
the fact that relatively little attention — academic, political, legislative, or otherwise — has been
paid to the charitable sector in recent years. In the estimation of most informed observers, the
charity sector constitutes a "third order" of organization in society, on a par, theoretically,
with the private or market sector and with the public or government sector. Like these, it is
implicated in the allocation of resources, the distribution and redistribution of wealth, and the
control of economic and social power. Also, like these it is, in principle, founded on a very
distinctive logic of human relations: its culture of altruism stands in contrast to the market
sector's culture of contract and the public sector's culture of law and the public interest.
Despite this position of theoretical pre-eminence, however, the charity sector in Canada has
attracted comparatively little academic, political, or legislative interest. As a consequence,
there is a noticeable lack of informed public debate on the role of the sector in Canadian
society.

This lack of interest is evidenced in Ontario by a relative quiescence on the legislative
and administrative fronts in recent decades. Although Ontario's laws governing charitable
organizations are among the most well-developed in Canada, and although the province's

The most notable being the Charitable Institutions Act, R.S.O. 1990, c. C. 9. Provincial laws affecting charity and
charitable organizations are listed infra. Appendix B-3 (public statutes) and Appendix B-4 (private Acts).

This is changing, however. The main current works on the law of charily are: D.J. Bourgeois. 77?^ Law of
Charitable and Nonprofit Organizations, 2d ed. (Markham, Ont.: Butterworths, 1995); R.J. Burke-Robertson,
Non-share Capital Corporations (Scarborough, Ont.: Carswell, 1992); Canadian Centre for Philanthropy, Law.
Tax and Charities: The Legislative and Regulatory Environment for Charitable Non-profit Organizations
(Toronto: 1990); A.B.C. Drache, The Charity and Not-for-profit Sourcebook (Scarborough, Ont.: Carswell, 1995);
A.B.C. Drache, Canadian Taxation of Charities and Donations, rev'd. ed. (Don Mills, Ont.: Richard dc Boo,
1994); and D.W.M. Waters, Law of Trusts in Canada, 2d ed. (Toronto: Carswell, 1984) (hereinafter referred to as
"Waters, Law of Trusts'). See, also, C.E.D. (Ont. 3d), Vol. 4, Title 24 "Charities", and Vol. lA, Title 10
"Associations and Non-profit Corporations'"; and (C.E.D. (West 3d), Vol. 5, Title 24, "Charities", and Vol. 12,
Title 10, "Associations". There have also been several publications resulting from continuing legal education
seminars. These include M. Siegel, Non-profit Organizations and Charities for the 90 's (Toronto: Law Society of
Upper Canada, Dept. of Continuing Legal Education , 1993); Canadian Bar Association, Continuing Legal
Education, Charities and the Tax Man and More (Toronto: 1990); and Canadian Bar Association, Continuing
Legal Education, The Charitable Mosaic (Toronto: 1983).

In recent years, the province of Alberta, notably, has moved forward on several fronts. See, for example, Bill 54,
Volunteer Incorporations Act, Alta. 1987 (21st Leg., 2nd Sess.), and the Public Contributions Act, R.S.A. 1980,
c. P-26. Portions of this statute were declared in violation of the Canadian Charter of Rights and Freedoms, being
Part I of the Constitution Act, 1982, which is Sch. B of the Canada Act 1982, c. 1 1 (U.K.). See Epilepsy Canada v.

Office of the Public Trustee is one of Canada's most active public administrations in this
domain, these laws are seriously out of date. Many of their provisions are internally
incoherent, and the financial and human resources devoted to their administration are meagre
given the size of the sector and the ostensible ambition of the legislation.'^ Among other
things, this neglect means that there is at present relatively limited administrative expertise in
this domain in Ontario and very limited information about the operations of Ontario's
charitable organizations.

Another sort of difficulty arises from the fact that much of the provincial law governing
charitable organizations, deriving as it does from the English law of trusts and the historical
parens patriae jurisdiction of the Crown, is at odds with the current organization and modem
identity of the sector. The language of the law and the logic of the current (provincial)
administrative models are derived from traditional trust law, but the current problems of this
sector are of more modem origin. This is not to say that the central preoccupations of this
body of law — policing the fiduciary duties of those in charge of charitable organizations and
supervising changes in the objects of charitable organizations — do not continue to be
important. Rather, it suggests that such matters as the regulation of fundraising, the
supervision of tax expenditures, the delivery of government-funded social and cultural
services through the instmmentality of charitable and nonprofit organizations, and the relative
efficiency of charitable and other types of nonprofit organizations are, all things considered,
more pressing in the modem context.

One significant corollary of this point is that the scope of many of the laws considered
in our study is, or ought to be, the nonprofit sector in general and not just specifically
charitable organizations. An example will illustrate the difficulty. Historically, the English
law of tmsts has been preoccupied with defining "charity" in order to determine the validity
of purpose tmsts. This definitional quest, more than anything else, has given charity law its
distinctive shape. The current preference for the corporate as opposed to the tmst form of
organization, however, has made this quest much less important than it once was; corporate
status is now granted to all nonprofit organizations almost without distinction and almost as a
matter of right. As a consequence, most charitable organizations have as much in common
with other nonprofit organizations (that is, corporate form, nonprofit purpose, and reliance on
donations for capital) as they do with each other. Thus, if the relevant issue is the regulation
of fundraising, or if it is the effective delivery of government-funded social and cultural
services through the efforts of a non-govemmental agency, then, whether the fundraiser or

Attorney General for Alberta (1994), 20 Alta. L.R. (3d) 44 and 57, 115 D.L.R. (4th) 501 and 514 (C.A.);
additional reasons at (1994), 155 A.R. 259, 73 W.A.C. 259 (C.A.) and (1994), 157 A.R. 268, 77 W.A.C. 268
(C.A.). The statute was repealed in 1995 and replaced by the Charitable Fund-raising Act, S.A. 1995, c. C-4.5.

There are over 40,000 charitable organizations in Ontario receiving over $1 billion dollars in donations each year.
The inherent opportunities for abuse and fraud are manifold.

non-governmental agency is technically a "charity" in the view of the traditional law of
charitable purpose trusts is entirely beside the point.'"'

Finally, our task is made difficult by the very strong claims to jurisdiction, in most of
the relevant areas of regulation, of both the federal and provincial governments. Almost any
conceivable regulation of the nonprofit or charitable sector could be justified as both valid
federal and valid provincial legislation: federally, as legislation in relation to income tax; and,
provincially, as legislation in relation to charity, the latter pursuant to section 92(7) of the
Constitution Act, 1867, which establishes provincial legislative jurisdiction in respect of "the
establishment, maintenance and management of hospitals, asylums, charities and
eleemosynary institutions ...". At the same time it is critical to recognize that the sector itself
has a very limited capacity, in terms of both economic and human resources, to respond to a
sophisticated regulatory regime at even one level of government — let alone two. This is
especially clear where the governing regimes diverge in important respects, as they do
presently in many cases.

The Commission has attempted to respond to these challenges in several ways. The lack
of public debate on the role of the charitable and nonprofit sector in Canadian society
encouraged us to devote considerable space to the discussion of theories and explanations of
the sector and of the unique problems it presents for regulation. The lack of recent legislative
activity and the relative lack of current administrative experience have encouraged us to
make recommendations for reform that are slightly more modest than the ideal. We devote
considerable space to developing a statistical profile of the sector and a history of
state/charity relations in order to escape the narrow focus imposed on the law of charity by
the English law of trusts. And when it is relevant to do so, we make recommendations for the
reform of the laws governing nonprofit organizations as well as those governing charitable
organizations. Finally, we discuss more fully than is our custom the federal laws governing
charitable organizations so that our recommendations as a whole might result in integrated
and complementary regimes of regulation. Where leaving the jurisdiction is a viable option
for a regulated organization, which is the case, for the most part, with private foundations, we
generally recommend that the regulation be adopted federally. Conversely, where community
or local standards seem paramount — such as in door-to-door and other types of local
fundraising — we recommend local regulation.

In this introductory chapter we provide a sketch of the background of the study in
section 2, and we briefly introduce the principal motives of the government and the sector for
regulation in section 3.

For a comprehensive and up-to-date study of the nonprofit sector, see J. Quarter, The Social Economy: The
Change Role of Co-ops, Credit Unions, and Other Alternative Business in the Canadian Economy (Toronto:
James Lorimer & Co., 1992).

2. BACKGROUND

(a) Genesis of the Project

Throughout the 1970s and 1980s there was evident dissatisfaction with the state of
Ontario's provincial law governing charitable organizations among members of the judiciary
and interested members of the province's legal and accounting professions. This
dissatisfaction was expressed on many occasions, but was perhaps loudest when the sector
demonstrated its particular vulnerability to fraud. In one such case, In the Matter of the
application of the Canadian Foundation for Youth Action for the passing of its accounts.
His Honour Judge Cornish remarked:

[T]he Charities Accounting Act, as it now stands, is a cumbersome, confusing statute which is
completely ineffective for the curbing of such operations as CFYA.... This Act should either be
drastically revised or the provision for control of charitable organizations transferred to some
other statute such as the Public Trustee Act.

The Court then made specific recommendations for the improvement of the law
governing charitable organizations that have been echoed by others knowledgeable in the
law of charities. For example, the author of the leading treatise on the law of trusts in Canada,
Professor Donovan Waters, has stated

[W]hile Ontario has made certain useful advances in this area [that is, the public regulation of
charitable organization], there appears to be much force in the contention that the whole subject is
in need of revision and modernization.

Moreover, the Commission itself, in two previous reports, also strongly recommended reform
in this area of the law.

Unreported (January 25, 1977, Ont. Surr. Ct.) (hereinafter referred to as "'Canadian Foundation for Youth
Action ").

Concern over the inadequacy of the provincial regimes has been one of the principal motivating factors in recent
years in the establishment of a number of associations founded to promote tlie cause of charity in Canada. See
M.C. Cullity, Case Comment (1977), 2 Philanthrop. (No. 1) 41. Particular examples include the Canadian Centre
for Philanthropy, and the Wills and Trusts Section of the Canadian Bar Association. See, further, infra, ch. 3.

Waters, Law of Trusts, supra, note 10, at 641. See, also, M. Cullity, "Statutory Machinery for Supervising
Charities" (1972), 1 Philanthrop. (No. 2) 22.

See Ontario Law Reform Commission, Report on Mortmain, Charitable Uses and Religious Institutions (Toronto:
Ministry of Attorney General, 1976), at 21-24.

The Commission is of the opinion that a review of the administration, regulation and monitoring of
charities by an appropriate body would be timely and in the public interest... .A consolidation of The
Charitable Gifts Act, The Charities Accounting Act, and any retained sections related to charitable uses of
The Mortmain and Charitable Uses Act is desirable.

A series of more recent events, however, has conspired to raise the public profile of the
sector and draw attention to the seriousness of the problems affecting it and the deficiencies
of the legal regime governing it. We note three such factors or events in particular.

(1) In recent years the Office of the Public of Trustee'^ has been exercising its statutory
mandate more aggressively than had been its custom previously. The Public Trustee has
instigated or has been involved in several high profile court cases involving, in several
instances, prominent charitable organizations. Some of these cases concerned straightforward
issues of mismanagement and misappropriation,' but most involved difficult cutting-edge
questions in which the traditional law was in apparent conflict with current practice. This
latter litigation dealt with such matters as the propriety of charitable organizations

remunerating their directors; the legality of charitable foundations making grants to amateur
athletic associations; the propriety of a charitable organization becoming involved in

political activities; the legality of public hospitals (or their related foundations) owning

interests in large medical arts office complexes; and the legality of a church corporation
leasmg its land under a ninety-nine-year lease. In addition to its involvement in these highly
publicized and controversial cases, the Office of the Public Trustee conducted its own

extensive internal review of the law of charitable organizations.

See, also, Ontario Law Reform Commission, Report on the Law of Trusts (Toronto: Ministry of Attorney General,
1984)Vol. II, at429.

The Office of the Public Trustee has recently been reconstituted (as a corporation sole) under the name "Public
Guardian and Trustee". See Public Guardian and Trustee Act, R.S.O. 1990, c. P. 51, as am. by S.O. 1992, c. 32,
s. 25. For the sake of convenience we refer to the office under its former name throughout this report.

22
23

24
25

See, for example, Canadian Foundation for Youth Action, supra, note 14, and In the matter ofEtobicoke Olympic
Facilities Fund, unreported (April 11, 1977, Ont. Surr. Ct.). See D.L. Campbell, Case Comment: "Remuneration
of Directors" (1990), 9 Philanthrop. (No. 1) 36.

See, for example, Re Faith Haven Bible Training Centre (1988), 29 E.T.R. 198 (Ont. Surr. Ct.); Re David
Feldman Charitable Foundation (1987), 58 O.R. (2d) 626, 26 E.T.R. 86 (Surr. Ct.); Re Harold G. Fox Education
Fund and Public Trustee (1989), 69 O.R. (2d) 742 and 748, 34 E.T.R. 113 and 120 (H.C.J.); and Re Public
Trustee and Toronto Humane Society (1987), 60 OR. (2d) 236, 40 D.L.R. (4th) 1 1 1 (H.C.J.) (hereinafter referred
to as 'Toronto Humane Society"). For a comment on the latter case, see Campbell, supra, note 19.

Re Laidlaw Foundation (1984), 48 O.R. (2d) 549, 18 E.T.R. 77, 13 D.L.R. (4th) 491 (Div. Ct.).
Toronto Humane Society, supra, note 20.

Re Centenary Hospital Association and Public Trustee (1989), 69 O.R. (2d) 1 and 447, 59 D.L.R. (4lh) 449
(H.C.J.). See D. Waters, Case Comment: ''Re Centenary Hospital Association" (1990), 9 Philanthrop. (No. 1) 3
(hereinafter referred to as "Waters, Case Comment".

Re Incorporated Synod of the Diocese of Toronto and H.E.C. Hotels Ltd (1987), 61 OR. (2d) 737, 44 D.L.R.
(4th) 161 (C.A.).

Ontario, Office of the Public Trustee, Charities Division, McComiskey Report (1986) (Chair: J. McComiskey,
Q.C.) [unpublished]. The Committee's mandate was as follows (at 33-36):

Although this interest in the exercise of the Office of the Public Trustee's statutory
mandate has, on several occasions, attracted the severe and even hostile criticisms of various
segments of the sector, it has also served usefully to point up many of the deficiencies in the
current law.

I. To review existing common law and statute enactments governing charities, and, if found
necessary, to recommend legislative enactments on any or all issues and all aspects of the law and
practice related to charitable organizations operated in Ontario, including:

1. The definition of charity;

2. The method of formation of a charity by incorporation or otherwise, and the jurisdiction to
supervise this initial procedure;

3. The control or review of the actions of charities, by whom such reviews should be performed,
and through which forum;

4. The rights of charitable organizations to carry on business to earn funds to support their
charitable objects;

5. The penalties to be imposed by fine, imprisonment, cancellation of charters or cancellation of
the right to operate in Ontario following a failure to comply with legislative enactments;

6. The obligations and responsibilities of officers and directors of charitable organizations and
the rights of members;

7. The rights of charitable organizations with respect to the holding, financing, leasing or
conveying property, real or personal;

8. Surrender and revival of charitable corporations;

9. The question of disclaimer by charitable organizations;

10. The modification and termination of charitable trusts including corporations, the Variation of
Trusts Act, the Accumulations Act, the Perpetuities Act and the Rule in Saunders v. Vautier;

11. The application of the doctrine of extra-territoriality;

12. Funding by government grant as compared with contributions or gifts from the public.

II. To submit a report on the committee's findings and recommendations.

III. To review draft legislation and to implement recommendations made by the Committee.

See, for example, Canadian Bar Association, Taxation, Wills and Trusts Section, submission to the Ministry of the
Attorney General (Ontario) (July 23, 1990) [unpublished], at 1:

[T]he Canadian Bar Association — Ontario] earnestly submits to the Attorney-General that recent
administrative actions of the office of the Public Trustee have created uncertainty and confusion among
public charities in Ontario. It is the purpose of this Submission that you take urgent action to clarify the
situation for all concerned.

The complaints against the activities of the Office of the Public Trustee continue. In criticizing the Public
Trustee's declared intention to seek a judicial winding- up of a charitable organization which had made donations
to another charity of a portion of its surplus funds, purportedly contrary to its objects' clause in its letter patent,
Canadian Taxpayer (January 29, 1991) 24 stated:

(2) Among the many cases in which the Office of the Pubhc Trustee has been involved,

the Centenary Hospital case was perhaps the most influential in demonstrating the
fundamental incoherence of important parts of the law governing charitable organizations.
This case dealt with the plans of the Centenary Hospital Association, a public hospital under
the Public Hospitals Act, to construct a medical arts building to generate revenues on an
ongoing basis to help finance its activities. Although these plans had been approved by the
Ministry of Health, the Office of the Public Trustee objected to them on three basic grounds.
First, it argued that the construction of a medical arts building would violate section 6b of the

Charities Accounting Act. This provision prohibits the ownership of land by a charity if the
charity does not actually use the land in the execution of its charitable purpose. Secondly, the
Public Trustee argued that proceeding with the medical arts building project would constitute
a breach of trust since it would entail risking charitable assets in a business. Thirdly, it argued

that the project would violate the Charitable Gifts Act, which prohibits a charitable
organization's ownership of more than ten percent interest in a profit-making enterprise. If
the Court had accepted any one of these arguments, the hospital would have been prohibited
from doing something which the Ministry of Health had not only permitted, but had, under its
Business Oriented New Development program, even encouraged.

In the result, Mr. Justice Osier held that public hospitals were not subject to the
supervisory jurisdiction of the Office of the Public Trustee, to section 6b of the Charities
Accounting Act, nor to the relevant provisions of the Charitable Gifts Act. Thus, each of the
Public Trustee's three arguments failed. Mr. Justice Osier found, instead, that public hospitals
were subject to the exclusive jurisdiction of the Ministry of Health under the Public Hospitals
Act.

28
29

30
31

We don't know what is in the mind of the Public Trustee and have no idea what will be developing.
But the proposition that the trustee appears to embrace seems both a danger to existing charities and
wrong-headed in a policy sense. But then, many of the positions taken by the Public Trustee in the past
few years have struck us the same way.

In an earlier edition of the Canadian Taxpayer (July 17, 1990), at 100, it was opined:

The point we wish to make is that there appears to be no end to the chutzpah of Ontario. If you even
contemplate operating.. .in Ontaric.you'd best be aware that big brother is watching you.

Re Centenary Hospital Association and Public Trustee, supra, note 23. See, also, Waters, Case Comment, supra,
note 23.

R.S.O. 1980, c. 410 (now R.S.O. 1990, c. P. 40).

R.S.O. 1980, c. 65, s. 6b, as en. by S.O. 1982, c. 1 1, s. 1. See, now, Charities Accounting Act, supra, note 7. s. 8.

R.S.O. 1980, c. 63. See, now. Charitable Gifts Act, supra, note 8.

See Ontario, Ministry of Health, Explanation of the Business Oriented New Development Plan (Toronto: Queen's
Printer, 1981).

Although this result was perfectly reasonable, it was not apparent to anyone prior to this
decision that the position of the Office of the Public Trustee was obviously wrong.
Moreover, much of the force of Mr. Justice Osier's reasoning derives from the fact that there
is, in the case of public hospitals, a separate comprehensive regulatory regime under the
Public Hospitals Act. It is unclear, therefore, whether some of the arguments made by the
Office of the Public Trustee might not prevail another day, even if it appears that some of the
force of the reasons supporting the decision of Mr. Justice Osier derived from the over-
restrictiveness and incongruence of the general regime governing charities.

What the case demonstrated to everyone involved was that clarifying the law of
charities can be a very expensive and time-consuming process.

(3) The third event leading up to the reference to the Commission was what may be
called, for present purposes, the "Patricia Starr affair". We will look at this matter in a little
more detail here since there is no easily accessible public record of it and since it also
involved several issues of concern central to this study. These issues include: (i) whether
Revenue Canada is effective in detecting violations of the provisions of the Income Tax Act,
specifically the provisions prohibiting partisan political activity on the part of registered
charities; (ii) whether the current government of Ontario practices for ensuring the proper
expenditure of government grants to nonprofit organizations are adequate; and (iii) whether
there is adequate provincial or federal supervision and enforcement of the trust obligations of
those individuals responsible for running charitable organizations.

Indeed, on the question of the Public Trustee's authority over the hospital, few thought the claim to jurisdiction
was even questionable.

The terms of reference establishing the public inquiry into the affair were held by the Supreme Court of Canada to
be unconstitutional, as, in pith and substance, relating to criminal law. See Starr v. Houlden, [1990] 1 S.C.R.
1366, 68 D.L.R. (4th) 641. See, also, Ontario Law Reform Commission, Report on Public Inquiries (Toronto:
Ministry of Attorney General, 1992) at 90-101. For Starr's own account, see P. Starr, Tempting Fate: A
Cautionary Tale of Power and Politics (Toronto: Stoddart, 1993).

The Patricia Starr affair also provoked federal concern and interest in reform of the law and its administration. The
Revenue Minister of the time. Otto Jelinek was reported in the media {Financial Post, November 21, 1990, at 3,
[Toronto] Globe and Mail, November 21, 1990, at A4) as having said:

A few bad examples which had received a great deal of attention cast a bad light on the entire sector.
I'm proposing to allow for even greater openness .... The Patti Star Affair confirmed to me that we had to
make changes sooner, rather than later.

At the same time, perhaps coincidentally. Revenue Canada expressed an interest in reviewing the law and
administration of nonprofit organizations; see, Canadian Taxpayer (October 16, 1990) 159. As a consequence of
that review, s. 149(12) as am. by 1994, c. 7, Sch. VIII (1993, c. 24), s. 88(4), was added to the Act in 1993 and
was made applicable for 1993 and later. It requires, for the first time, that nonprofit organizations with investment
income of over $10,000 or assets equal to $200,000 or more, complete an annual information return. Previously,
nonprofits organized as corporations were required to file only a corporate tax return. Now see Form T1044.

The affair involved three types of legal wrongs and, ultimately, Patricia Starr was
convicted of three types of criminal or quasi-criminal violations. She was convicted on eight
counts under the Election Finances Act, all involving excessive donations to certain
political campaigns or failures to reveal the identity of the contributor; she was convicted of a
criminal breach of trust relating to her stewardship of funds belonging to the charity for
which she worked,^^ the National Council of Jewish' Women ("NCJW"); and, she was
convicted of criminal fraud relating to a fraudulent grant application to the Ministry of
Citizenship, signed by her and made on behalf of the NCJW.

The Patricia Starr affair first surfaced as an incident involving improper contributions
by a charity to the political campaigns of several Liberal and Progressive Conservative
politicians. The journalists who uncovered the improper contributions may have initially been
attracted to the activities of Patricia Starr by her high profile connections to important
members of the Ontario Liberal Party, including members of the DelZotto family, principals
in the Tridel Corporation, and others. These reporters used records available under the
Election Finances Act to uncover the improper campaign contributions. These, it was later
discovered, had all been made from a "capital" fund belonging to the NCJW, but controlled
by Patricia Starr. Subsequently, a number of private and public investigations were

conducted which uncovered the following facts concerning the sources of the fund from
which the illegal contributions had been made:

35
36

37
38

R.S.O. 1990, c. E. 7.

[Toronto] Globe and Mail, June 29, 1991, at A5. It is worth noting that at her sentencing Mr. Justice Ted Wren of
the Ontario Court of Justice, General Division, noted that Stan's contribution to the well-being of society was
remarkable. He said: "She has dedicated herself with an uncommon zeal toward the betterment of life in the
community": ibid. It is also worth noting that it does not appear from the public record that Starr gained personally
from any of her dealings.

Ibid.

A number of [Toronto] Globe and Mail articles suggested that the connections between Starr, the Tridel
Corporation, the DelZotto family, and the government were too obvious. As Michael Valpy put it in the [Toronto]
Globe and Mail, June 24, 1989, at A8: "[Starr] told anyone who would listen of her close friendship witli the
DelZotto family. Her constant escort to political gatherings was Mario Giampreti, Tridel 's vice-president of
corporate development."

Linda McQuaig of the [Toronto] Globe and Mail, June 24, 1989, at A2 wrote: "[A Liberal source] said that he and
several other Liberals who saw [Starr] at the Tridel offices warned her that she was very foolish to be running a
political ftind-raiser for the housing minister out of the office of one of the province's largest developers."

Separate investigations were completed by the police, by the Office of the Public Trustee, by the law firm
Goodman and Goodman (at the behest of the NCJW), by several provincial govcmmcnl ministries, including the
Minisfry of Community and Social Services, the Ministry of Citizenship, the Ministry of Culture and
Communications, and the Ministry of Revenue, by several govemment agencies, including the Canada Mortgage
and Housing Corporation, and by Revenue Canada.

- $25 1 ,000 of the fund came from a sales tax rebate issued by the Ontario Ministry of
Revenue. The rebate was in respect of sales taxes paid during the course of the
construction of a nonprofit housing project that the NCJW had constructed in
partnership with the Tridel Corporation. According to the Ministry, the rebate
money was supposed to have been used to reduce the rents of tenants in the

. . 40

project.

- $33,000 was alleged to have come from the Ministry of Community and Social
Services as part of a $380,000 grant intended for disabled persons under the
ministry's Attendant Care Program.

- At least $30,000 of the flind came from the Tridel Corporation in the form of what
Patricia Starr maintained were "consulting fees" on account of the charity's work in
the construction of the nonprofit housing project.

Other alleged improprieties were also uncovered:

- The NCJW had received over $350,000 from the Ministry of Citizenship for
renovations to a NCJW building under a matching grant program. As it turned out,
the cost estimate given to the Ministry by the NCJW was double the true value.

- $1 13,000 of a grant obtained from the Ministry of Community and Social Services
was spent without authorization on a bus for disabled residents of the housing

• . 44

project.

- The NCJW failed to report the $215,000 sales tax rebate to the Canada Mortgage
and Housing Corporation, which provided some of the financing for the NCJW's
housing project.

40
4i
42
43
44
45
46

The Public Trustee found that "a total of 126 separate, prohibited payments were
made to various beneficiaries, amounting to $160,053.84". These funds were paid
out over a four-year period commencing in 1985 and went to political candidates at

See [Toronto] Globe and Mail, November 1, 1989, at A9.
[Toronto] Globe and Mail, June 19, 1989, at Al.
[Toronto] Globe and Mail, January 25, 1990, at A14.
[Toronto] Globe and Mail, September 20, 1989, ^t A17.
[Toronto] Globe and Mail, April 6, 1990, at A9.
[Toronto] Globe and Mail, December 2, 1989, at A 10.
[Toronto] Globe and Mail, July 7, 1989, at Al.

all levels of government. While payments went to candidates from all three major
parties the overwhelming majority of recipients were Liberal/^

What is perhaps most disturbing about the Patricia Starr affair is, first, that her
wrongdoings were, it appears,"** initially discovered by the press and, secondly, that the first
clues of her wrongdoing were found in the reports required under the Election Finances
Act. This trail eventually led to the discovery of the more serious matters involving the
criminal charges. Thus, none of the various administrative controls on the activities of the
NCJW, it seems, had revealed any of the improprieties. One major reason for this failure, of
course, was Ms. Starr's own fraud. For example, the spaces provided for the disclosure of
financial information relating to political activities on the NCJW's T3010 returns were left
blank.

Incidents like the Patricia Starr affair occur with a frequency sufficient to undermine the
public's confidence in the sector. ^ The public reasons that if one charity can do what Patricia
Starr's did and escape detection, how many others can do the same? As the law and
administrative practice now stand, we have no way of providing a definitive answer. Even if
this ignorance does not argue conclusively for a more rigorous administration within this
sector, it at least raises a serious question.

(b) History and Methodology of the Project

Work on the project commenced in January 1990. A research team was appointed, and
a Project Advisory Committee of twenty-four people was formed. Notices which announced
the project and solicited submissions on the issues of interest to the project were placed in
several Ontario newspapers and in the Ontario Gazette in early 1990. The Commission also
directly solicited submissions from over 800 charitable organizations in all parts of Ontario in

For details of who was involved, see M. Valpy's column in the [Toronto] Globe and Mail, June 15, 1989, at A. 8.

See, also, "Trail Littered with Names Since First Report", [Toronto] Globe and Mail, June 16, 1989, at A 14.

We do not know to what extent the defrauded Ontario government ministries were aware of her activities prior to
the revelations in the press.

Supra, note 35.

Similar or more serious incidents have occurred recently in other jurisdictions. The former president of the United
Way of America was sentenced for defrauding the organization of $1.2 million in 1995. For a fuller account, see
R.E. Herzlinger, "Can Public Trust in Nonprofits and Govemments Be Restored?" (1996), 74 Harv. Bus. Rev.
(No. 2) 97. In England, C. Baxter, "Trustees' Personal Liability and the Role of Liability Insurance", [1996] Conv
12 cites the example of Rosemary Aberdour who "was allowed to relieve the National Hospital for Neurology and
Neurosurgery of 2.4 million pounds". See, also, [1992] Ch. Comm. Rep. 24. Unlike the Starr case, supra, note 33,
these foreign examples appear to have involved an element of personal benefit.

See, infra. Appendices C-1 and C-2.

March 1990; over one hundred submissions resulted from these efforts. ^^ In June 1990 the
project director held day-long consultations with representatives of over twenty foundations
and representatives of over one hundred charitable organizations. Later, in September 1990,
members of the Project Advisory Committee were consulted. The Commission also held
meetings with the members of nine consultative groups from various representative charitable
sectors in Ontario in February 1991. Finally, in February 1993 the Commission met with
members of the Canadian Bar Association-Ontario, Special Committee on Charities. ^^ The
final draft of the full report was submitted to the Commission in January 1995.

3. WHY REGULATE CHARITY?

(a) Government's Perspective

There are five main reasons why governments have regulated charitable activity and
charitable organizations. These reasons, which are specific to charity, are reviewed in this
introductory chapter to orient the discussion that follows.

The first and, from the point of view of provincial governments, historically most
important reason arises out of the regard society has for the charitable intentions of donors.
This regard is reflected in the law in two basic ways. First, the law facilitates charitable
activity by providing appropriate legal forms, such as the charitable purpose trust, the
nonprofit corporation, and the unincorporated association. Second, the law acts to protect
charity from its particular vulnerability to fraud and waste.

These objectives (to facilitate and protect charitable activity) and their underlying
motive (the high value placed by society on those activities) can be seen in a wide variety of
current policies and concerns. They are most evident in the law of charitable trusts where the
existence and precise content of the donor's charitable intention are the focus of most of the
important doctrines. They also lie behind recent calls for closer government supervision of
professional fundraisers: many people fear that professional fundraisers employed by
charitable organizations skim or waste money intended for charity; others are concerned that
donors are deceived if the involvement of professionals in a fundraising campaign is not
made explicit at the time of solicitation. These objectives also provide some support for the
restrictive approach governments have traditionally taken towards charitable investments: by
restricting the investment opportunities of capital devoted to a charitable purpose,
governments have sought to preserve that capital from undue risk and ensure that charitable
trustees do not become unduly preoccupied with the instrumental goals of capital growth and

See, infra. Appendices D-2, D-3, and D-4.

See, infra. Appendices C-3 and C-4.

Similarly, it has been suggested that businesses which advertise that a portion of their sales revenues goes to
charity improperly exploit the charitable intentions of their customers.

income generation, but focus instead on financing charitable activity over the long term.
Finally, on the basis of this rationale, the law, and especially the law of trusts, imposes
substantial burdens on administrators of assets devoted to charitable purposes, and exacts
from them a very high standard of care and duty of integrity. In all these instances, the
principal reason for the state's intervention is the concern society has for the charitable
intentions of donors.

A second reason governments regulate charitable activity is to ensure the legitimacy and
authenticity of the recipients of several extraordinary state-confeiTed privileges. For example,
charitable organizations are permitted to issue receipts for donations which entitle donors to
deduct from their income tax a certain percentage of the donation. ^^ This tax credit is of
significant benefit to charitable organizations at a substantial cost to governments.^^ So too is
the tax-exempt status of charitable organizations and their favourable treatment under sales
tax and property tax laws. Consequently, there arises the need to ensure that the organizations
which receive the favourable treatment are what they purport to be.

These two objectives are commonly, but not necessarily, associated with two quite
different theoretical perspectives on the charity sector and on the role government should
play in it. A common interpretation of the first objective — that it is the charitable intentions
of donors that are significant — maintains that "charity" is a real concept. As a consequence,
people who approach issues relating to the role of the state in the charity sector with the first
sort of objective in mind usually look to the true meaning of "charity" for guidance on when
and how charities should be regulated. A common interpretation of the second objective, by
contrast, regards the concessional tax treatment as a kind of government expenditure — a "tax
expenditure" — and, therefore, tends to regard charity and charitable organizations as, in some
way, instrumental to other more central objectives of the state.

Often, the policy recommendations of these two perspectives converge, but frequently,
as will be seen, they diverge.^^ Our recommendations will be drawn from the arguments
developed from both perspectives.

There are two further regulatory concerns of the state — one that has motivated the
regulation of charity in the past and one that is increasingly important today. First, at certain
times in Anglo-Canadian legal history, the dominant regulatory concern has been the fear that
charitable organizations would grow to the point where they would begin to usurp the

Some regard this tax credit as a state subsidy, others as merely a more equitable way of defining the tax base. This
issue is taken up more fully, infra, ch. 9.

A detailed statistical profile is provided infra, ch. 5. For a recent review of the federal government's performance
in supervising chairities, see J. Bryden, M.P. for Hamilton-Wentworth, MP. 's Report: Canada's Charities A
Need for Reform (October 1996).

We introduce this division in the theories at this juncture, but develop tlicir respective policy implications in
greater depth in chs. 6 and 9, infra.

functions of the state or the commercial economy or, relatedly, the fear that charitable
organizations would be used to shelter economic activity from the taxing and regulatory

powers of the state. Historically, this concern applied ahnost wholly to religious institutions.
It manifested itself in regulations restricting the power of landowners to devise their land to
charitable purposes, in requirements that charitable trusts (and corporations, generally) obtain
licences from the state in order to hold land, and in legislation limiting the power of such
organizations to own land at all. There is some existing law that was initially motivated by
concerns of this sort. For example, subject to certain exceptions and prescribed modalities,
the Charities Accounting Act in Ontario still prohibits charitable organizations from owning
land that is not used for their charitable purposes.

This traditional concern is important to keep in mind for two reasons. First, in some
instances, it is still valid. In the mid-1970s, for instance, federal authorities became concerned
that family foundations were being used, inappropriately, as a way of avoiding the capital
gains tax that would otherwise arise on an intergenerational transfer of wealth. Controlling
shareholders, it was claimed, were donating their controlling interests in the family business
to foundations controlled by other members of the family. The capital gains tax was thus
avoided, but family control of the business was nonetheless maintained. Similarly, the
Ontario government enacted the Charitable Gifts Act in 1950, in part, to foreclose the use of
family foundations to avoid succession duties.

The second reason to keep the traditional concern in mind is that we should be alert to
its presence in the current law and be prepared to ask whether, in fact, its current applications
are still valid. We suspect that to the extent society continues to be concerned that charitable
organizations not become "too large", society's real concern is that the charitable
organizations which are too large are, in fact, no longer truly charitable. When the issue is
reformulated in this new way, this third objective sounds very much like the second
objective, since the true problem will be whether the relevant organization should continue to
be entitled to the privileges that the state confers on charitable organizations.

The newer concern arises out of the increasing need of governments to deliver some
goods and services through the instrumentality of non-government agencies. Modem
governments are, thus, substantial donors. As such, they need responsible and effective
charitable organizations that deliver on their promises and a charitable sector of sufficient

59
60
61

Mortmain legislation was motivated by other considerations as well, including the desire to protect the dying from
undue exploitation by the church; skepticism as to the value of religion generally; a desire to protect subsequent
generations from being disinherited; and a desire to enhance the alienability of land. For a further discussion, see,
infra, ch. 18.

Supra, note 7.

See, further, L. McQuaig, Behind Closed Doors (Markham, Ont.: Penguin Books, 1987) ch. 2, for a fuller account.

Supra, note 8.

variety and vibrancy to satisfy their diverse needs. In this respect" governments are similar to
large public and private foundations. However, as well as voluntarily accepted accountability
reporting, governments also have the legislative power to impose general performance
standards on charitable organizations. Charitable organizations are reluctant to accept this
increased regulation, in part, because they perceive an already high degree of accountability
to government through government grant-reporting mechanisms. Conversely, some of the
impetus for greater centralized accountability is coming from the government agencies that
use the sector to deliver government-financed services.

All four of these government concerns share two common regulatory objectives. Given
the decisions to facilitate charity through the provision of the required legal forms, to treat
charities favourably under the tax system, and to effect government purposes through the
instrumentality of nonprofit organizations, then the ultimate objectives of most government
regulation are to ensure both a certain loyalty to purpose on the part of charitable fiduciaries,
and a certain level of effectiveness on the part of charitable organizations and their
administrators. Much of this report, therefore, discusses the formulation of and the modes for
enforcing the relevant standards of loyalty and diligence and competence in this area, while
another considerable portion is devoted to the issue of the appropriate design of provincial
public administration of the charitable sector.

It would be a mistake, however, for government to lose sight of the core values which
have motivated much of its activity in this domain historically by adopting a posture which is
exclusively interest driven or exclusively instrumentalist. We stated at the beginning of this
section that one of the chief influences on government involvement in the sector has been the
high value society has placed on charitable activity. This value lies not only, or even chiefly,
in the fact that the beneficiaries of charity benefit from it, but also in the facts that, first, the
donors and volunteers benefit from giving their support and, second, society profits because
the virtues of good citizenship are valued and practised widely. The valorization and
promotion of good citizenship, hence, constitutes a fifth objective of government
involvement in the sector.^^ It suggests a role for government that is complementary and

See G. Floyd, "The Voluntary Sector in Canada's New Social Contract: More Responsibility But No Voice"
(1996), 13 Philanthop. (No. 2) 39, and R. Kramer and P. Terrell, Social Service Contracting Out in the Bay Area
(Berkeley, Ca.: Institute of Government Studies, 1984) for studies of government uses of voluntary organizations
for the delivery of social programs, and the problems associated therewith. See, also, J. Warburton and D. Morris.
"Charities and the Contract Culture", [1991] Conv. 419.

A similar sentiment was expressed in the U.K. Report of the Committee on the Law and Practice Relating to
Charitable Trusts (Cmd. 8710, 1952) (hereinafter referred to as the ''Nathan Report''), at 12, para. 53:

The democratic state as we know it could hardly function effectively or teach the exercise of
democracy to its members without such channels for and demands on voluntary service. Not only docs
voluntary service act as a nursery school of democracy but also as the field in which good neighbourliness
may be exercised. ... Some of the most valuable activities of voluntary societies consist, however, in the
fact that they are able to stand aside from and criticize state action, or inaction, in the interests of ihc
inarticulate man in the street.

cooperative; it also suggests a regulatory approach that relies less on command and sanction
and more on mutual respect and persuasion.

(b) Charitable Sector's Perspective

Charitable organizations themselves might like the state to regulate their activities for
several groups of reasons. The most important of these relates to their shared interest in the
integrity of the sector as a whole. Effective government regulation might inhibit fraudulent
and dishonest actors from infiltrating the sector and staining the name of charity to the
detriment of all. Government regulation of standards might also promote professionalism and
efficiency in the sector, thereby enhancing its reputation in the eyes of the public. Private
agencies, such as better business bureaus or charity watch groups, might contribute to the
achievement of these goals. These private agencies, however, could not be as effective or
forceful as the government in excluding fraudulent actors, nor possibly, would they have the
resources to be as accurate or as comprehensive in their assessments of performance.
Further, this sort of regulation may specifically require a taxing power to finance it, since it is
difficult to see how the information gathering and dissemination required could be made
profitable. Finally, the endorsement and legitimacy that government "certification" gives to
any particular charity may be of considerable advantage to the charity when it comes time to
raise money through public donations, big or small.

Another group of reasons has to do with the benefits to the sector as a whole from
having better information about itself Armed with better general information, the sector
would be in a better position to police itself and to advance its interests politically in the same
way that Chambers of Commerce or the Business Council on National Issues do for the
business sector.

Finally, there are, perhaps less legitimate concerns that there may be too many actors in
the sector and, thus, too much competition for scarce charitable dollars. Older, more
traditional charities might advocate strict rules on admission to the status and privileges of
charity in order to reduce the competition, from newer charities, for scarce donor funds.
Local charities might seek to exclude outsiders for similar reasons. Thus, it is quite common
in the various provincial regulatory schemes dealing with the licensing of gaming events to
require that the proceeds of the event be spent in the province where the event takes place.
Historically, international charities have encountered significant problems in the English law
of charitable trusts.

On the virtue of good citizenship, see A. Etzioni, The Spirit of Community: Rights, Responsibilities, and the
Communitarian Agenda (New York: Crown Publishers, 1993). In general, see R.D. Putnam, Making Democracy
Work: Civic Traditions in Modern Italy (Princeton, N.J.: Princeton University Press, 1993), and J.F. Helliwell and
R. Putnam, "Social Capital and Economic Growth in Italy" (1995), 21 Eastern Economic J. (No. 3).

See J. Gregory, "Evaluating Charities: The Better Business Bureau" (1991), 10 Philanthrop. (No. 3) 25. The
National Charities Information Bureau in the United States has, however, been praised for its work. See
A.L. Cowan, "The Gadfly Who Audits Philanthropy", New York Times, October 7, 1990.

All of these various objectives of the charity sector argue conclusively in favour of
some form of regulation. The most substantial problem from the point of view of the sector
itself is balancing the achievement of these objectives with the fact that the sector has a very
limited capacity to respond to complex regimes of regulation. Thus, this report is based on
the premise that the question is not whether to regulate charities, but how.

CHAPTER 2

PREVIOUS STUDIES

1. INTRODUCTION

In section 2 of this chapter we survey the recent studies conducted by various
governments in Canada on the laws affecting charity and charitable organizations. The
objective of section 2 is to assess the level and quality of recent government interest in the
sector in order to gauge the timeliness and appropriateness of any possible reform. Our
conclusion is that recent government interest — at least at the provincial level — in the
viability, effectiveness, and honesty of the sector has been weak. We therefore think that any
reform of the laws governing charitable organizations that might result from this study should
proceed with caution and only after substantial ftirther consultation with the sector.

Section 3 is a survey of the main public studies of the charity sector that have been
carried out in the United Kingdom, the United States, and Australia in recent years. The
objective of section 3 is to provide a basis for understanding the relevance of the legislative
and administrative experience of these jurisdictions in this area of the law to the current
situation in Ontario. Our preliminary conclusion, based on the limited evidence presented in
section 3, is that the government of Ontario should be wary of adopting legislative and
administrative models developed in these jurisdictions, because the social, historical, and
legal contexts in which these models were developed are markedly different from the social,
historical, and legal context in which the law of charity has developed in Ontario.
Specifically, for these reasons, we do not think that the law, practice, and institutions of the
United Kingdom are of any determinative relevance to the current situation in Ontario.

2. GOVERNMENT STUDIES (CANADA)
(a) INTRODUCTION

There has never been a comprehensive study of the law of charity in Canada, nor have
Canadian governments displayed much official curiosity regarding their role in the charity
sector. Canadian governments have looked at discrete questions of interest to the sector,

' Contra, see, for example, Ontario, Public Trustee, "Submissions to the Ontario Law Reform Commission: Project
on the Law of Charities" (1990-91), 10 Est. & Tr. J. 272.

[21]

sometimes as the need has arisen, more frequently long after. But even in the various discrete
domains that have been examined, there has rarely been a great deal of thought devoted to the
appropriate design of the law, and there has been little resultant legislative activity.

Before going on to the main task of this section, which is to describe the government
studies that have been completed to date, it is important to speculate why this neglect has
occurred and to ask whether, on balance, it has been benign.

On the positive side, there have been at least three factors:

• Perhaps of first importance has been the recognition on the part of Canadian
governments that the raison d'etre of the charity sector is to be "apart" from govern-
ment, and therefore that too much government influence in the sector would be
simply counter-productive.

• The lack of government interest reflects, as well, the tendency of contemporary
Canadian society to place much less emphasis on the role of charity in the provision
of social welfare assistance, education, and health care than, to pick two obvious and
relevant examples, American society and Canadian society in earlier times. This has
meant that Canadian governments have not had to rely on the sector to deliver basic
social services to the extent that governments in more "interventionist" jurisdictions
have; therefore there has been less reason, from a public policy point of view, for
Canadian governments to be interested in the integrity and effectiveness of the
sector. Interestingly, Canadian governments, in a sense, have thus been among the
most interventionist, since they have merely taken over proportionately more of the
sector's traditional work in establishing the Canadian version of the welfare state.

• Last, on the positive side, the lack of government interest reflects the recognition of
Canadian governments that even the facilitative role of the state is of relatively
modest value in a sector whose actors are motivated principally by altruism. This
factor, in particular, helps explain the fact that government interest has been
incidental and fragmentary: charity has been a subject of interest only when the tax
privileges available to charities have been thought subject to abuse or when charities
have been the object of exploitation by non-altruistic elements in society, such as in
the case of commercial bingo operations, other gambling operations, and
professional ftindraisers.

There are, as well, two negative factors that have contributed to the neglect. First, the
sector has always had a relatively weak share of voice in the halls of government, due largely
to its lack of organization and to the dominance that economic and social issues have had on
legislative agendas. Second, Canadians in general do not seem to regard the health of the
sector as a matter of pressing public interest. This may be due to a pervasive feeling that the

sector is basically honest, but recent trends in donating and volunteering behaviour also
suggest a general decline in interest in charity on the part of vast numbers of Canadians.

Assessing whether this neglect has been benign or not, is, in the light of these factors,
not an easy task. Certainly the lack of activity to date is cause for caution against moving too
quickly or going too far in the present reform. With these points in mind, we turn to a
description of the government level studies that have preceded the present one.

(b) Ontario Government Studies

(i) Ontario Ministry of Consumer and Commercial Relations,
Entertainment Standards Branch

The Ministry of Consumer and Commercial Relations, Entertainment Standards Branch,
issued a press release and consultation paper in February 1990, to commence a process of
public review of the legislation, regulation, and administrative practice governing commercial
bingo halls and other forms of charitable gaming in Ontario. This effort was undertaken in
response to "the unprecedented growth of charitable gaming" and "the strain" which that
growth had caused to "the regulatory framework". It followed the imposition, in August
1989, of a temporary moratorium on the licensing of charitable gaming events in new
commercial bingo facilities. The consultation and review led to the introduction of Bill 237,
An Act to provide for the Regulation of Gaming Services, on June 27,1990. The Bill died on
the order paper when the provincial Legislature was dissolved in the summer of 1990. A
statute regulating gaming services was finally enacted in 1992. This statute, called the
Gaming Service Act, 1992^ was amended in 1993 and in its present form is entitled the
Gaming Control Act, 1992.

As the title of the consultation paper suggested — Charitable gaming: putting the
charities back in the driver's seat/Jeux de bienfaisance: redonner le controle aux
organismes — the government's main concern was the adequacy of the level of returns to
charitable organizations from licensed gaming events. Charitable gaming in Ontario had

Ontario, Ministry of Consumer and Commercial Relations, Charitable gaming: putting the charities back in the
driver's seat/Jeux de bienfaisance: redonner le controle aux organismes (Toronto: February 1990).

Ibid., at 2.

S.O. 1992, c. 24.

Ibid., title am. by S.O. 1993, c. 25, s. 25. This Act imposes a registration requirement on suppliers of gaming
services and provides for the prescription by regulation of the rules of play, trust accounts for moneys due to
charities, financial statement reporting requirements, and investigative and enforcement powers.

grown from a $80 million business in 1975 to a $600 million business in 1990. The
discussion paper suggested that this unprecedented growth had entailed greater and greater
sophistication on the part of the operators of commercial bingo halls with more and more
exploitation of charitable organizations as a consequence. The government's objective in
enacting legislation was to ensure that the primary purpose of charitable gaming — fundraising
for charity — was not unduly subordinated to the interests of commercial operators. We will
present our own views on this issue in chapter 18.

(ii) Ontario, Ministry of Community and Social Services,
Provincial-Municipal Social Services Review

The Ministry of Community and Social Service appointed the Provincial-Municipal
Social Services Review (PMSSR) Committee in May 1987. The Committee was comprised of
four members from the Ministry of Community and Social Services, four members represent-
ing the Association of Municipalities of Ontario, and three from the Ontario Municipal Social
Services Association.

The Committee was established to review the existing relationships between the
province and the municipalities with respect to "the delivery and funding of social services"
and to propose "options for a more rational framework of responsibilities for service delivery
and cost sharing". The Ministry published the Committee's report in February 1990. The
report dealt extensively with the allocation of responsibility for policy development, service
management, service delivery, and funding of social services in the province. Although its
main preoccupation was the provision of social welfare assistance in Ontario by governments,
it did make reference to and recommendations with respect to the "voluntary sector". In
particular, it recommended that "the role of the voluntary sector be preserved and
encouraged", that the responsibility for the delivery for social welfare assistance continue to
be shared between "municipal and non-government service providers", and that the develop-
ment of social service plans at the community level include participation from the voluntary
sector. Overall, the Committee conceived of the role of the voluntary sector as
complementary to that of the government in the provision of social welfare assistance and as
adding a necessary dimension of diversity in the face of "constantly changing" public needs.

Ontario, Ministry of Community and Social Services, Report of the Provincial-Municipal Social Services Review
(Toronto: Queen's Printer, 1990).

^ /Z)/J.,at43.

Ibid., at 20.

^ Ibid., ai 25.

(iii) Ontario Ministry of Community and Social Services, Social
Assistance Review Committee

In April 1988, the Ministry of Community and Social Services published Transitions,
the report of its Social Assistance Review Committee.'^ The Social Assistance Review
Committee was established in July 1986, as an "independent committee charged with
undertaking a public review of the province's social assistance system"." The Committee
was comprised of twelve members, all of whom had extensive experience in the field of
social assistance provision. It was assisted in its deliberations by seven advisory groups. The
mandate of the Committee was to answer the following four questions:'^

What should be the guiding principles and objectives of social assistance and related programs?

To what extent is the present system meeting those objectives?

What overall strategies or change should the province adopt?

What parameters should the province accept as it moves to change its legislation?

Although the bulk of the Committee's report dealt with the overall design of provincial
social assistance programs, and although the report focused almost exclusively on
government administration and government funding of social assistance programs, it did
make a number of observations and recommendations on the role of the voluntary sector in
social assistance delivery. In a revealing statement of its conception of the role of the
voluntary sector in the provision of social assistance, the Committee made the following

observation in its summary of the report:

The emergence of a secondary welfare system, represented by food banks and emergency
food and shelter programs, highlights the need for a clarification of the relationship between
government and the voluntary sector. We strongly recommend that the government reaffirm the
importance of the ongoing and supportive role of the voluntary sector, while also asserting its
own responsibility to meet basic human needs for food, shelter, and clothing by providing
adequate benefits. Adequate social assistance is the primary method of ensuring the natural
demise of the secondary welfare system, thereby freeing the voluntary sector to perform its vitally
important role of personal care and support. The answer is not to provide formalized funding for
food banks.

12
13

Ontario, Ministry of Community and Social Services, Report of the Social Assistance Review Committee-
Transitions: Summary (Toronto: Queen's Printer, 1988).

Ibid., at 1 .

Ibid., at \.

Ibid., at 96.

The Committee concluded with the following four recommendations concerning the

voluntary sector

265. The government should reaffirm the traditional and ongoing role of the voluntary sector,
while also asserting its own responsibility to provide adequate social assistance to those in
need.

266. Measures should be taken to promote greater collaboration between government and the
voluntary sector in the planning and coordination of services.

267. The voluntary sector should be looked upon as a possible provider of opportunity
planning within the new social assistance system, with full government funding.

268. The Ontario government should not provide formalized funding to food banks.

(iv) Submissions to Federal/Provincial/Territorial Working Group

The Ontario Ministry of Consumer and Commercial Relations, in early 1988, produced
two short working papers dealing with issues relating to fundraising. These papers were
presented to a February 1988 meeting of ministers responsible for consumer affairs in
Canada.

The first paper. Charitable Solicitations, dealt with issues relating to third-party
fundraisers, with fraudulent fundraising scheme, and with fundraising schemes of
questionable integrity. The paper canvassed the issues and surveyed the existing legislative
schemes in Canada, but recommended only that a process of ongoing exchange of
information among the various levels of government in Canada be continued.

The second paper, Computerized Gaming Technology, dealt with the more peripheral
issue of the problems for regulation presented by gaming machines. The paper examined the
existing regulatory and administrative practice affecting computerized gaming events in all
Canadian jurisdictions, and looked at proposals for the reform of the Criminal Code
provisions that authorize provincial governments to issue licences for gaming events.

14
15

/6/fi?., at 100-01.

Ontario, Minister of Consumer and Commercial Relations, Charitable Solicitations (Federal/Provincial/Territorial
Working Group Submission, February 1988) [unpublished].

Ontario, Ministry of Consumer and Commercial Relations, Computerized Gaming Technology
(Federal/ProvincialATerritorial Working Group Submission, February 1988) [unpublished].

R.S.C. 1985, c. C-46, s. 207.

(v) Ontario Law Reform Commission: Report on the Law of Trusts

The Ontario Law Reform Commission's Report on the Law of Trusts^^ contained one
chapter on the law of charitable trusts and non-charitable purpose trusts.'^ The Commission
concluded that the major reform of the law of trusts recommended by the report as a whole
should not affect the law of charitable trusts until the law of charitable trusts has been

"examined in totd\ The Commission expressed the view at the time that the law of
charitable trusts and non-charitable purpose trusts was governed by "a unique body of case
law and diverse statutory provisions""^' such that it required separate detailed consideration.

However, the Commission did make three sets of interim recommendations, the first
relating to imperfect trust provisions (that is, provisions containing mixed charitable and non-
charitable purposes), the second relating to the variation and reorganization of charitable
trusts, and the third relating to the disposition of the unexpended funds of a public appeal.

a. Recommendations Relating to Imperfect Trust Provisions

The first set of recommendations in the report dealt with the common law rule that, to
be valid, a charitable purpose trust must be for exclusively charitable purposes. This rule has
resulted in the invalidity of many trusts provisions, and the thwarting of many charitable
intentions. For example, a gift to "such charitable or benevolent purposes that my trustees
shall selecf runs afoul of this rule because benevolent purposes are not charitable purposes.
In its report, the Commission reviewed the case law and the various legislative ameliorations
of this harsh doctrine then existing in other jurisdictions, and concluded by recommending

the abolition of the doctrine, using the following statutory language:

81. — (1) In this section, 'imperfect trust provision' means a trust under which a non-charitable
as well as a charitable purpose or purposes is or are included or could be construed as being
included in the object or objects of the trust to or for which an application of the trust property or
any part thereof is by the trust directed or allowed.

(2) A trust for both non-charitable and charitable purposes shall not be held to be invalid for the
reason only that it is an imperfect trust provision.

18
19

20
21

Ontario Law Reform Commission, Report on the Law of Trusts (Toronto: Ministry of Attomey General, 1984).

Ibid., Vol. II, ch. 8.

Ibid., at 429.

Ibid, (footnotes omitted).

Ibid., at 520.

(3) Every imperfect trust provision shall be construed and given effect to as if no application of
the trust property or any part thereof to or for any non-charitable purpose had been or could be
construed to have been authorized.

In the formulation of its recommendation, the Commission took account of the

provisions of section 16 of the Perpetuities Act. Section 16 (1) of the Perpetuities Act
validates all specific non-charitable purpose trusts as powers to appoint, exercisable by the
trustees for a period of twenty-one years. Under section 16 (2), any property remaining after
the expiry of the twenty-one year period reverts to the settlor or testator. In its report on the
law of trusts, the Commission recommended that where such specific non-charitable purposes
are combined with charitable purposes, the remainder revert to the charitable purposes, not to
the settlor or to testator. The Commission recommended the adoption of the following
statutory language:

81. — (4) Where under an imperfect trust provision property is held on trust which is valid by
virtue of subsection 16 (1) of the Perpetuities Act, subsection (2) of that section does not apply to
the trust, and subsection (3) of this section applies but in those circumstances and to that property
only in or to which that subsection 16 (2) would otherwise have applied.

The Commission also recommended that the relieving provisions of section 81 not
apply to trust property which the trustees are expressly or impliedly directed to apply to a
non-charitable purpose. This proposal is formulated in section 81(5) of the Commission's
draft statute:

^^ R.S.O. 1990, c. P.9. Section 16 provides as follows:

16. — (1) A trust for a specific non-charitable purpose that creates no enforceable equitable interest in a
specific person shall be construed as a power to appoint the income or the capital, as the case may be,
and, unless the trust is created for an illegal purpose or a purpose contrary to public policy, the trust is
valid so long as and to the extent that it is exercised either by the original trustee or the trustee's
successor, within a period of twenty-one years, despite the fact that the limitation creating the trust
manifested an intention, either expressly or by implication, that the trust should or might continue for a
period in excess of that period, but, in the case of such a trust that is expressed to be of perpetual duration,
the court may declare the limitation to be void if the court is of opinion that by so doing the result would
more closely approximate the intention of the creator of the trust than the period of validity provided by
this section.

(2) To the extent that the income or capital of a trust for a specific non-charitable purpose is not fully
expended within a period of twenty-one years, or within any annual or other recurring period within
which the limitation creating the trust provided for the expenditure of all or a specified portion of the
income or the capital, the person or persons, or the person or person's successors, who would have been
entitled to the property comprised in the trust if the trust had been invalid from the time of its creation, are
entitled to such unexpended income or capital.

24 V

Report on the Law of Trusts, supra, note 18, at 521.

Ibid.

81. — (5) Where under the terms of an imperfect trust provision the trustees are expressly or
impliedly directed to apply a part of the trust property to or for any non-charitable purpose,
subsections (2), (3) and (4) do not apply to the trust property which is to be so applied.

b. Recommendations Relating to the Variation and Reorganization of
Charitable Trusts

The Commission also took up the problem of the reorganization and variation of
charitable trusts. The Commission observed that changes in the manner of administration of
charitable trusts are often necessary or desirable and that the purposes of such trusts often
become outdated. The common-law cy-pres doctrine is designed to deal with these
problems, but in its report the Commission argued that the common-law cy-pres doctrine is
inadequate to current needs. The Commission argued that the situation in Ontario was
considerably different from the situation in the United Kingdom where the "hand of histor>'
lies heavy, stretching back over four centuries to the Tudor period, and beyond that in the
case of many trusts, including those associated with colleges, cathedrals and churches, to
origins in the twelfth century". Ontario's "smaller population", "more recent origin", and
different social structure had produced "a smaller and less varied scene of charitable

activity". This circumstance had resulted in a less technical and less finely developed
doctrine oi cy-pres. The Commission recommended, nevertheless, the adoption of a provision
to give courts a good deal more freedom to vary the terms of charitable trusts by, first,
broadening the grounds for the variation of the terms of charitable trusts to include not only
"impossibility" and "mipracticability", but also any "other difficulty" hindering or preventing
the carrying out of the intention of the terms of the trust, or in circumstances where the
variation of the terms of the trust "would facilitate the carrying out" of the intention of "the
terms of the trust". Second, the Commission recommended that variations effected by courts
not be constrained by the two requirements of the cy-pres doctrine, the first to the effect that
the donor should have a "general charitable intent", and the second to the effect that, in
selecting new objects, the court should select objects that are as "close as possible" to the
objects of the original gift. The Commission was of the view that these common-law
constraints on the freedom of courts to vary had resulted in lengthy, expensive, and
unnecessary litigation to discover the intention of the donor. The Commission recommended
that the first requirement be abolished outright,^^ except in the circumstance where there is a
gift over or a reversion to the donor, and that the second be modified "by permitting the court
to approve or select substituted objects that are as close as is practicable or reasonable to the

^^ /Z)/^., at 453.

^^ 76/^., at 468.

Ibid., 3X469.

^^ Ibid., 31411.

objects being varied". The Commission recommended the adoption of the following
statutory language to implement these recommendations:

76. — (1) If the Court upon application by the trustees of a charitable trust, or, in the absence
of such trustees, by the personal representatives of a testamentary donor, finds,

(a) that an impracticability, impossibility or other difficulty has arisen, whenever it
arose, that hinders or prevents the carrying out of the intention of the terms of the
trust; or

(b) that a variation of the terms of the trust or an enlargement of the powers of the
trustees would facilitate the carrying out of that intent,

the Court may amend, replace, delete or otherwise vary any term of the trust or may enlarge the
powers of the trustees to administer the trust.

(2) For the purposes of variation under subsection (1),

(a) it is irrelevant whether the donor had a particular or a general charitable intent,
except that where an instrument of gift expressly provides for a gift over or a
reversion in the event of a lapse or other failure of a charitable object, the gift over
or reversion, if otherwise valid, may take effect despite this clause; and

(b) the Court shall approve or select one or more purposes as close as is practicable or
reasonable to the original or previously varied purpose or purposes.

c. Disposition of the Unexpended Funds of Public Appeals

Finally, the Commission's report dealt with the problem of the disposition of the
unexpended funds of public appeals. This problem has always created difficulty for the
common law since it is often the case that donors to a public appeal do not have a general
charitable intention, and therefore that the cy-pres doctrine could not be deployed to dispose
of the unexpended portion of the funds raised on a public appeal. The Commission
recommended that this problem be solved by the application of its new cy-pres doctrine,
except in the circumstance where the donor had specified in writing, at the time of his or her
donation, that the ftinds were to revert to him or her if they were not required for the purposes
of a public appeal.

'' Ibid.

" /fcW., at 519-20.

No legislation implementing any of these recommendations has been proposed or
enacted in Ontario to date.

(vi) Ontario Law Reform Commission, Report on Mortmain, Charitable Uses
and Religious Institutions

The Ontario Law Reform Commission conducted a study^^ on the utility and
effectiveness of two statutes affecting charitable organizations, The Mortmain and Charitable
Uses Act and The Religious Institutions Act, ^ and presented its Report on Mortmain,
Charitable Uses and Religious Institutions to the Attorney General, the Hon. R. Roy
McMurtry, Q.C., in 1976. The Commission recommended the repeal of The Mortmain and
Charitable Uses Act on the basis that the policy of this statute was anachronistic. The
Commission argued that, to the extent that there may have been valid policy reasons for
restricting the power of charitable organizations to invest in land (such as, the fear that "great
concentrations of economic wealth consisting of land, a scarce resource, will be controlled in
perpetuity by a few wealthy individuals through 'private' charitable trusts or foundations"^^
or the need to monitor the activities of charitable organizations), these could be implemented
more effectively and coherently in other statutes. The recommendation was expressed as
follows:

3. If as a matter of government policy it is thought desirable to continue to restrict direct
investment in land by charities, the charitable uses provisions of the Act should be repealed and
replaced with new and simpler legislation to achieve that purpose.

The Commission's report went on to recommend detailed changes to The Mortmain and
Charitable Uses Act, in order to make the expression of its policy more coherent, in the event
that the Legislature did not choose to follow its first recommendation.

The Commission also looked at The Religious Institutions Act and concluded that its
policy — which was to facilitate the holding of lands in perpetuity by unincorporated religious
societies — was sound and that the Act should, as a consequence, be continued. The

33
34
35
36

Ontario Law Reform Commission, Report on Mortmain, Charitable Uses and Religious Institutions (Toronto:
Ministry of the Attorney General, 1976).

R.S.O. 1970, c. 280.

R.S.O. 1970, c. 411.

Report on Mortmain, Charitable Uses and Religious Institutions, supra, note 32, at 20.

Ibid., at 24.

Commission made detailed recommendations for its improvement and in an annex to its

report provided a draft replacement Act

In 1982, the Legislature responded by repealing The Mortmain and Charitable Uses
Act and enacting an amendment to the Charities Accounting Act, which incorporated most
of the Commission's recommendations for improvements to the charitable uses provisions of
the Mortmain and Charitable Uses Act. A few years earlier, The Religious Institutions Act
had been repealed and the Religious Organizations' Lands Act enacted, the latter
incorporating most of the Commission's recommendations with respect to the improvement
of the former.

(i) Alberta, Institute of Law Research and Reform

There has been some effort in recent years to reform non-profit corporations law in
several Canadian jurisdictions. Success has been achieved m Saskatchewan. Alberta has
recently studied the question and reviewed the issues with a view to enacting new legislation
to replace its Societies Act and Companies Act. As one of the first steps in this effort, the
Institute of Law Research and Reform published a report, in March 1987. That report
contained a proposed statute and a discussion of the issues affecting its design. The statute
proposed in the report constituted a major renovation of the province's nonprofit corporation
law, equal in scope to that which occurred in the domain of business corporations law across
Canada in the early 1980s.

37
38
39
40
41
42

43
44
45

Ibid., at 60. The draft Act is contained in Appendix A of the report at 63.

R.S.O. 1980, c. 297, as repealed by S.O. 1982, c. 12, s. 1.

R.S.O. 1980, c. 65, ss. 6a-6d, as en. by S.O. 1982, c. 1 1, s. 1.

Supra, note 34, as repealed by S.O. 1979, c. 45, s. 28.

S.O. 1979, c. 45, now R.S.O. 1990, c. R.23.

See The Non-profit Corporations Act, 1995, S.S. 1995, c. N-4.2, en. as The Non-Profit Corporations Act by
S.S.1979, c.N-4.1.

R.S.A. 1980,c. S-18.

R.S.A. 1980, c. C-20.

Alberta, Institute of Law Research and Reform, Proposals for a New Alberta Incorporated Associations Act,
Report No. 39 (Edmonton: March 1987).

The Institute's report was followed up by the introduction in the Legislature of Bill 54,
Volunteer Incorporations Act,^^ in 1987, by the Minister of Consumer and Corporate Affairs.
In July 1988, the then Minister of Consumer and Corporate Affairs, the Honourable Elaine
McCoy, appointed a task force (the Volunteer Incorporations Act Task Force) to review
Bill 54. That task force presented its report"*^ in January 1990. The task force consulted
widely over a period of eighteen months in the nonprofit sector. Its report recommended the
adoption of Bill 54, with minor changes.

Bill 54 is principally an enabling statute, but it does contain provisions that regulate
those nonprofit corporations which use "public money", that is, money solicited from the
public and money obtained through grants from the government. The principal regulatory
devices are the requirement that annual financial statements be audited and the requirement
that annual financial statements be filed with the registrar under the Act. The Bill makes
provision for regulations prescribing the form of the financial statements.

Bill 54 has not been enacted to date.

(ii) Law Reform Commission of British Columbia

The Law Reform Commission of British Columbia reviewed in a series of reports'*^
several of the most difficult legal issues confronting the non profit sector. In its report on
informal public appeals, the Commission examined the legal status of public appeals and the
question of the disposition of the unexpended ftinds of public appeals. The Commission
recommended a legislative solution to the various problems. In its report and working paper
on conflicts of interest, the Commission examined issues relating to self-dealing transactions
between non profits and their fiduciaries. It recommended the enactment of a new statute, the
"Standards of Conduct Act", to prohibit such transactions, subject to a number of restrictive
exceptions. Finally, in its report on non-charitable purpose trusts, the Commission
recommended the adopt of legislation that would validate and facilitate the creation of non-

Bill 54, Volunteer Incorporations Act, Alta. 1987 (21st Leg., 2d Sess.).

Alta., Volunteer Incorporations Act Task Force, Toward New Non-Profit Legislation: Report of the Task Force on
the Volunteer Incorporations Act (Edmonton: Minister of Consumer and Corporate Affairs, January 1990). See,
also, D.G. Roberts, "Charitable and Non-profit Corporations in Alberta — ^An Update on Legal and Tax Issues"
(1989), 27 Alta. L. Rev. 476.

See Law Reform Commission of British Columbia, Report on Informal Public Appeals (Vancouver: Minister of
Attorney General, 1993); Law Reform Commission of British Columbia, Consultation Paper on Conflicts of
Interest: Directors and Societies (Vancouver: Minister of Attorney General, 1993); Law Refomi Commission of
British Columbia, Report on Conflicts of Interest: Directors and Societies (Vancouver: Minister of Altomey
General, 1995); Law Reform Commission of British Columbia, Working Paper on Non-charitable Purpose Trusts
(Vancouver: Minister of Attorney General, 1991); and Law Reform Commission of British Columbia, Report on
Non-charitable Purpose Trusts (Vancouver: Minister of Attorney General, 1992).

charitable purpose trusts. We examine the proposals made by the Commission in these reports
in appropriate chapters below. To date, none of the recommended statutes has been enacted.

(iii) Manitoba Law Reform Commission

In its 1992 report, the Manitoba Law Reform Commission recommended the adoption
of legislation to validate and facilitate non-charitable purpose trusts. The proposals of the
Manitoba Law Reform Commission are discussed in more detail below in chapter 14. The
recommended legislation has not been enacted.

(iv) Canada, Department of Consumer and Corporate Affairs

The federal government published a study of nonprofit corporations law in 1974. The
study was written by Professor Peter A. Cumming of Osgoode Hall Law School. It contains a
lengthy discussion of the issues and the provisions of a proposed not-for-profit corporations
statute. There was some effort to enact legislation federally in 1980 which ultimately failed. It
died on the order paper in November 1983 when the 31st Parliament was prorogued. The
proposed statute was, however, enacted in Saskatchewan in 1979.

(v) Federal Tax Reforms: 1975, 1983, and 1990

There has been federal legislation governing charitable organizations since the first

Income Tax Act in 1917. The federal scheme of regulation developed considerable
sophistication in 1967 when a centralized registration and reporting system was put into
place. Since 1967, there have been three major reforms of the federal tax regime. We review
these reforms briefly here and in greater detail in chapters 10 and 1 1 of this report.

In 1975, the Department of Finance published a green paper which proposed a major
reconsideration of the federal tax regime applicable to charities. The green paper itself was
eight to ten pages long, did not contain much in the way of empirical analysis, and was not
accompanied by specific legislative provisions. Its principal recommendation was to suggest

49
50

52
53

Manitoba Law Reform Commission, Non-charitable Purpose Trusts, Report No. 77 (Winnipeg: Queen's Printer,
1992).

Canada, Department of Consumer and Corporate Affairs, Proposals for a New Not-for-profit Corporations Law
for Canada (Ottawa: Information Canada, 1974).

The Non-Profit Corporations Act, supra, note 42.

Income War Tax Act, 1917, 7-8 Geo. 5, c. 28 (Can.).

Canada, Department of Finance, The Tax Treatment of Charities (discussion paper) (Ottawa: June 1975).

that there was a need for greater public accountabiHty of charitable organizations and that the
best way to meet this need was to implement a public system of information disclosure.
Legislation implementing this recommendation was enacted in \911.^'^

In 1983, the Department of Finance published a discussion paper, Charities and the
Canadian Tax System. This was a twenty-page document, accompanied by detailed
legislative provisions. It recommended the adoption of several complex rules designed to
tighten up the disbursement regime applicable to charities. There was a very substantial
background paper written prior to this report. That background paper dealt with issues
relating to the definition of charity, the political activities of charities, the possibility of
extending tax exempt status to "citizen interest groups", and the federal registration
procedures applicable to charitable organizations. Legislation dealing with these and other
matters was enacted in 1984.

Finally, the federal government in the late 1980s conducted a major review of the
charities tax regime. On this occasion it was the Charities Division of Revenue Canada, not
the Department of Finance, which investigated ways of improving the federal tax administra-
tion and procedures, and increasing the public accountability of charitable organizations. This
process of review resulted in the publication in 1990 of a discussion paper, A Better Tax

Administration in Support of Charities. This discussion paper formed the basis of a public
consultation which was completed in March 1991. The discussion paper deals with the
following issues: the definition of "related business"; disclosure concerning fundraising costs;
the foreign activities of charitable organizations; the political activities of charitable
organizations; public disclosure of information relating to the operations required of
charitable organizations; and the administration of the annual filing requirement. Unlike the
previous two studies, one of the main concerns of this study is to find ways to enhance the
credibility and reputation of the sector in Canada. Many of the issues addressed in the
discussion paper are still under review. The Charities Division is now in the final stages of
revising the annual information return and public information return (Form T3010), and we
understand that the revised form will be implemented in 1997.

56
57
58

An Act to amend the statute law relating to income tax, S.C. 1976-77, c. 4, amending the Income Tax Act. R.S.C.
1952, c. 148, as am. by 1970-71-72, c. 63.

Canada, Department of Finance, Charities and the Canadian Tax System— A Discussion Paper (Ottawa: May
1983).

See N. Brooks, Charities: The Legal Framework (OtidMa: Secretary of State, 1983) [unpublished].

An Act to amend the Income Tax Act and related statutes, S.C. 1984, c. 45.

Revenue Canada Taxation, A Better Tax Administration in Support of Charities, discussion paper (Ottawa:
November 1990).

(d) Concluding Observations

Two concluding observations are in order. First, it is noteworthy that although there
have been a number of recent studies touching on issues of concern to the charity sector in
Ontario, the government of Ontario has introduced legislation in only two cases, the first in
response to the recommendations of the Commission in 1976 on the law of mortmain,
charitable uses and religious institutions, and the second in respect of the regulation of
gaming services. Second, none of the Ontario government studies summarized above dealt
with the sector or any of the major problems of the sector directly. Rather, issues affecting
the sector have arisen incidentally in the investigation of other more preoccupying matters,
such as charitable gambling, the efficient delivery and just distribution of social welfare
services, or the law of trusts. Thus none of the studies purported to treat charity or the charity
sector directly and in its own right.

These observations reiterate the points made at the beginning of this section that there
has been very little consideration and very little action at the provincial level for decades.

3. STUDIES IN OTHER JURISDICTIONS

(a) The United Kingdom

(i) Introduction

The law of the United Kingdom has for several centuries exhibited an abiding interest in
the supervision of charitable trusts. This interest exists against a background of a very long
and rich social tradition of charity in the United Kingdom that has had a profound impact on
the current law of charities there, and has contributed in a significant way to the very high
public profile that the law of charity has had and continues to have in the United Kingdom.

Indeed two of them suggested that a comprehensive study of the sector was needed. See Report on Mortmain,
Charitable Uses and Religious Institutions, supra, note 32, at 2 1 and 24, and Report on the Law of Trusts, supra,
note 18, at 429.

This social tradition is documented in several substantial works. Principal among these are D. Owen, English
Philanthropy 1660-1960 (Cambridge: Belknap Press, 1964); W.K. Jordan, Philanthropy in England, 1480 to 1660
(London: George Allen & Unwin Ltd., 1959); The Charities of London, 1480 to 1660 and The Charities of Rural
England, 1480 to 1660 (New York: Russell Sage Foundation, 1961); B. Kirkman Grey, A History of English
Philanthropy (London: P.S. King & Son, 1905); and G. Jones, A History of the Law of Charity, 1532 to 1827
(London: University Press, 1969).

This high public profile is reflected in the extent to which the law of charity is a subject of interest to textbook
writers. There are several major treatises on the law of charity in the United Kingdom, in addition to the always
lengthy chapter on the law of charities contained in the English textbooks on the law of trusts. See, for example,
H. Picarda, The Law and Practice Relating to Charities, 2d ed. (London: Butterworths, 1995); D.G. Cracknell,

It is important to keep these distinctive features in mind as we review the recent experience in
the United Kingdom. We look at the following studies: the Nathan Report;^^ the Goodman
Report f^ the Woodfield Report;^ and the 1989 White Paper. ^^

(ii) The Nathan Report

The modem law of the public regulation of charity in the United Kingdom begins in
1952 with the publication of the Report of the Committee on the Law and Practice Relating to
Charitable Trusts (the Nathan Report). That report was the result of the investigations of a
Committee whose mandate was:

to consider and report on changes in the law and practice (except as regards taxation) relating to
charitable trusts in England and Wales which would be necessary to enable the maximum benefit
to the community to be derived from them.

Since the Nathan Report forms the foundation of the current regulatory regime in
England and Wales, and since it dealt with many of the same issues and concerns with which

Law Relating to Charities, 2d ed. (London; Oyez Longman, 1982); J. Warburton and D. Morris, Tudor on
Charities, 8th ed. (London: Sweet & Maxwell, 1995); and G.W. Keeton and L.A. Sheridan, The Modern Law of
Charities, 2d ed. (Belfast: Northern Ireland Legal Quarterly, 1971). See, also, M.R. Chesterman, Charities, Trusts
and Social Welfare (London: Weidenfeld & Nicolson, 1979), ch. 7; J.B. Clark, Theobald on Wills, 14th ed.
(London: Stevens & Sons, 1982), ch. 35; H.G. Hanbury and R.H. Maudsley, Modern Equity (London: Stevens &
Sons, 1981), ch. 17; D.J. Hayton, Nathan and Marshall Cases and Commentary on the Law of Trusts, 6th ed.
(London: Stevens & Sons, 1975), ch. 6; G.W. Keeton and L.A. Sheridan, The Law of Trusts, 10th ed. (London:
Professional Books Ltd., 1974), ch. 12; R.H. Maudsley and E.H. Bum, Trusts and Trustees: Cases and Materials
(London: Butterworths, 1972), ch. 10; Lord Nathan, The Charities Act, /PdO (London: Butterworths, 1962); D.B.
Parker and A.R. Mellow, The Modern Law of Trusts, 3d ed. (London: Sweet & Maxwell, 1975) at 171 et seq.;
P.H. Pettit, Equity and the Law of Trusts, 3d ed. (London: Butterworths, 1974), ch. 6; and J.G. Riddall, The Law of
Trusts, 2d ed. (London: Butterworths, 1982), ch. 5.

62
63

66
67

U.K., Report of the Committee on the Law and Practice Relating to Charitable Trusts (Cmd. 8710, 1952)
(hereinafter referred to as the ""Nathan Report").

U.K., National Council of Social Service, Charity Law and Voluntary Organizations: Report of the Goodman
Committee (London: Bedford Square Press, 1976) (Chair: Lord Goodman) (hereinafter referred to as the
"Goodman Report").

U.K., Efficiency Scrutiny of the Supervision of Charities, Report to the Home Secretary and the Economic
Secretary to the Treasury, by P. Woodfield, G. Binns, R. Hirst, and D. Neal (London: HMSO, 1987) (hereinafter
referred to as the "Woodfield Report").

U.K., Charities: A Framework for the Future (Cmnd. 694, 1989) (hereinafter referred to as the "1989 White
Paper").

Appointed by Prime Minister Attley in January 1950.
Nathan Report, supra, note 62, at 1 .

we deal in this report, we examine it in some detail, under the following headings: genesis;
methodology; main recommendations; and reception.

a. Genesis

By most accounts three factors led to the need for a major study of the law of charity in
the United Kingdom in the early 1950s. The first was the development in the 1930s and
1940s, on a massive scale, of the welfare state. This development, it was thought, required a
complete rethinking of the role of the voluntary sector in the provision of social welfare
assistance in the United Kingdom. This point was expressed in the following way by Lord
Beverage in his influential book published in 1948:

It is needless to emphasize the importance of the subject whose study is attempted [in this
book]. In a totalitarian society, all action outside the citizen's home ... is directed and controlled
by the state. By contrast, vigour and abundance of voluntary action outside one's home
individually and in association with other citizens for bettering one's own life and that of one's
fellows are the distinguishing marks of a free society. They have been outstanding features of
British life ... . Room, opportunity and encouragement must be kept for voluntary action in
seeking new ways of social advance. There is need for political invention to find new ways of
fruitful cooperation between public authorities and voluntary agencies.

One aspect of the problem posed by the development of the welfare state in the United
Kingdom was the increasing redundancy of a vast number of the longstanding charitable
trusts. Another was the fear that voluntary action in general had been made superfluous.
Speaking to this second aspect, one commentator observed that there were many people who

69
70

Beverage, Voluntary Action: A Report on Methods of Social Advance (London: 1948). This study was financed by
grants from charitable societies. Lord Beverage published a second book (together with A.F. Wells), The Evidence
for Voluntary Action (1949).

Cited in the Nathan Report, supra, note 62, at 2 (emphasis added).

The contours of the post-war crisis are sketched in more detail in Owen, supra, note 60, ch. 19 entitled "Junior
Partner in the Welfare Firm". The classic example of agencies made redundant by the growth of the welfare state
were those charitable trusts established to provide for "surgical appliances" (crutches, braces, and trusses), all of
which were now to be provided for under the National Health Service Act, 1946, 9 & 10 Geo. 6, c. 81 (U.K.).
Other examples of redundancy were the various trusts established to provide scholarships and exhibitions for
university education. University exhibitions and scholarships became redundant with the Education Act, 1944, 7
& 8 Geo. 6, c. 31 (U.K.), and with the state's provision of universal access to university-level education.

Owen, supra, note 60, states at 573: "[T]he expansion of the public social services in the 1920s and 30s raised
questions about without dramatically altering the status of private philanthropy. But the impact of the legislation
of the 40s was of a different order of magnitude. Plainly, charitable enterprise would have to take stock of its
position and perhaps lay out a new course."

were "wondering whether voluntary action ... is really needed, and whether their own
sacrifices are really wanted in the Britain of the present day".^"

A second factor militating in favour of a major reconsideration of the role of the sector
in British society was the "gradual drying up of the sources from which financial support for
charities, including charitable trusts", was to come.^^ The origins of this problem lay in the
transformations of English society which had occurred since the end of the nineteenth
century, and in the consequent marked decline in both the social importance attached to
charitable giving and in the economic capacity of donors to give. David Owen attributed the
diminishing financial resources of charitable organizations to the "drain that the welfare state
had on the resources [of donors]". "Was it reasonable", he continued, "that donors already
harried by staggering taxes should continue to support voluntary effort?"^'*

The Nathan Report itself summed up these first two motive forces of the pressure for an
inquiry, and, at the same time, intimated the connection between them, as follows:^^

[FJirstly ... the importance, particularly in the circumstances of today, of putting to the best
possible use the country's voluntary agencies, including charitable trusts as a typical and
numerous example of them; and secondly ... the importance of providing for voluntar>' action ...
additional finance from private as opposed to public, funds, by the reallocation of the
endowments of charitable trusts which were thought to be 'moribund' or 'dormant'.

Thus, to simplify this matter for the purposes of comparison with the present situation in
Ontario, the first problem — the redundancy of the traditional charities — was to be remedied
by redirecting their endowments, if possible, to solve the second problem — the lack of
sources of funding for the more modem charities.

These peculiar circumstances of Lord Nathan's study contrast starkly with the current
situation in Ontario, as evidenced in part by the concerns expressed by the Attorney General
in his letter of reference to the Law Reform Commission: there is no statement in the
Attorney General's reference to the Commission concerning the redundancy of a significant
number of charitable trusts in Ontario. We have not discovered such redundances, nor have
such redundancies been reported by other studies. Nor does the Attorney General make any
reference to any significant social transformation that has caused a radical shift in the sources

Lord Pakenham, cited in the Nathan Report, supra, note 62, at 3.

Owen, supra, note 60, at 533.

'' Ibid.

Nathan Report, supra, note 62, at 3 (emphasis added).

of financing of the charity sector in Ontario. In short, as one might expect, the social,
historical, and legal context of our report is considerably different from that of the Nathan
Report.

A third impetus for Lord Nathan's study was the call by the legal profession in England
for a review of the law of charity which, in the view of many, had become too complex and

77 78

too overburdened with unnecessary technicality. In one notorious decision, a gift of over
£250,000 "for such charitable or benevolent object or objects" as the testator's trustees should
select, was held to be an invalid charitable trust, on the basis that "benevolent purposes" were
different from and wider than "charitable" purposes and only the latter could form the objects
of a valid charitable trust in equity. The end result of the decision was that the testator's
residual estate of over £250,000 went to the testator's next-of-kin, not to charity as he had
intended.

b. Methodology

Lord Nathan was appointed chair of the Committee. He was a lawyer and politician
who had been a member of Parliament, first as a Liberal in the 1930s, then as a member of
the Labour Party. The Committee membership was comprised of another eleven people, all of
whom had considerable knowledge of social welfare law and the law of charity.

The Committee worked from January 1950 to December 1952. They received written
evidence from over eighty-five individuals and organizations, met thirty-one times, and heard
oral evidence from over ninety witnesses. The Committee heard from all sectors of British
society with an interest in charity: religious groups, social service agencies, education trusts,
members from the legal and accounting professions, voluntary associations, and boards of
trade. The Committee did not undertake any empirical studies, such as comprehensive
surveys of existing charities, because of their desire to complete the work "in the shortest
time compatible with its scope and complexity". However, the Committee did produce a
sample of charitable trusts established in the United Kingdom between June and October
1951, to give what they considered to be a flavour of the level of activity in the United
Kingdom.

77
78

This is not to say, of course, that we will not be concerned with making recommendations for revision of the cy-
pres doctrine, or for the government role in the encouragement of charitable giving and volunteering.

See, for example, Owen, supra, note 60, ch. 21.

Re Diplock's Estate; Diplock v. Wintle, [1948] Ch. 465, [1948] 2 All E.R. 318; afTd sub nom. Ministry of Health
V. Simpson, [1951] A.C. 251, [1950] 2 All E.R. 1 137 (H.L.).

Nathan Report, supra, noit 61, 2X5.

c. Main Recommendations

After affirming the value of voluntary action and its complementary relationship with
government-provided social services, and after noting that the quality of the information on
the 110,000-odd charitable trusts in England and Wales was exceedingly poor, the Nathan
Committee went on to make numerous recommendations all of which, in essence, sought
merely to revamp the existing legislative apparatus, as embodied in the Charitable Trusts
Acts of 1853, 1855, and 1860^^ and the Endowed Schools Acts of 1869, 1873, and 1874.^^
This body of legislation had two primary objectives: to ensure the "due administration of
charitable funds"; and to permit changes in the purposes of obsolete charitable trusts.
Pursuant to these nineteenth century statutes, a public administration, the Charity
Commissioners, had already been established. The Charity Commissioners exercised
advisory, administrative, supervisory, and quasi-judicial authority over the charity sector. The
recommendations of the Nathan Committee were directed at merely enhancing the powers of
the Charity Commissioners and rationalizing the legislative framework under which the
Commissioners operated. They also recommended the establishment of a central registry for

1853, 16 & 17 Vict, c. 137 (U.K.); 1855, 18 & 19 Vict, c. 124 (U.K.); and 1860, 23 & 24 Vict, c. 136 (U.K.)
respectively.

1869, 32 & 33 Vict, c. 56 (U.K.); 1873, 36 & 37 Vict, c. 87 (U.K.); and 1874. 37 & 38 Vict, c. 87 (U.K.)
respectively.

The Nathan Report, supra, note 62, made the following specific recommendations:

(1) that provision be made for the establishment of a central registry of charitable trusts so that "would-
be beneficiaries and voluntary workers" and members of the general public would have access to
information on the existence, financing, and granting policies of all charitable trusts in England and

Wales;

(2) that a re-active, as opposed to pro-active public administration be supported. Thus, the Charity
Commissioners were to continue to have wide powers to inquire into breaches of trust and
fraudulent administration, but they were only encouraged to facilitate the adoption by charitable
trustees of the "best administrative techniques";

(3) that more effective enforcement of the already existing obligation of charitable trustees to file
annual accounts. It recommended, as well, that there be an obligation to have those accounts audited
prior to filing;

(4) that all land owned by charitable trusts and all securities and other investments owned by charitable
trusts be vested in two corporations sole, namely, the Official Custodian of Charity Land and the
Official Custodian Charitable Funds, respectively. This recommendation was justified on the basis
that the assets of charitable trusts could more easily be transferred and new trustees could more
easily be appointed by avoiding the cumbersome formalities associated with the transfer of assets
from a trust. This was not a new idea, however. It was based on already existing institutions, the
Official Trustees of Charity Lands and the Official Trustees of Charitable Funds, both of which had
been exercising a similar but more restricted jurisdiction;

charities in England and Wales, and the adoption of a statutory basis for cooperation between
social welfare charities and state welfare agencies.

A notable feature of the recommendations contained in the Nathan Report for present
purposes is that they were all very context specific. One particularly important feature of the
context was the fact that the vast majority of charitable organizations in England and Wales at
the time of the Nathan Report were organized in the form of trusts, not corporations. This fact
had a marked effect on the preoccupations of the Nathan Committee and can be seen as an
important factor in many of its recommendations, such as those dealing with the renovation
of the Official Trustee of Charity Lands and the Official Trustees of Charitable Funds.

(5) that the powers granted in the several Charitable Trusts Acts to the Charity Commissioners to permit
transactions in land not otherwise permitted in the trust instrument and to restrict certain transactions
in land whether permitted or not in the trust instrument be continued and clarified;

(6) that the law of mortmain as it applied to charitable corporations be abolished;

(7) that the range of permissible investments for charitable trusts (whose trust instrument did not
explicitly mention a range of permissible investments) be extended to include, at 173-74: "with
certain safeguards... the stocks and shares, including equity (i.e. ordinary) stocks and shares of
financial, industrial and commercial companies";

(8) that the definition of charity be reworded in a way that would allow greater flexibility of interpreta-
tion and be more in accordance with Lord Macnaghten's rather general definition in Commissioners
for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28
(H.L.);

(9) that the cy-pres doctrine be "relaxed" so that trust instruments could be modified even though their
objects had not become, strictly speaking, impracticable or impossible. The report recommended
that the Commissioners' and the Court's power to make schemes be subject to several limiting
considerations such as, at 174, "the spirit of the intention of the founders", the "interest of the
locality", and "the possibility of effecting administrative economy by merging endowments". The
scheme-making authority would also be obliged to consult with the trustees of the trust, and
alterations to the trust within 35 years of its establishment would not be permitted except with the
consent of the trustees and the founder(s);

(10) that the Charity Commission be reconstituted so that

(i) there would be a Minister in Parliament responsible for its administration (under the previous
law, although one of the commissioners was also an M.P., lack of ministerial accountability
and ministerial representation in Parliament meant that charities issues were usually
unsuccessful in getting and keeping the attention of Parliament); and

(ii) their numbers would be increased; and,

(11) that the existing exemptions from the jurisdiction of the Charity Commissioners be continued with
minor modifications, for the most part aimed at redressing anomalies.

83 ^ .

In some instances, however, this basic feature of the context of the Nathan Report, supra, note 62, makes only the
verbal formulation of the recommendations inapplicable to the situation in Ontario. For example, the report's
focus on the cy-pres doctrine, although formulated almost entirely in the language of the law of trusts, applies with

A second important relevant feature of the Nathan Committee's recommendations
relates to the Committee's critical evaluation of the role of the Charity Commissioners, and to
its recommendations for the reform of that institution. A good deal of the Committee's public
hearing time was spent listening to the complaints made by charitable organizations and local
authorities about the practices of the Commissioners. According to David Owen, these
complaints were of two main types:^'*

In the first place, there was the complaint, by no means novel, of intolerable delay in the
office of the Commissioners. One agency stressed its reluctance to submit cases which required a
decision 'within a reasonable time' [memorandum from the Methodist Board of Trustees for
chapel affairs]. The Royal Maternity Charity, founded in the mid-eighteenth century to provide
mid-wives for poor, married women, submitted over 100 documents... bearing on its request to
tum over its work and assets to the Central Council of District Nursing. An examination of the
correspondence, which covered two years of negotiations, suggest that although some of the
epithets applied to the Commission may have been excessive — 'unimaginative departmentalism',
'coercion difficult to distinguish from tyranny' — they were not entirely unmerited. ...

A second criticism was perhaps more fundamental. This had to do with the Commissioners'
conception of their function. On the whole, they tended to exaggerate the quasi-judicial side of
the work at the expense of the administrative end... to be excessively legalistic and literal in their
decisions. ... [T]hey had long ceased to be actively concerned with the broader questions of
charitable endowments and how to improve their social utility. ... The inquisitorial function,
which originally formed an important part of the commissioner's mandate, was rarely exercised,
and then only for a suspected breach of trust or other serious legal offence. Their major
obligation, as they saw it, was to answer inquiries, decide questions referred to them, and frame
schemes in accordance with sound law. ... [T]o visit the Ryder Street office was to find oneself in
a sleepy bureaucratic backwater wholly cut off from the main currents. The isolation was not only
spiritual but constitutional, for the Commission was affiliated with no govemment department.
This was in sober fact an orphan agency. Its spokesmen in the House continued to be, as for
decades, an unpaid parliamentary commissioner, whose influence was necessarily limited as back
bench status.

The Nathan Committee sought to address these rather severe criticisms by proposing
that the Charity Commissioners be re-invigorated. To this end, the Committee recommended
that the body be enlarged (to between five and nine members), that it be represented by a
Minister in Parliament, and that it be less dominated by lawyers.

The interesting feature of these latter proposals, from the perspective of Ontario, is the
very limited extent to which they apply to the Charities Division of the Office of the Public
Trustee since that agency has always had a much more restricted role in the charity sector.

equal force to the law of non-profit corporations, where there is also a need for some vehicle for modifying
outmoded charitable objects.

Owen, supra, note 60, at 584-86.

The more interesting question for Ontario is whether quasi-judicial powers, such as those
exercised by the Charity Commissioners, should be granted to an administrative agency in
Ontario. The Nathan Report is quite unhelpful on this point, however, since it basically
assumes that the policy underlying the creation of the Charity Commissioners in the mid-
nineteenth century was, in all essential respects, correct.

d. Reception

The public reaction to the Nathan Report is also of some interest. We rely on David
Owen's characteristically vivid appraisal:

Broadly speaking, the cleavage [in the public's reaction] was between those who conceived of
charity as a personal and voluntary act and those who were more concerned with maximizing the
utility (to recall the Benthamite formula) of the nation's charity resources. These positions, both
of which stopped short of rigid dogmatism, were ably enunciated [in The Lord's in July of 1953]
by the Archbishop of Canterbury (Jeffrey Fisher) and Lord Samuel. The former, while joining in
the praise of the Report, was doubtful about too much tidying up of the charity household.
Husband and wife, he reflected, sometimes have different ideas, and 'when, as here, the relation
is between the robust forceful partner of statutory action and the frail and delicate but gracious
partner of voluntary charity, one must be more than ever careful'. It was the old fear echoed by
several noble lords, of rigidity over centralization, indifference to local interests and the wishes of
benefactors and thus, in the words of The Times, 'loss of the grace and spontaneity without which
charity, in the Christian sense, is no longer itself.

Owen cites Lord Nathan's "incisive" reply in the House of Lords to the two criticisms:

On the one hand, the myriad of trusts could be thought of as assets with some £200 billion,
together with vast amounts of land, 'to be disposed of, reformed and diverted like so many
military formations in the battle against want and wretchedness. Alternatively, they can be
considered, as they have for centuries past been considered, as so many benefactions, each whose
peculiar characteristics must as far as possible be reverently protected against the ravages of time
and the buffetings of economic change. The first is an argument for efficiency — efficiency for the
sake of the beneficiaries. The second is an argument for piety, for respect for the wishes of the
founders.'

86
87

For a review of the Nathan Report, see D.W. Logan, "Report of the [Nathan] Committee" (1953), 16 Mod. L.
Rev. 348.

Owen, supra, note 60, at 589-90 (footnotes omitted).

Ibid., at 590 (footnotes omitted).

He concludes with a statement summarizing the overall feel of the Nathan Report:

What had been attempted and what in the opinion of most competent critics had been
accomplished with tolerable success was to strike a balance between the demands of efficiency
and piety.

The official response of the government to the Nathan Report came several years later
in a white paper, Government Policy on Charitable Trusts in England and Wales. ^^ The 1956
White Paper's response to the recommendations of the Nathan Committee could be
characterized as lukewarm.^^ According to Owen, this unsympathetic response was due to the

Ibid.

The government responded almost immediately to one of the proposals contained in the Nathan Report
(hereinafter referred to as the "1956 White Paper"). That proposal dealt with the problem posed by bequests to
mixed charitable and non-charitable purpose trusts. The statute is the Charitable Trusts (Validation) Act, 1954, 2
& 3 Eliz. 2, c. 58 (U.K.).

In particular, the 1956 White Paper, supra, note 89, made the following recommendations:

(1) that the actual content of the definition of "charity" should not change in substance, and
consequently that the definition should not change in form either since any change in form might be
interpreted by a court as a change in substance;

(2) that a central registration system should be established, but that the penalty for failure to comply
with the requirements of the central registration system be committal for contempt of court and not a
penalty on each of the responsible trustees, as had been recommended by the Nathan Report;

(3) that consistent with the Nathan Report's recommendation, the existing powers of inquiry of the
Charity Commissioners not be expanded and that the Charity Commissioners be given no more
responsibility than simply to stimulate and encourage the efficient administration of charitable
trusts;

(4) that contrary to the Nathan Report's recommendation, all annual accounts of all charities subject to
the Charity Commissioners' jurisdiction need not be audited since this would impose too large a
burden on smaller charities. In addition, the 1956 White Paper recommended thai the
Commissioners be given the power to permit some charities to submit accounts less frequently than
on an annual basis;

(5) that the recommendation of the Nathan Report, that all land and all investments of charitable trusts
be vested by statute in an official custodian, not be adopted. Instead it was recommended that the
institution of the Official Custodian of Charitable Property be maintained, but be made available to
all charitable trusts at their option;

(6) that consistent with the Nathan Report, certain restrictions on dealings in charity land be continued;

(7) that consistent with the Nathan Report, the law of mortmain, as it applied to charitable corporations,
be abolished;

fact that the government had changed from Labour to Conservative and the new Conservative
government "was reluctant to disturb the existing charity structure, even to the extent contem-

plated by the Nathan Reporf\

Legislation effecting a reform was not enacted until 1960. This legislation, studied in
more detail below in chapter 17, in essence reflects the more moderate views of the 1956
White Paper.

(iii) Subsequent Studies

There have been several reviews of the law and the public administration of charities in

the United Kingdom since the enactment of the Charities Act, 1960. We will look at each of
these briefly in turn.

a. The Goodman Report

In February 1974, the National Council of Social Service (NCSS) organized a national
conference of voluntary organizations in the United Kingdom in response to "repeated

calls" for a review of the law of charity and its effect on the voluntary sector. Following this

(8) that consistent with the Nathan Report, a power to increase the powers of investment of charitable
trustees be vested in the Charity Commissioners, but that this new power of the Charity
Commissioners be made subject to certain statutory safeguards and conditions;

(9) that consistent with the Nathan Report, the cy-pres doctrine should be relaxed although it should not
be relaxed to the extent recommended by the Nathan Committee. The J 956 White Paper agreed that
the antecedent conditions for the application of the doctrine and the criteria for the acceptability of
modifications needed to be refined. The 1956 White Paper however recommended that the power to
initiate modifications in the objects of charitable trusts should rest almost exclusively with the
trustees of the charitable trusts and only in "very exceptional cases" should the Charity Commis-
sioners have the power to initiate changes;

(10) that consistent with the recommendation of the Nathan Report, the Charity Commissioners be given
a Minister (the Home Secretary) and that the office of Parliamentary Commissioner be abolished;

(11) that contrary to the Nathan Report's suggestions on the recomposition of the Charity Commission,
the 1956 White Paper conceived of the role of the Commission as primarily a body whose task "was
to deal with proposals initiated by trustees". Thus the 1956 White Paper's recommendation on the
composition of the Commission was that the Parliamentary Commissioner be abolished and that
eligibility for the position of two legal commissioners be extended to solicitors.

Owen, supra, note 60, at 591.

^^ 8 & 9 Eliz. 2, c. 58 (U.K.).

Goodman Report, supra, note 63, at 1.

1974 national conference, the executive committee of the NCSS established in September
1974 a "committee of enquiry" with the following terms of reference:'^'*

In view of the present-day role of voluntary organisations within the field of social welfare,

(a) to examine the effects of the existing legislation regarding charitable organisations in
England and Wales; and

(b) to suggest improvements which will benefit the work and development of voluntary
organisations.

The Committee was chaired by Lord Goodman. There were fifteen Committee members who
were selected, for the most part, from the executives of national charitable organizations. The
Committee received written submissions from several hundred organizations and individuals,
and heard oral testimony from over twenty-five individuals and organizations. The
Committee conducted research into three areas: the definition of charity; the financial
privileges of charity; and the public administration of charity. Much of the investigative work
of the Committee was comparative. This fact is reflected in its report which contains
descriptions of the law relating to charity and charitable organizations from different
European and North American countries.

By far the main preoccupation of the Goodman Committee was the definition of
"charity". The Committee made recommendations supporting the distinction between
charitable purposes and nonprofit purposes generally. It also sought to define the words

"benefit" and "community" as used in the Pemsel test. The Committee supported the rule
prohibiting charitable organizations from carrying on political activities.

The Committee also investigated the justifiability of the existing tax privileges (rate
reliefs and favourable income tax treatment of donations) and the need for an exemption in
favour of charitable organizations from the new value-added tax. Finally, the Committee
made recommendations with respect to improvements to the registration system, the rational-
ization of local charities, the regulation of fund raising, and the public accountability of
charitable organizations.

b. The Woodfield Report

A review of the law of charity was taken up at the government level, in February 1987,
by a committee of four persons commissioned by the Home Secretary and the Economic

Ibid.

See Commissioners for Special Purposes of the Income Tax v. Pemsel, supra, note 82.

Secretary, under terms of reference which required it to assume that "no change in the law

relating to the definition of charitable status" was to occur, and with a mandate to make
recommendations which "could be introduced within the existing legislative framework, as
opposed to those which would have to await legislation to alter that framework". ^^ Within
these very limiting constraints, the Woodfield Committee was to provide a critique of the law
and practice relating to charitable organizations in the United Kingdom.

The Committee reported within a year, recommending substantial changes to the

Charities Act, 1960, the majority of which could be characterized as "deregulatory" in
orientation. In particular, the Committee recommended that the monitoring and investigatory
powers of the Charity Commissioners be enhanced, but that their supervisory jurisdiction
with respect to investments and land transactions be reduced. The Committee also made
recommendations in favour of a further relaxation of the cy-pres doctrine, and for
improvements to the central registration and annual reporting system. Lastly, the Woodfield
Committee made recommendations relating to malpractice in fundraising, in recognition of
the "growing importance of modem fundraising charities as compared with the older
traditional charity based on an endowment".

c. The 1989 White Paper

The renewed interest of government in the charity sector as evidenced in the Woodfield
Report and in two contemporaneous reports (one by the Public Accounts Committee and the
other by the National Audit Office was expressed more formally again by a government
white paper entitled Charities: A Framework for the Future (the 1989 White Paper ). The
object of the 1989 White Paper was to set out detailed proposals for legislation that would
implement the recommendations of the Woodfield Report. Besides the predictable
preoccupation with the functioning of the Charity Commissioners, the White Paper focused
on two new issues of concern. The first of these was the level of government funding of the
sector — in the order of £2 billion per year — and the need for ensuring that "[government]

96
97
98
99
100

101

Woodfield Report, supra, note 64, at 55.

Ibid., at 56.

Supra, note 92.

Woodfield Report, supra, note 64, at 1-2.

U.K. Report of the Public Accounts Committee, Monitoring and Control of Charities in England and Wales
(1988), and U.K., National Audit Office Report, Monitoring and Control of Charities in England and Wales
(1987). See, generally, H.W. Wilkinson, "Brother, Can You Spare? Monitoring and Control of Charities" (1988),
55Conv.N.S. 163.

Supra, note 65.

funds are being effectively and efficiently deployed in a way which is of practical help and
achieves the benefits intended". '^^ The 1989 White Paper expressed the view that an
appropriate balance between the public's need for accountability, on the one hand, and the
sector's need for freedom to allow "innovation and enterprise", on the other, was best
captured in the idea of "partnership". The second new preoccupation concerned the
"modernization" of the charity sector in the United Kingdom, especially in the area of
innovative financing techniques, such as running associated businesses, organizing as corpor-
ations as opposed to trusts, and using modem fundraising techniques, such as television
advertising.

The 1989 White Paper also expressed views on the definition of "charity", arguing in
favour of a categorical distinction between political activity and charitable activity, and in
favour of the maintenance of the advancement of religion as a charitable purpose. Although
the issue of the appropriateness of the statutory regime governing charity organized in the
form of a corporation was raised, the 1989 White Paper did not present any recommendations
on the reform of nonprofit corporations law in any detail.

The bulk of the 1989 White Paper's recommendations, however, dealt with improve-
ments to the organization and functioning of the Charity Commissioners and the problem of
altering outmoded trust objects. In particular, the 1989 White Paper agreed with the
Woodfield Committee that the investm.ent function of the Official Custodian for Charities
should be abolished, and that charities should no longer be required to obtain the consent of
the Commission for land transactions. Most of the recommendations of the 1989 White Paper
were implemented by legislation enacted in 1992 and 1993.'^^ The current regime in England
and Wales is discussed in more detail below in chapter 17.

(iv) Concluding Observations on the Relevance of the U.K. Studies

Several features of the more recent studies conducted in the United Kingdom are
noteworthy. The first is the new interest in these studies in issues of more direct relevance to
the situation in Ontario. Thus, the Goodman Report takes up directly the issue of what
privileges should be extended to charitable organizations, and the Woodfield Report and the
1989 White Paper place more emphasis on fundraising issues and, to a lesser extent, issues
relating to the inappropriateness of existing nonprofit corporations statutes. Nonetheless, and
secondly, it is still the case that the main preoccupation of all these studies is the functioning
of the Charity Commissioners. As suggested above, it may well be that an institution like the
Charity Commissioners is required in Ontario at the present time, but the fact is that its

Ibid., at 2.

103

See Charities Act, 1992, c. 41 (U.K.), and Charities Act. 1993,c. 10 (U.K.).

necessity in the United Kingdom remains more or less unquestioned in these three reports. On
that issue, it is also worth emphasizing that the position of the Thatcher government, as
expressed in the 1989 White Paper, was in favour of a Board of Charity Commissioners with
fewer powers of intervention into the affairs of charitable organizations. The third noteworthy
feature of the situation in the United Kingdom for present purposes is the level and quality of
the interest of government and other public organizations in the sector. Each of the studies
mentioned is detailed and extensive in its consideration of the issues. This level of
government and public interest contrasts starkly with the situation in Ontario, as described in
section 2(b) of this chapter.

(b) The United States

(i) Introduction

Our review of the public studies conducted in the United States in recent decades must
be, due to the complexity of the matter, quite superficial in scope. As will become evident as
we review each of the areas of policy concern in Part IV of this report, the level of legislative
and administrative activity in the United States has been enormous. This activity, as one
might expect, has been accompanied by a vast number of government and other public
studies of various areas, as well as academic interest by economists and academic lawyers.
We propose therefore to look briefly at two major public studies conducted in the early 1970s
in the United States that were very influential in encouraging debate on the appropriate role
of government in the charity sector. These two studies were prepared by the Commission on
Foundations and Private Philanthropy (the Peterson Commission) and the Commission on
Private Philanthropy and Public Needs (the Filer Commission). ^^^

(ii) The Peterson Commission

The Peterson Commission was founded in February 1969 when John D. Rockerfeller III
invited Peter G. Peterson, chairman of the Board of Bell & Howell Limited, to provide "an
independent appraisal of American philanthropy". The Commission was founded in
response to the very difficult situation that private philanthropy found itself in at that time in
America. There had been many severe criticisms of American foundations alleging, in

104

105

106

U.S., Commission on Foundations and Private Philanthropy, Foundations, Private Giving and Public Policy,
(Chicago: University of Chicago Press, 1970) (hereinafter referred to as the ""Peterson Commission Report).

U.S. Commission on Private Philanthropy and Public Needs, Giving in America: Toward a Stronger Voluntary
Sector (Washington, D.C.: 1975) (Chair: J.H. Filer) (hereinafter referred to as the 'Tiler Commission Report].

Peterson Commission Report, supra, note 104, at 3.

general terms, that they were simply tax dodges for the wealthy. The Peterson Commission,
in the first chapter of its report, summarized the climate aptly as follows: '^^

American philanthropy generally and the foundations specifically have come under heavy siege
in recent years. Their inner life, their external effects, have been investigated by four congres-
sional committees, analyzed and then studied by the Treasury Department and frontal ly attacked
by individual critics respected for their professional competence in law or finance. Able men have
also come to the defense of philanthropy. Yet even when the best of the defenders have directly
joined the issue with the best of the critics, the result has not always been a gain in public
understanding. More often than not, the self-centred advocacy of each side has served only to
cloud the public's view of the dynamics of American philanthropy.

At another point in the first chapter of its report, the Commission described the

predicament of private philanthropy as follows:

108

Among other things, it was charged 1) that many or most of the foundations were nothing but
tax dodges for millionaires; 2) that many foundations represented great concentrations of money
and power controlled by self-appointed, self-perpetuating "ivy league" establishment; 3) that
foundations were heavily involved in politics, not charity; 4) that foundations often used their
money to further extreme ideologies, whether of the right or of the left; 5) that the foundations
squandered on high salaries and lavished expense accounts the money that ought to go to charity;
6) that foundations hoarded money as though it were their own when in fact the money belongs
to the public and should be spent on charity.

One result of this negative sentiment was the enactment of the Tax Reform Act of
1969^^^ which established a stricter regulatory regime for charitable organizations, including
a strict regime of disbursement quotas for foundations.

The Commission set itself terms of reference comprising five basic questions. First, the
Commission wanted to investigate the role of philanthropy in American society. The
objective was to determine what "private" charity could do that would supplement the
educational, scientific, and social endeavours that had recently been taken up by government.
Was private philanthropy, in short, complementary or merely redundant? Second, the
Commission wanted to investigate how charitable organizations would be able to finance
their activities in the years to come. In particular, the Commission was concerned with the
role that private foundations would and should play in the financing of charitable activities.

107
108
109
110

Ibid., at 2.

Ibid., at 4.

Pub. L. No. 91-172, 83 Stat. 487.

See, further, infra, ch. 11.

Third, the Commission sought to investigate the appropriateness of tax incentives for private
philanthropy, and in particular, the fairness and efficiency of the then existing regime of tax
incentives. Fourth, the Commission sought to investigate the nature of the abuses committed
by private philanthropy and the appropriateness of the proposed government responses. Fifth
and finally, the Commission sought to determine whether or not foundations served a useful
social purpose.

The Commission had a very distinguished membership of over fifteen people chosen
from the private sector. Among them, in addition to Peter G. Peterson, the chairman, were the
chairman-president and chief executive officer of Coca-Cola, J. Paul Austin; the president of
the University of Chicago and former law professor and Dean of Law, Edward H. Levi; law
professor, Paul A. Freund; and Harvard sociology professor, Daniel Bell.

Overall, the Commission's report argued in favour of a very healthy and vigorous
charity sector, for the maintenance of a system of tax incentives in favour of charitable
donations, and a regime of regulation of foundations that would require increased public
accountability and disclosure, as well as significant annual disbursement requirements. The
significance of the Commission's report was that it marked the beginning of two decades of
sustained policy and academic interest in the sector in the United States and the creation of an
academic literature that is enormous.

(iii) The Filer Commission

The Filer Commission was established in November 1973. Like the Peterson Commis-
sion, it was privately initiated and privately funded. Its mandate was to investigate the role of
philanthropic giving and the role of the voluntary or "third" sector in American society, and
to make recommendations "concerning ways in which the sector and the practice of private
giving can be strengthened and made more effective". In part, like the Peterson
Commission, it was established in response to the very negative criticism of the sector
generated during the congressional hearings leading up to the enactment of the Tax Reform
Act of 1969. The membership of the Filer Commission came from a cross-section of
American life and included religious and labour leaders, foundation executives, corporate
executives, and former government officials.

The most remarkable thing about the work of the Commission was its sponsorship of
over eighty studies on all aspects of the charity and nonprofit sector. Those studies were
published separately from the Commission's report, in six lengthy volumes. The studies
included: (1) histories of the sector and its relationship with government; (2) studies of

111 „, ^

hiler Commission Report, supra, note 105, at 1. John D. Rockerfeller III was also instrumental in the

establishment of the Filer Commission.

matters of interest to the particular fields of philanthropy (education, science, health, welfare,
arts and culture, environment, voluntarism, social action, and public and international
affairs); (3) economic studies of philanthropic behaviour; (4) studies of government funding;
(5) smdies dealing with the tax treatment of charity; and (6) studies dealing with the public
regulation of the charity sector. Many of the studies were comparative in nature, dealing with
the laws and practice of other jurisdictions including Canada, the United Kingdom, and
France. This research effort of the Commission constitutes an outstanding legacy both for its
breadth and for the fact that it generated a very deep academic and policy interest in the
sector in the United States, which has been sustained to this day.

The Filer Commission made detailed recommendations on the law and policy affecting
philanthropy and the nonprofit sector in the United States."^ All of these recommendations, it

112

The most relevant and interesting recommendations for our purposes are as follows (Filer Commission Report,
supra, note 105):

Chapter VI: "Broadening the Base of Philanthropy":

2. That an additional inducement to charitable giving should be provided to low- and middle-income
taxpayers. Toward this end, the Commission proposes that a 'double deduction' be instituted for
families with incomes of less than $15,000 a year; they would be allowed to deduct twice what they
give in computing their income taxes. For those families with incomes between $15,000 and
$30,000, the Commission proposes a deduction of 1 50 per cent of their giving.

Chapter VII: "Improving the Philanthropic Process: Accessibility":

1. That the duplication of legal responsibility for proper expenditure of foundation grants, now
imposed on both foundations and recipients, be eliminated and that recipient organizations be made
primarily responsible for their expenditures.

2. That tax-exempt organizations, particularly funding organizations, recognize an obligation to be
responsive to changing viewpoints and emerging needs and that they take steps such as broadening
their boards and staffs to insure that they are responsive.

3. That a new category of 'independent' foundation be established by law. Such organizations would
enjoy the tax benefits of public charities in return for diminished influence on the foundation's
board by the foundation's benefactor or by his or her family or business associates.

Chapter VII: "Improving the Philanthropic Process: Minimizing Personal or Institutional Self-
Benefitting":

1. That all tax-exempt organizations be required by law to maintain 'arms-length' business
relationships with profit-making organizations or activities in which any member of the
organization's staff, any board member or any major contributor has a substantial fmancial interest,
either directly or through his or her family.

2. That to discourage unnecessary accumulation of income, a flat payout rate of 5 per cent of principal
be fixed by Congress for private foundations and a lower rate for other endowed tax-exempt
organizations.

3. That a system of federal regulation be established for interstate charitable solicitations and that
intrastate solicitations be more efTectively regulated by state governments.

is fair to say, sought to enhance the activity of the sector. In part, like the Peterson
Commission, the Filer Commission can be seen as an effort to rehabihtate the standing of the
sector in the face of the severe criticism it suffered at the end of the 1960s.

(iv) Concluding Observations on the Relevance of the U.S. Studies

To simplify matters for the purposes of comparison, the debate on the sector in the
United States has always been polarized between those suspicious of the philanthropic
motives of wealthy private benefactors and those who regard the sector as a vitally important
segment of democratic society. This polarization has surfaced frequently in the Canadian
debate on the sector to an extent, we would suggest, not justified by the facts nor grounded in
our indigenous political culture. This is because we have tended to accept, without sufficient
critical distance, many of the presuppositions of the vast American literature that has arisen
out of these two reports. Our suggestion here is that we remain cognizant of this danger when
it comes time to assess the policies and the administrative initiatives which have been adopted
as a consequence of this writing.

Finally, we note, as with the case of the United Kingdom, the level of public interest in
the sector in the United States, as evidenced by these two vast public studies, is nowhere near
equalled in Canada.

In December 1993, the Australian government referred to the Australian Industry
Commission a project to examine and report on (1) the size, scope, efficiency, and
effectiveness of the services provided by charitable organizations in Australia; (2) the size
and scope of and funding arrangements for the services provided by Australian charitable
organizations overseas; and (3) the administrative efficiency of charitable organizations. As
part of that study, the Industry Commission was to look at, in particular, the appropriateness
of the legislation governing charitable organizations and the appropriateness of the tax
incentives provided to charitable organizations. The study excluded from the scope of its
review organizations in the health and education sector, and religious organizations. Its
specific focus was on what the Industry Commission termed "community social welfare

4. That as a federal enforcement tool against abuses by tax-exempt organizations, and to protect these
organizations themselves, sanctions appropriate to the abuses should be enacted as well as forms of
administrative or judicial review of the principal existing sanction ~ revocation of an organization's
exempt status.

Chapter VII: "Improving the Philanthropic Process: Influencing Legislation":

That nonprofit organizations, other than foundations, be allowed the same freedoms to attempt to
influence legislation as are business corporations and trade associations, that toward this end Congress
remove the current limitation on such activity by charitable groups eligible to receive tax-deductible gifts.

organizations" (CSWOs) and non-government development organizations (NGDOs), the
latter referring to organizations involved in international development.

The final report presents a detailed statistical profile of the segment of the Australian
charity sector studied. One interesting finding was that over half, $2.7 billion out of $4.8
billion in 1993-94, of the sector's financing came from government and only $580 million of
the sector's financing came from individual donations. The final report found that the sector
employs over 100,000 people.

The report made recommendations with respect to the development and application of
standards governing the quality of the services provided by the sector; the standardization and
streamlining of government procedures for the selection of service providers and for the
valuation of their work; the standardization of funding procedures across all governments; the
removal of the distortions caused to the sector by the dividend imputation; the reform of
fundraising legislation so that it would be brought up to date and made uniform, and so that it
would pay special attention to issues such as the public disclosure of contract fundraisers,
public nuisance, and donor privacy; the provision of funding to the Australian Accounting
Standards Board and the Public Sector Accounting Standards Board to develop suitable
accounting standards for the sector; better auditing of organizations receiving preferential tax
treatment; and the development of a framework for the collection of statistics on the sector by
the Australian Bureau of Statistics.

There is some overlap between the scope of our study and the scope of the Australian
study. Of particular interest is the Australian study's preoccupation with the matter of
government involvement in the sector, a topic we examine in chapter 19. One very significant
different is the exclusion from the study of organizations in the education and health sector,
and in the religious sector — the former because they are in large measure already the public
sector institutions; the latter because, presumably, it is a case apart.

^'^ Australia, Industry Commission, Charitable Organizations in Australia (Melbourne: Australian Govcmmcnl
Publishing Service, 1995).

CHAPTER 3

SOURCES OF INSTITUTIONAL
SUPPORT AND PROSPECTS
FOR SELF-GOVERNANCE

1. INTRODUCTION

In section 2 of this chapter, the Commission reviews the objectives and describes the
activities of the private organizations, while in section 3 we review the public agencies that
provide support to the charity sector in Ontario, both through the provision of financial and
organizational resources, as well as through the collection and dissemination of information.
We conclude in section 4 with several general recommendations on how governments might
better support the efforts of these organizations and agencies.

2. PRIVATE ORGANIZATIONS

A number of private organizations have developed in Canada in recent years to promote
the cause of charity and to encourage charitable giving. Some of these organizations act as
advocates of the interests of charitable organizations as a whole, some are involved in the
promotion or coordination of charitable giving, and some are concerned with developing the
capacity of the sector to manage itself effectively. We describe the main organizations of this
kind in this section.

(a) Canadian Centre for Philanthropy
(i) Mission

The Canadian Centre for Philanthropy was founded in the early 1980s by a small group
of people' interested in promoting charity and charitable giving in Canada. Today, the

Among them, members of the Advisory Committee of the Ontario Law Refomi Commission— AlUui Arlctt. Ian
Morrison, and Arthur Bond.

In March 1980, a similar association, the Independent Sector, was established in the United .Slates. The Indepen-
dent Sector's current membership is composed of national voluntary organizations (52%) and grant-making
groups (48%) for a total membership of more than 700 nonprofit organizations. The Independent Sector has a
large board of directors of over fifty members, including twelve officers. It has a full-time stalfof more llian thirty
and an operating budget of over $4 million.

[57]

Centre carries out a range of activities in fulfilment of its formal objects, which are
"strengthening the relationship between the charitable sector and Canadian society. ..helping
charities adjust to the demands of a radically changing social and economic
environment... [and] promoting greater understanding and constructive support for the sector
among the Canadian public, opinion leaders and policy-makers". These objects are pursued
through the following four main program areas: public affairs; research; awareness; and
professional development and information.

a. Public Affairs

The Centre provides information and tools, in the form of "Issue Alerts" and discussion
papers, to help organizations understand the public policy issues that most affect them. The
public affairs program also holds round-table discussions and consultations with charitable
organizations, makes presentations to government on issues affecting the sector, and
undertakes media relations activities.

b. Research

The Centre aims to build a base of knowledge about the sector and the environment in
which it functions. The research department has produced several studies, and it also issues
regular "Research Bulletins" on a variety of topics relating to the charitable sector.

c. Awareness

Imagine is a national, bilingual program, launched in 1988, to promote giving and
volunteering in the corporate sector and among individuals. Over 400 corporations have
become Imagine "Caring Companies" by pledging to donate one percent of pre-tax profits
(averaged over three years) and to encourage giving and volunteering among their
employees. The thrust of Imagine 's Phase II program, which began in 1994, is to promote
partnership between the private and charitable sectors so that innovative ways are found to
meet the needs of Canadians. This is summed up in Imagine's Phase II theme: "A New Spirit
of Community".

The objectives and activities of the Independent Sector parallel those of the Canadian Centre for Philan-
thropy. In the late 1980s, the Independent Sector ran a national campaign — "The Give Five Campaign" — which
was designed to encourage volunteering by Americans. The Independent Sector also publishes a substantial
number of books and pamphlets on the nonprofit sector and is the sponsor of many conferences, including a
widely attended annual workshop.

This statement is taken from the Canadian Centre for Philanthropy mission statement. The information that
follows was obtained through conversations with representatives of the Centre and from the Centre's promotional
literature.

See D. Sharpe, A Portrait of Canada 's Charities: The Size, Scope and Financing of Registered Charities
(Toronto: Canadian Centre for Philantropy, 1994); Law, Tax and Charities: The Legislative and Regulatory
Environment for Charitable Non-profit Organizations (Toronto: Canadian Centre for Philanthropy 1990); and
M.H. Hall, Charitable Fundraising in Canada (Toronto: Canadian Centre for Philanthropy, 1996).

d. Professional Development and Information

The Centre provides resources to help charities with their fundraising and management
efforts. PubHcations include The Canadian Directory^ to Foundations,^ The Grant Report!"
and Building Foundation Partnership. The Centre holds seminars on topics such as
"effective foundation fundraising" and "corporate giving". An annual national symposium,
launched in 1995, brings together representatives from government, corporations,
foundations, and the charitable sector to discuss current issues. The Centre launched two
national certificate programs in 1990 — one in voluntary and nonprofit management^ and the
other in fundraising management — and continues to participate in the supervision of both
programs. Course enrolment totals approximately 1,300 each year, and is made up of people
in senior staff positions with Canadian charities. A resource centre, open to the public, is
maintained in Toronto.

(ii) Funding and Administration

The Centre receives most of its funding from annual membership fees, product sales,
charitable gifts, and grants from foundations and corporations. The Centre has a board of
directors comprised of eleven members. Over 600 charitable organizations, foundations, and
corporations, of which nearly 400 come from Ontario, are affiliates of the Centre. The Centre
is run by one full-time president and chief executive officer, and nine full-time staff More
detailed information on the Centre is set out in the following table, derived from the Centre's
audited financial statements from 1992 to 1995.

Rose van Rotterdam (ed.), The Canadian Directory to Foundations, 11th ed. (Toronto: Canadian Centre for
Philanthropy, 1995).

Rose van Rotterdam (ed.). The Grant Report (Toronto: Canadian Centre for Philanthropy, 1995).

Ingrid van Rotterdam, Building Foundation Partnership (Toronto: Canadian Centre for Philanthropy, 1995).

The certificate program in voluntary and nonprofit sector management is made up of eight courses:

- Strategic and Operational Planning in the Non-Profit Sector

- Board, Community and Government Relations in the Non-Profit Sector

- Financial Management in the Non-Profit Sector

- Management Leadership and Decision Making in the Non-Profit Sector

- Human Resource Management in the Non-profit Sector

- Marketing for the Non-Profit Sector

- Fund-Raising and Resource Development for the Non-Profit Sector

- Program Planning and Evaluation in the Non-Profit Sector

The courses offered are:

- Overview to Non-Profit Management

- Overview to Fund-Raising Management

- Developing Fund-Raising Volunteers

- Information and Financial Management for Fund-Raisers

- Strategic Management for Fund-Raising Campaigns

- Applied Marketing for Fund-Raisers

- Fund-Raising Approaches I

- Fund-Raising Approaches II

Revenue

1992

1993

1994

1995

Grants and donations

1,769,989

1,178,218

484,847

552,345

Affiliate fees

403,833

446,580

421,056

289,677

Publications

215,100

253,499

322,056

404,631

Conferences and seminars

292,340

241,154

192,031

108,042

Management certificates

27,653

30,755

34,333

38,185

Computer searches

20,078

25,614

32,353

Investment income

138,458

95,633

61,269

27,473

Other

Total

2,863,501

2,265,512

1,544,277

1,573,398

Expenditures

Total expenditures

3,382,240

2,052,966

1,890,762

1,609,642

Salaries, benefits, and
contract staff*

1,304,315

965,504

901,661

820,352

Total Assets

1,274,138

1,843,840

1,948,913

2,162,581

* This amount is included in the total expenditures.

(b) VOLUNTARY SECTOR MANAGEMENT PROGRAM, YORK UNIVERSITY

The Seymour Schulich Business School at York University, under the directorship of
Dr. Brenda Zimmerman, runs a Nonprofit and Leadership Management Program. There are
two levels of courses:

- The certificate course is aimed at providing a basic introduction for practitioners to
the management of third-sector organizations. This course has two formats: regular,
which involves one half-day a week for one academic year; and summer, which
involves two intensive weeks in June for two years.

- The M.B.A. concentration course is aimed at providing a more intensive,
comprehensive understanding of the management of the third sector. This course can
be taken either full time or part time in the evenings.

The program also sponsors workshops, seminars, conferences, and a summer institute.

As well, it publishes and distributes research papers and other publications

See York University, Voluntary Sector Management Program, Faculty of Administrative Studies, Overview of
Mission, Achievements and Future Needs.

See, for example, M.S. Moyer, "How Voluntary Sector Managers Might Use Consumer Research to Market Their
Organizations to Volunteers" (1984), 4 Philanthrop. (No. 3) 15.

The Canadian Centre for Business in the Community (CCBC), formerly the Institute for
Donations and Public Affairs Research (IDPAR), is a nonprofit research organization,
affiliated (as of 1991) with the Conference Board of Canada. The primary source of funding
for CCBC comes from its members, who are, for the most part, the few larger Canadian
corporations that make a practice of donating to nonprofit organizations. IDPAR was founded
in 1972 and incorporated federally in 1976. Its primary purpose is to provide research
information to its membership.

CCBC publishes two publications that are important sources of information on the

sector. The first. Corporate Community Investment in Canada, is an annual publication
which provides a compilation and analysis of information on corporate donating practices in
Canada. It contains information obtained through CCBC's annual poll of its members. The
second publication, Campaigns Outlook, is published twice yearly (formerly under the title

1 T

Fund Programs Planned). It provides a near-comprehensive listing of major campaigns
($50,000 or more) taking place in Canada, up to the date of publication. In addition to these
two publications, CCBC provides a number of other information services to its corporate
clientele. It also occasionally sponsors conferences.

(d) Coalition of National Voluntary Organizations

In 1977, People in Action, the report of the National Advisory Council on Voluntary
Action (NACOVA), recommended the establishment of a Coalition of National Voluntary
Organizations (NVO). It was to be an umbrella organization and the main link between
voluntary organizations (at the national level) and the federal government on all issues of
concern to the voluntary sector. The NVO has received a large portion of its operating
support from the Voluntary Action Program ever since.

The NVO was one of the first organizations developed by Canadian voluntary organiz-
ations to represent their interests to government. The Coalition is still in existence and, in
addition to its lobbying efforts, acts as a forum for the exchange of information and ideas
among its members, mostly through its annual conference. To give some examples of its
lobbying efforts, the Coalition was instrumental in persuading the federal government to
repeal the standard $100 deduction in 1984, and it was instrumental in the design of the
current tax credit treatment of charitable deductions, which was put into place in 1988.

13
14

See J. Rostami, Corporate Community Investment in Canada (Ottawa: CCBC/IDPAR). See, also, infra, ch. 4,
sec. 2(b).

See infra, ch. 4, sec. 2(b).

See infra, this ch., sec. 3(a).

(e) The PhilanthropisjMe philanthrope

The PhilanthropistMe philanthrope is a quarterly journal published by the Agora
Foundation. It was founded in the late 1960s by a small group of Toronto lawyers who,
styled as the Charities Committee of the Wills and Trust Section of the Canadian Bar
Association — Ontario, responded to the need in Canada for legal scholarship on charity
issues. The first editor of the journal was Bertha Wilson. She was succeeded by Marie-Louise
Dickson in 1976, who was followed by Lynn Bevan in 1981, then John Gregory in 1987.
Initially, the PhilanthropistMe philanthrope was published annually and dealt exclusively
with legal issues. Today, it deals with matters ranging from management and accounting
issues to public policy and black-letter law. Its current vocation is to act as a forum for the
discussion of all issues of concern to the charity sector. Its editorial content, although not
scholarly or speculative, is well-informed and critical.

(f) Charities Committee of the Wills and Trusts Section, Canadian Bar
Association — Ontario

Besides being the original sponsors of the PhilanthropistMe philanthrope, the Charities
Committee of the Wills and Trusts Section of the Canadian Bar Association — Ontario, has
played an important role in sponsoring conferences on charity issues and in taking up the
brief of the sector when the occasion has required. Recently, the Committee has written a
critical evaluation of the activities of the Charities Division of the Office of the Public
Trustee.

(g) Federated Appeals

Federated appeals have been in existence in Canada since 1917. The first federated
appeals were developed by Jewish charities in Toronto and in Montreal. They were followed
quickly by other sectarian and non-sectarian federations in Montreal, Toronto, and Winnipeg.

By 1939, there were federated appeals in nine Canadian cities; by 1952, there were fifty-
six federated appeals in Canada serving 5.5 million people or thirty-eight percent of the
population; by 1972, there were over one hundred campaigns serving 14 million people or
nearly two-thirds of the population of Canada; and by 1981, there were ninety-three

1 9>

campaigns. The 1990 Canadian United Way campaigns raised over $209 million for the

At the outset, the journal was published independently by the Agora Foundation. During the early 1980s, the
Canadian Centre for Philanthropy took over publication. Responsibility was returned to the Agora Foundation in
1987.

Canadian Bar Association — Ontario, Charities Committee, Jurisdiction of the Public Trustee (July 17, 1990)
[unpublished draft].

See S.A. Martin, An Essential Grace: Funding Canada 's Health Care, Education and Welfare, Religion and
Culture (Toronto: McClelland & Stewart, 1985), at 21.

See Martin, ibid, at 219, and S.A. Martin, Financing of Humanistic Service (Toronto: McClelland & Stewart,
1975), at 121.

benefit of over 3,600 charitable organizations. Of this, over $100 million was raised in
Ontario (over fifty percent of the Canadian total), as follows:

ONTARIO UNITED WAY/CENTRAIDE

1990 Campaigns

Population Served

Amount Raised

Ajax-Pickering

110,000

$ 925,000

Barrie/South Simcoe

105,000

725,080

Belleville and District

40,000

374,000

Brant

118,373

845,600

Leeds and Grenville

83,166

410,000

Cambridge and North
Dumfries

95,000

1,151,163

Chatham-Kent

103,777

1,050,000

Northumberland

23,000

303,000

Collingwood and District

23,700

62,500

Cornwall and District

55,000

461,178

Deep River District

7,800

104,000

Fergus and District

8,000

43,700

Greater Fort Erie

23,453

282,063

Guelph

80,136

900,505

Halton Hills

34,189

150,000

Burlington, Hamilton-
Wentworth

535,000

6,750,000

Kingston, Frontenac, Lennox
and Addington

145,000

1,309,000

Kirkland and District

13,000

42,000

Kitchener- Waterloo

237,000

2,890,000

Lanark County

50,000

121,000

Victoria County

51,000

232,000

Greater London

300,000

240,863

Milton

33,500

200,000

Niagara Falls

72,100

708,000

Oakville

104,000

1,127,000

Oshawa-Whitby-Newcastle

225,000

2,895,623

Ottawa-Carleton

643,300

11,600,000

Peel

690,000

5,600,000

Upper Ottawa Valley

40,000

241,000

Peterborough and District

105,493

1,793,342

Sarnia-Lambton

82,000

1,750,000

Sault Ste. Marie

80,000

1,189.025

Haldimand-Norfolk

89,000

331.517

St. Catharines and District

150,000

2,360,176

Elgin-St. Thomas

70.000

660,017

Stratford-Perth

31,600

376,792

Sudbury and District

152,000

1,055,294

Thunder Bay

125.000

812.745

Porcupine

45,000

373,000

ONTARIO UNITED WAY/CENTRAIDE

1990 Campaigns

Population Served

Amount Raised

Greater Toronto

2,200,000

44,255,000

South Niagara

70,000

776,000

Windsor-Essex County

268,000

7,058,000

Woodstock and District

30,800

470,000

York Region

475,000

2,227,000

Total

105,751,340

Although there are a number of sectarian federated campaigns still in operation in
various centres around Ontario, the largest fundraiser of this type remains the United Way.
The United Way is organized at the national level under an umbrella organization, United
Way/Centraide Canada. In what follows, we provide a brief description of the operation of
the United Way of Greater Toronto in order to present a more precise picture of how United
Way organizations function in general and, in particular, to examine the extent to which
member organizations are held accountable for their use of donated dollars.

(i) The United Way of Greater Toronto

a. Goals and Organizational Structure

The United Way of Greater Toronto seeks to "meet urgent human needs and improve
social conditions by mobilizing the community's volunteer and financial resources in a

common cause of caring". The ways in which the organization attempts to accomplish this
objective are further specified in its mission statement to include, among other things:

- "raising funds to meet vital community needs through a federated campaign";

- "insuring that donor dollars are spent... as efficiently and effectively as
possible";

- "promoting the development of needed community services ...";

- "strengthening the voluntary sector by providing... support services to voluntary
organizations...";

'managing United Way operations efficiently and effectively...".

„ 21

United Way/Centraide Canada was founded in 1939. Its current membership numbers 122 United Way and
Centraide branches across Canada. Its function is to provide administrative support to its member agencies across
Canada. Over half of its revenues (57%) are composed of membership dues. Sales of supplies and services
constitute the bulk of the remainder of its revenues (32.5%).

United Way of Greater Toronto, mission statement.

Ibid.

The affairs of the United Way are managed by a board of trustees, most of whom are
elected by the members of the United Way of Greater Toronto, and a few of whom are
directors ex officio, including the president of the Labour Council of Metropolitan Toronto
and senior representatives of government, business, labour, and other community
organizations. The membership of the organization includes all persons, individual or
corporate, who have made a receipted donation of at least $1 to the United Way. The bylaws
of the United Way of Greater Toronto provide for a chairperson and three vice-chairpersons
(one of whom is chief financial officer of the corporation), and a president or "senior pro-
fessional officer". They also provide for the creation of an executive committee to which is
delegated the powers of the board between the meetings of the board.

As befits an organization of its size and complexity, the United Way of Greater Toronto
conducts much of its business through the standing committees of its board of trustees. There
are several such committees, the most important of which are Allocations and Agency
Services, and Community Outreach. Other committees, such as the Campaign Cabinet, are
responsible for the fundraising endeavours of the corporation.

b, Fundraising Activities

The United Way of Greater Toronto's annual campaign runs from early September to
late November each year. It is conducted according to several basic principles, namely:

(1) the United Way endeavours to canvass all individuals in the Metropolitan Toronto area;

(2) no "undue pressure to give" is placed on prospective contributors and the United Way "does
not condone any technique used to obtain contributions based on motivations other than the
desire to help others"; and

(3) the United Way does not "lend its support to any project publicity event or other event that
would cause an unfavourable reaction" among its supporters and volunteers.

The Campaign Cabinet, under the direction of the general campaign chairman, manages the
annual campaign. The annual campaign goal is recommended by the Campaign Cabinet to
the board of trustees.

c. Allocation of Funds

Two committees of the Board play a role in the allocation of funds. The Allocations and
Agency Services Committee makes recommendations to the board of trustees on the
allocation of funds to the United Way of Greater Toronto member agencies through the
evaluation process of citizen review — a panel of volunteers who evaluate each agency's
performance in relation to both membership and allocation criteria.

To be eligible for funding by the United Way, an agency must:

(1) be private and nonprofit, and not connected to any political or religious
group;

(2) be incorporated and registered as a charitable organization under the federal
Income Tax Act;

(3) provide programs and services which are of a social, health, community, or related
nature;

(4) meet a vital community need;

(5) be able to demonstrate that it has the support of the community;

(6) be operated by a volunteer board of directors which reflects the community it
services, and which is responsible for the development, delivery, and evaluation of
services, as well as the efficient and effective management of the agency's
programs and budgets;

(7) effectively use volunteers in the delivery of services; and

(8) be supportive of the United Way, its operating policies, and campaign efforts.

Member agencies are required to submit an application which includes detailed financial,
operational, and organizational information, along with comparative audited financial
statements, including a statement of operations, a balance sheet, and capital accounts, all with
appropriate notes. Member agencies are thus held to a very rigorous standard of
accountability.

(ii) Association of Canadian Foundations

The Association of Canadian Foundations has over forty members, representing all
types of foundations — public, private, community — ^and a wide range of sizes. It acts as a
vehicle for discussion of issues of importance to foundations as well as, on occasion, the
voice of foundations to government.

(iii) Better Business Bureaus

The Better Business Bureau of Metropolitan Toronto (BBB), through its Charities
Review Board, provides a rating service of charitable organizations operating in the
Metropolitan Toronto area. Financial and operating information is solicited from charitable
organizations. This information includes annual reports, copies of T3010 filings, and
responses to the Bureau's own questionnaires. Organizations are ranked as follows: A(i), a
registered charity "whose status the BBB has no reason to doubt"; A(ii), a "genuine charity
that occasionally uses a professional fundraiser whose costs show up in the financial
statements"; A(iii), a "genuine charity that occasionally uses a promoter on commission
whose expenses are not reflected in the financial statements"; B(i), "an organization whose

R.S.C. 1985, c. 1 (5th Supp.).

information is incomplete"; B(ii), "an organization [that] has refused to provide the BBB with
information"; and C, a for-profit enterprise that "may be confused with a charitable
organization". One informed commentator doubts the capacity of the Bureau's present
service to detect fraud systematically, or to vet the quality and efficiency of the many varied
types of charitable organizations.^'*

3. PUBLIC AGENCIES

(a) VOLUNTARY ACTION PROGRAM, DEPARTMENT OF CANADIAN HERITAGE,

Canada

Arguably, the most supportive government agency in the sector is the Canadian Identity
Directorate's Voluntary Action Program in the federal Department of Canadian Heritage. The
Program originated in the social development movement of the late 1950s and early 1960s
and was originally called "Assistance to Community Groups".

The Program's current mandate is to maintain close links with the voluntary sector, to
monitor the voluntary sector's evolution, to facilitate access of voluntary organizations to
government decisionmakers, and to promote the concept of voluntary action, both within
government and to the public. The two primary objectives of the Voluntary Action Program
are:

(1) to support the growth and diversity of the voluntary sector through
advocacy and the promotion of volunteerism; and

(2) to strengthen the independence of the voluntary sector by facilitating access
to financial assistance and technical expertise, and by developing
innovative financing techniques.

The Program fulfils this mandate through three program components — the granting
program, the production unit for a series of technical resource publications for use by the
voluntary sector, and the policy and research arm of the Directorate.

The Voluntary Action Program operates with an annual budget of $95,000 and a
complement of almost six person-years. Although the granting program in recent years was
typically able to disperse $805,000 to some sixty-five to seventy-five groups, because of
budget restrictions this aspect of the Program has been substantially reduced in recent years.

J. Gregory , "Evaluating Charities: The Better Business Bureau" (1991), 10 Philanthrop. (No. 3) 25, at 26. At the
national level, the Canadian Council of Better-Business Bureaus provides information on national charities
through its Philanthropic Advisory Service. In the United States, the National Charities Infomiation liurcau
(NCIB) reviews the activities of charities. There is also the Council of Better Business Bureaus (CBBB) and the
recently established American Institute of Philanthropy (AIP).

Ibid., at 28.

In 1995-96 its grants budget was reduced to $65,000, and in 1996-97 there will be a further
reduction to $27,000.

The Program maintains in its inventory some twenty titles of technical resource
publications for use by the voluntary sector, in both English and French, and dispenses copies
without charge to voluntary organizations and individuals on request. Among the most
noteworthy publications are two statistical studies on donation behaviour in Canada. In
addition, the Program is looking into the establishment of an Internet link.

With the major decrease in the grants budget, the Program's emphasis has recently
shifted to policy and research. The major activities are research on the information needs of
the voluntary sector, research on the effects of the current taxation infrastructure on the
financing of the charitable sector, and monitoring current trends in volunteerism.

(b) Ministry of Consumer and Commercial Relations / Office of the
Public Trustee, Ontario

The Ontario Ministry of Consumer and Commercial Relations and the Office of the
Public Trustee jointly published a handbook in 1989, entitled Not-for-profit Incorporator's
Handbook. This handbook is designed for the use of laypersons and professionals involved
in the formation of nonprofit corporations. It contains much useftil information on
procedures, sample object clauses, and an examination of the governing regulatory regime. It
is a very helpful publication even if, in places, it tends to present some matters of opinion as
statements of law.

4. CONCLUDING OBSERVATIONS AND RECOMMENDATIONS

Four observations flow from this description of the public and private support
organizations.

First, almost all of the presently existing private organizations are of recent origin.
Although they are few in number and exist on limited resources, their high level of achieve-
ment in recent years demonstrates a significant capacity in the charity sector to organize itself
and coordinate its activities. This capacity is also exhibited at the community level in smaller
organizations such as social planning councils, as well as at the provincial and national levels
in umbrella organizations such as United Way/Centraide Canada and the Canadian Council of
4-H Clubs. Although this feature of the sector, by itself, is not a sufficient demonstration of a
ftiU capacity for self-governance, it does suggest that there is no need for any legislative
action to organize the sector.

See Canada, Voluntary Action Directorate, Donations to Registered Charities: Revenue Canada Taxation Data
for 1986 (Ottawa: Secretary of State, 1989), and Canada, Vountary Action Directorate, N. Duem (ed.), Donations
to Registered Charities: Revenue Canada Taxation Data forl986 and 1987 (Ottawa: Multiculturalism and
Citizenship Canada, 1991).

(Toronto: Queen's Printer, 1989).

Second, none of the organizations, except perhaps and to a limited extent only the NVO
and the Canadian Association of Foundations, acts in an official capacity as the voice of the
sector or a segment of the sector to government. Although many of these organizations have
been consulted by governments in the past, and many have taken the initiative to make their
views known to the government, none is a full-time interest group. Moreover, the most
obvious candidate for that job, the Canadian Centre for Philanthropy, in fact represents two
groups — foundations and active charities — whose interests are significantly different and
often diverge. We mention this to highlight the point made in the previous chapter that the
sector's share of influence in the halls of government has historically been relatively weak.

Third, however, there may be a role for government in coordinating and financing some
of the activities of some of the private organizations described, perhaps along the lines of the
model presented by the Voluntary Action Program. It is true that, at least in recent years, the
sector has demonstrated a capability for financing its activities through membership fees and
fees for service. But, it is also true that both the Canadian Centre for Philanthropy and the
Voluntary Sector Management Program at York University, for example, provide public or
quasi-public goods — information, training, and education — ^whose provision might be
enhanced by government involvement through subsidies and/or increased cooperation. As an
example only, better cooperation between the Canadian Centre and Ontario government
agencies that published the handbook could have resulted in a better publication. CCBC,
perhaps, provides an interesting and informative counter-example of consumers of
information coordinating their efforts and defraying the entire cost of producing the
information that they require. Yet the information published by CCBC is of use to many
donors, large and small, not just the few hundred corporate members of CCBC. The provision
and dissemination of its information could be made more efficient and more effective were a
less exclusive agency — such as government — involved. These observations are merely to
suggest that there may be a problem in producing sufficient information about, and adequate
programs of education for, the charity sector. This in turn may indicate a need for a public
sector contribution in the form of subsidies or in the form of institutions like the Voluntary
Action Directorate. The only recommendation of the Commission in this regard, at this point,
is the quite general one that whichever Ontario government agency (or agencies) retains
responsibilities in the sector, its approach should be flexible, imaginative, and open to the
possibility of cooperative efforts with the sector's own institutions.

Fourth, there is no organization in Canada with the resources sufficient to produce the
quantity and quality of scholarly writing on the third sector equivalent to those which exist in
several major educational institutions in the United States.^^ It would be enormously helpful
to the viability of the sector if there were greater scholarly interest and greater public support
for scholarly research into the issues affecting the sector. Public support could be developed

Not-for-profit Incorporator's Handbook, ibid.

^^ There are serious problems with the quality of this information as well. See, infra, ch. 4.,

^^ There are research and educational programs at Yale University, New York University School of Law, University
of San Francisco, and Case Westem Reserve University, among others.

in a number of ways, ranging from the creation of a small centre along the lines of the
Ontario Centre for International Business, to financial support for the research efforts of
already existing programs or institutions such as the Canadian Centre for Philanthropy and
the York Management Program. The level and type of support would of course be subject to
general budgetary constraints. However, it is the Commission's view that, all things
considered, public money is as well spent on fostering scholarly research into the sector as it
is on increasing the resources available to the public agencies responsible for policing and
regulating the sector.

CHAPTER 4

SOURCES OF EMPIRICAL
INFORMATION ON THE
CHARITY SECTOR IN CANADA:
AN OPPORTUNITY FOR
GOVERNMENT

1. INTRODUCTION

It is generally acknowledged that the quality and quantity of information available on the
charity sector in Canada is considerably weaker than desirable.' In this chapter the existing
sources of information are surveyed. In section 3 of this chapter, the Commission concludes with
recommendations on what Canadian governments can do to improve the quality and quantity of
information on the sector.

2. SURVEY OF SOURCES OF EMPIRICAL INFORMATION

(a) Four Main Sources of Empirical Information

There are four principal sources of empirical information on the charity sector in Canada:
the publicly available tax information filed by charitable organizations; the publicly available
aggregate tax data derived from the confidential tax filings of individuals and corporations; the
Statistics Canada family expenditure surveys; and the confidential tax filings of individuals,
corporations, and charitable organizations themselves. We assess each of these sources of primary
data in turn.

First, the public portions of Form T3010 (Registered Charity Information Return and Public
Information Return) and Form T2050 (Canadian Charities Application for Registration) tax filings
of Canadian charitable organization are available from Revenue Canada upon request. Revenue
Canada has also made this information available in aggregate form to various users, usually at
cost.^ Ideally, the information on these forms, when aggregated, should provide a reliable and

See, for example, B.R. Levens, Some Problems and Gaps in the Reporting of Charitable Giving By Corporations and
Individuals, prepared for Canadian Centre for Philanthropy (Vancouver, May 1991) [unpublishedl.

Our survey of recent empirical studies is based on Ontario Law Reform Commission, Study Paper 3: Survey of Existing
Empirical Studies of the Charity and Nonprofit Sector (Toronto: Ministry of Attomey General, 1991).

Aggregate T3010 data for 1986 is published in Canada, Voluntary Action Directorate, Donations to Registered
Charities: Revenue Canada Taxation Data for 1986 (Ottawa: Secretary of State, 1989), Part IV. Two recent empirical
studies used aggregate T3010 and T2050 data: D. Sharpe, A Portrait of Canada's Chanties: Ihe Size. Scope, and

detailed description of Canadian charitable organizations in regard to such matters as their
administrative structure, their sources of financing, their methods of operation, and their
beneficiaries. In fact, however, this source of information is generally thought to be somewhat
less than reliable and, as a consequence, was bypassed by many of the studies that were interested
in these sorts of questions because of its deficiencies.

There are a number of reasons for the deficiencies. Historically, large numbers of registered
charities have consistently failed to file their annual information return on time or at all. This has
meant that the aggregate information from this source is always incomplete. Further, the aggregate
information provided for any particular taxation year, in fact, always covers more than twelve
calendar months since the taxation years of charities do not uniformly correspond to the calendar
year. This has meant that it is not possible to draw accurate statistical conclusions on the
operations of Canadian charitable organizations based on the data from this source for any given
period time. Finally, a number of other factors, such as the design of the forms, the varying levels
of qualifications of the people who complete them, and the deficiencies in the applicable
accounting standards, have contributed to the poor quality of information on the T3010 and T2050
forms.

A second major source of empirical information on the sector is the compilation of taxation
statistics taken from stratified random samples of individual and corporate tax returns. These
statistics provide aggregate information on the donating behaviour of individual Canadians,

Financing of Registered Chanties (Toronto: Canadian Centre for Philanthropy, 1994) used 1991 aggregate data; and
K.M. Day and R.A. Devlin, The Canadian Nonprofit Sector (Ottawa: Canadian Policy Research Network and Kahanoff
Foundation, 1996) [forthcoming] used aggregate data from 1988 to 1994.

Surprisingly, given the potential value of this source of information, aggregate information derived from these forms has
only been available from Revenue Canada since the mid-1980s.

See, for example. Statistics Canada, Selected Financial Statistics of Charitable Organizations (Catalogue 61-212)
(November 1975) for 1971 and (February 1976) for 1972 and 1973; Statistics Canada, Selected Financial Statistics of
Charitable Organizations: 1980 (December 1982) (Catalogue 61-519); Statistics Canada, Selected Financial Statistics
of Religious Organizations (Catalogue 61-211) (September 1975) for 1971, (February 1976) for 1972 and 1973, and
(July 1977) for 1974 and 1975. All of these studies used the financial statements submitted by charitable organizations
with their T30 10 returns, not the financial information contained on the T3010 return itself The aggregate data from the
T3010 return, however, was, in some of these studies, used for validafion purposes.

The Auditor General's report for 1990 states that there is a 31% late filing rate. See Canada, Report of the Auditor
General of Canada to the House of Commons: Main Points, 1990 (Ottawa: Department of National Revenue, Taxation
and Finance, 1991) (hereinafter referred to as ""Auditor General's Report, 1990''), at 258.

Sharpe, supra, note 3, outlines the difficulties he had with the aggregate T3010 in an appendix: (l)when the actual
T3010 forms were reviewed, it was discovered some registered charities in fact reported their financial information in
the thousands of dollars (dropping three zeros from their T3010 financial data) but that the data was inputed without the
three zeros; (2) when the T3010 aggregate data for universities were compared with other available sources of
information (such as information from the Association of Universities and Colleges of Canada), only 15 out of 51 of the
aggregate revenue figures matched, with the remainder downwardly biased; and (3) a similar discrepancy was
discovered for hospitals. Because of these errors, the T3010 financial data used for the Sharpe study were multiplied by
an adjustment factor of 1.5 on the assumption that other reporters would be as likely to exhibit the same errors as
hospitals and universities. A small portion of this adjustment factor was to compensate for inflation between 1991, the
date of the data, and 1993, the date of the study.

according to several demographic variables (age, sex, occupation, province of origin, etc.), and of
Canadian corporations. For corporations, these aggregate statistics have been available since
1965. For individuals, they have been available since 1946.'^

The standard $100 deduction, implemented in 1957 and repealed in 1984, diminishes
considerably the value of this source for these years since it is very difficult to determine with any
assurance of accuracy what the actual level of donations was in those years. Since all claims for
charitable deductions or tax credits must, since 1984, be supported by receipts, the aggregate
information provided from this source might be a reasonably reliable indicator of the level of
individual donations for taxation years after 1983. The hesitation is due to the fact that many
donations to charities are unreceipted and many individuals (and corporations) who are issued
receipts do not use them to claim credits. ^°

The corporate taxation statistics are also not entirely accurate since many corporate
donations are accounted for as business expenses, not deductible charitable donations.

A third main source of empirical information is the family expenditure survey published
periodically by Statistics Canada. These surveys have been conducted by the federal government
since 1937, on a more or less decennial basis, until the late 1970s, when there were two, 1976
and 1979. In the 1980s, there were three: 1982, 1984, and 1986; and since then, one, in 1992.'^
These surveys test the spending habits of Canadian families by tracking the actual spending of a
representative sample of families over the course of a year. They are generally thought to provide
reasonably reliable information on the donation behaviour of Canadian families, although they are
methodologically deficient in at least two respects: they do not impose a rigorous definition of
"charity" on respondents, and they rely on respondents' ability to recall donations, as opposed to
requiring respondents to record donations as they are made. As a consequence, there are often
very marked differences between information from this source and the statistical conclusions
drawn from data available from other sources. For example, the family expenditure survey
estimates of individual donations generally are much higher than that available from taxation

Statistics Canada, Corporation Taxation Statistics (annual publication).

Revenue Canada, Taxation Statistics (annual publication). The most recent version is for the taxation year 1994.
Additional historical data is available in Statistics Canada, National Income and Expenditure Accounts, Volume I,
Annual Estimates, 1926-1974 (Catalogue 13-531), 1968-82 (November 1983) (Catalogue 13-201), and Statistics
Canada, Charitable and Benevolent Institutions in Canada, Vol. IX, 1931 (83-D-51), 1936 (83-D-56), 1941 and 1946
(83-D-55), and 1951 (83-D-51).

Sharpe, supra, note 3, estimates $6.6 billion receipted donations for individuals and $1 billion receipted donations for
corporations, and an additional $2 billion in unreceipted donations, in 1993. Individuals, according to tlic Sharpe study,
claimed only $3.5 billion in credits. Corporations similarly claimed only $500 million.

The first one was published in 1937 by the Dominion Bureau of Statistics.

See Statistics Canada, Family Expenditure in Canada. 1986 (March 1989) (Catalogue 62-555); Statistics Canada,
Family Expenditure in Canada. Selected Cities. 1984 (November 1986) (Catalogue 62-555); and Statistics Canada,
Family Expenditure in Canada, 1982 (October 1984) (Catalogue, 62-555). The most recent is 1992: Statistics Canada,
Family Expenditure in Canada, 1992 (October 1994) (Catalogue 62-555).

statistics. Some of the discrepancy is accounted for by the fact that not all donations are receipted;
some, no doubt, is due to errors inherent to the methodology.

A fourth main source of empirical information on the sector are the confidential tax filings
of individuals and corporations (the annual tax returns) and of charitable organizations (the
financial statements that charitable organizations are obliged to file with their annual information
returns and the private portion of those returns). A number of federal government studies have
used information taken from one or more of these sources to develop profiles of the sector, of
organizations, and of individual donating habits. One excellent source, for example, published by
Statistics Canada in 1982 and entitled Selected Financial Statistics of Charitable Organizations
1980,^^ is a survey of the confidential fmancial statements of charitable organizations. Using the
Revenue Canada six-part classification of charitable organizations, this study provides aggregate
information on the number of different types of charitable organization m Canada, their sources of
funds, and the destination of their ftinds. Another two studies, published by the Voluntary
Action Directorate and the Department of the Secretary of State and entitled Donations to
Registered Charities: Revenue Canada Taxation Data for 1986 and Donations to Registered

\f\ 17

Charities: Revenue Canada Taxation Data for 1987, used a sample of personal Tl income tax
returns to obtain more accurate information on the destination of donations according to the type
of charity and according to certain demographic variables of donors.

(b) Other Sources of Current Data

Other empirical mformation of lesser importance is available from numerous surveys of the
sector conducted over the past decade. These are listed below.

13
14

15
16

Supra, note 5.

The 6-part Revenue Canada classification system divides charitable organizations into the following categories:
Welfare, Health, Education, Religion, Community, and Miscellaneous. The previous Statistics Canada surveys used the
1970 Standard Industrial Classification which established 9 categories: Charitable Trusts and Funds; Miscellaneous
Health Services; Voluntary Welfare Services; Miscellaneous Charitable Organizations; Education and Related Services;
Theatrical and Other Stage and Entertainment Services; Miscellaneous Amusement and Recreation Services; Camping
Grounds and Trailer Parks; and Religious Organizations. Unfortunately, the lack of correspondence between the two
classification systems used in the various Statistics Canada Studies means there is no possibility of direct comparison
between the early ones and the 1982 study.

Supra, note 3.

Canada, Voluntary Action Directorate, N. Duem (ed), Donations to Registered Charities: Revenue Canada Taxation
Data for 1986 and 1987 (Ottawa: Multiculturalism and Citizenship Canada, 1991).

The 1986 survey sampled 366,034 individual tax returns using the coded charitable receipts to determine the destination
of donations by Revenue Canada's classification. The accuracy of the survey thus depends a great deal on the
classification of charitable organizations established when they were first registered, since while organizations change in
orientation over time, they seldom change their initial registration classification. On this particularly problematic feature
of the survey, however, the authors of the study remark that "verification by Revenue Canada Taxation indicates that the
error rate is very small and need not be considered significant overall" (at 2). We rely heavily on the information
provided in these studies in ch. 5, infra.

(i) Canadian Centre for Philanthropy - D. Sharpe, A Portrait of Canada's
Charities

The Centre sent a four-page, twenty-five-question survey to all 67,73 1 registered charities in
August 1993. The effective response rate was 6.05 percent. The information obtained from the
survey was used in D. Sharpe, A Portrait of Canada's Charities: The Size, Scope and Financing
of Registered Charities.

(ii) Voluntary Sector Management Program, York University

Together with the Canadian Centre for Philanthropy, the Voluntary Sector Management
Program conducted a joint survey in late 1993 on the effectiveness of not-for-profit organization
boards. A questionnaire of sixty-eight questions was sent to the membership of the Canadian
Centre for Philanthropy. Results of the survey were published in 1992.'^

(iii) Longwoods Research Group - General Public Research

In August 1990 the Longwoods Research Group Limited conducted a research study for
Revenue Canada — Taxation, to test for "attitudes and perceptions on current policy" and "percep-
tions of Revenue Canada — Taxation concerning its mandate and role in administrating policy"

among informed members of the general public. This was qualitative, as opposed to quantitative,
research. Eight focus groups were formed, two in each of Halifax, Montreal (French), Toronto,
and Vancouver. These groups were asked to express their opinions on current issues of public
policy relating to the tax treatment of charities, such as the definition of charity, the business
activities of charities, fundraising and receipting, the political activities of charities, and foreign
charities. They were also asked to express their opinions on the role of Revenue Canada —
Taxation in the charity sector. The study was commissioned as part of Revenue Canada's recent
reappraisal of its charities regime.

(iv) Longwoods Research Group - CEOs of Canadian Charities

A second research study, commissioned as part of Revenue Canada's recent reappraisal
and completed by the Longwoods Research Group, was also qualitative in nature. The

18
19

Supra, note 3.

See V. Murray, P. Bradshaw, and J. Wolpin, Do Nonprofit Boards Make a Difference? An Exploration of the
Relationship Between Board Structure, Process and Effectiveness (Toronto: York University Voluntary Sector
Management Program, 1992); The Nature and Impact of Nonprofit Boards of Directors in Canada: A Preliminary
Report (Toronto: Yoric University Voluntary Sector Management Program, 1992); and Power in and Around Nonprofit
Boards: A Neglected Dimension of Governance (Toronto: York University Voluntary Sector Management Program.
1992).

Charities Tax Measure, General Public Research— Final Report (RCT/PSB-1 4 1-03393) (Ottawa: September 1990)
[unpublished].

^' Charities Tax Measure; Survey of CEOs of Canadian Charities (Ottawa: September 1 990) [unpubl ishcd].

methodology was to canvass the opinions of the CEOs and treasurers of charities in eight focus
groups. Sessions were conducted in Toronto, Winnipeg, and Montreal. Opinions were canvassed
on the following issues: problems that arise in dealing with Revenue Canada; perceptions of the
performance of Revenue Canada Taxation; and certain proposals for reform.

(v) Doreen Duchesne, Giving Freely: Volunteers in Canada

This research study was based on the returns from two questionnaires used in a survey of
some 70,000 people, conducted by Statistics Canada in October 1987 and January 1988 and
sponsored by the Secretary of State of Canada. The objective of the survey was to obtain
information on the volunteering habits of Canadians and the profiles of volunteers in Canada.
The results of the survey were published in the general report, Giving Freely: Volunteers in
Canada, which was complemented by the publication of numerous specific reports dealing with
volunteering in different sectors of charitable activity, different geographic regions of Canada,
and selected demographic groups. The Coalition of National Voluntary Organizations also

22
23

(Ottawa: Statistics Canada, 1989).

N. St-Amand and I. Gunn, Volunteers in New Brunswick (Profile #27) (Ottawa: Secretary of State, 1989); J.W. Catano,
Volunteers in Nova Scotia (Profile #28) (Ottawa: Secretary of State, 1989); J.E.Green, 77ze Special Character of
Volunteer Activity (Profile #29) (Ottawa: Secretary of State, 1989); S. Murphy and K. Anonsen, Volunteers in
Newfoundland (Profile #30) (Ottawa: Secretary of State, 1989); F. MacLeod, Volunteers in British Columbia
(Profile #21) (Ottawa: Secretary of State, 1989); P.T. Paid, Albertans As Canada's Leading Volunteers (Profile #22)
(Ottawa: Secretary of State, 1989); D. Pearce, Volunteers in Saskatchewan (Profile #23) (Ottawa: Secretary of State,
1989); H. Stevens, Volunteers in Manitoba (Profile #24) (Ottawa: Secretary of State, 1989); J. Gagn^, Volunteers in
Quebec (Profile #26) (Ottawa: Secretary of State, 1989); A. Cumyn, Youth As Volunteers (Profile #1) (Ottawa: Secretary
of State, 1989); L. Graff, Voluntary Activity in Ontario: How Much Is 4.5 Billion Dollars Worth? (Profile #25) (Ottawa:
Secretary of State, 1989); J.W. Catano, Women As Volunteers (Profile #3) (Ottawa: Secretary of State, 1989);
L. Stewart, Volunteers Who Work With Children and Youth (Profile #32) (Ottawa: Secretary of State, 1989); A. Harvey,
Informal Volunteers: Doing It On Their Own (Profile #33) (Ottawa: Secretary of State, 1989); J. Guay, Self-Help
Groups in Canada (Profile #34) (Ottawa: Secretary of State, 1989); M. Prince, Volunteers in the Community: Society
and Public Benefit Organizations (Profile #16) (Ottawa: Secretary of State, 1989); B. Brennan, Volunteers in Religious
Organizations (Profile #14) (Ottawa: Secretary of State, 1989); M. Emo, Volunteers in Multi-Domain Organizations
(Profile #17) (Ottawa: Secretary of State, 1989); J. Benoit, Fire Service Volunteers: Image and Reality (Profile #18)
(Ottawa: Secretary of State, 1989); K. Thompson, Volunteerism in the International Sector (Profile #19) (Ottawa:
Secretary of State, 1989); L. Graff, Voluntary Organizations and Volunteering: Size Doesn't Matter (Profile #20)
(Ottawa: Secretary of State, 1989); J. Kent, Volunteers in Leisure, Recreation and Sports Organizations (Profile #15)
(Ottawa: Secretary of State, 1989); A. Lang, Volunteers in the Arts and Culture (Profile #13) (Ottawa: Secretary of
State, 1989); K.D. Hart, Volunteers in Organizations Focusing on Employment and Economic Interests (Profile #12)
(Ottawa: Secretary of State, 1989); S. Kalef, Volunteers in Law and Justice Organizations (Profile #11) (Ottawa:
Secretary of State, 1989); J. Maynard, Volunteers in Education and Youth Development (Profile #10) (Ottawa: Secretary
of State, 1989); J. Kent, Volunteers in Health Organizations (Profile #9) (Ottawa: Secretary of State, 1989); M.J. Prince,
Volunteers in Social Service Organizations (Profile #8) (Ottawa: Secretary of State, 1989); J. Zenchuk, We, the
Volunteers: From the Volunteers' Perspective (Profile #31) (Ottawa: Secretary of State, 1989); F. MacLeod, Volunteers
in Major Metropolitan Centres (Profile #7) (Ottawa: Secretary of State, 1989); B. Brennan, Seniors As Volunteers
(Profile #2) (Ottawa: Secretary of State, 1989); P.T. Faid, Urban and Rural Volunteers (Profile #6) (Ottawa: Secretary
of State, 1989); S. Kalef, Education and Volunteering (Profile #5) (Ottawa: Secretary of State, 1989); and K.D. Hart,
Employment and Volunteering (Profile #4) (Ottawa: Secretary of State, 1989).

published a short summary of the findings of the study prepared by David T. Ross and
E. Richard Shillington.'^'*

(vi) Canadian Centre for Business in the Community (CCBC), formerly Institute
of Donations and Public Affairs Research (IDPAR) - Semi-annual Reports

The Institute of Donations and Public Affairs Research (IDPAR), now (since 1991) the
Canadian Centre for Business in the Community (CCBC), has published since the early 1970s

25 •

semi-annual reports on major nondenominational campaigns, across Canada, seeking funds from
the private sector (individuals, corporations, and foundations). Typically, only campaigns of
$50,000 or more are listed. The information is collected by canvassing "a myriad of agencies and
institutions, large and small across Canada, both in English and in French for financial campaign-
ing information". It also obtains information in cooperation with the Canadian Hospital
Association, the Association of Community Colleges of Canada, the Sports Marketing Council,
the Canadian Association of Educational Development Officers, and the YMCA National Council.
CCBC also uses government sources. The publication is circulated among the members of the
Conference Board of Canada to provide them with the information they need in making their
donation decisions.

(vii) Canadian Centre for Business in the Community (CCBC), formerly Institute
of Donations and Public Affairs Research (IDPAR) - Policy and Attitude
Studies

These reports, ^^ now in their twenty-fifth consecutive annual edition, are a series of annual
policy and attitude studies conducted by IDPAR/CCBC. Typically, these studies result from
200-odd valid responses returned from a poll of over 3,500 Conference Board of Canada
members' firms. In the past, two types of questionnaires, "industrial" and "non-industrial",
were sent to member and non-member corporations of IDPAR/CCBC. The questionnaires asked

25
26

DT. Ross and E.R. Shillington, Profile of the Canadian Volunteer: a Guide to the 1987 Survey of Volu/ueer Activity in
Canada (Ottawa: Coalition of National Voluntary Organizations, 1989). There was a similar, but less extensive, earlier
effort: Statistics Canada, An Overview of Volunteer Workers in Canada. February. 1980 (November 1981) (Catalogue
71-530). See, also, N. Carter, Volunteers, The Untapped Potential (Canadian Council on Social Development, 1975).
Different classifications were used by Statistics Canada in its two studies of volunteering in Canada. The 1980 study
used an 8-part classification (Health, Education, SocialAVelfare, Leisure Activities, Religion, Civil/Community Action,
Political, and All Other); the 1987 used a 13-part classification (Health, Education and Youth Development, Social
Services, Sports and Recreation, Law and Justice, Employment and Economic Interest, Religious Organizations, Arts
and Culture, Society and Public Benefit, Environment and Wildlife, Foreign and International Organization, Multi-
Domain, and Miscellaneous).

Campaigns Outlook (formerly Fund Programs Planned).
IDPAR, Fund Programs Planned, 1990, at iv.

For example, the City of Montreal maintains a collection of financial campaigns in the Montreal area, "Campagncs el
collectes".

Corporate Giving in Canada, Policies and Practices and Corporate Giving in Canada (Ottawa: CCBC/IDPAR), Tables
and Commentary; and J. Rostami, Corporate Community Investment in Canada (Ottawa: CCBC/IDPAR).

the respondent corporations about the level of their donations, their allocations of funds
according to type of charity, and about the nature and size of their firms. The publications
resulting from these polls provide a detailed, but somewhat unreliable, picture of corporate
donation practices in Canada for the year.

(viii) A. Arlett, P. Bell, and R.W. Thompson, Canada Gives

Two public opinion surveys were conducted in the fall of 1987 by Decima Research at the
behest of the Canadian Centre for Philanthropy. The first survey was designed to determine the
attitudes of individual Canadians towards charitable giving. Interviews with a random sample of
1,000 adults across Canada and an additional 1,149 residents of Vancouver, Calgary, Winnipeg,
Toronto, Montreal, and Halifax were undertaken between October 15 and October 30, 1987.
Highlights and analysis of the survey are set out in chapter 2 of the Canada Gives publication.^^
It examines the following issues: individual Canadians' attitudes toward charities; the profile the
charitable sector has among Canadians; the level of giving to non-religious organizations; the
level of giving to religious organizations; volunteerism; the reputation of charitable
organizations; and the potential for Canadians to give more.

The second survey was of senior executives in 134 of Canada's largest corporations and
228 smaller companies (defined as having revenues between $1 million and $40 million and at
least twenty employees) to test for corporate attitudes towards donations. The published study,
chapter 3 of Canada Gives, contains information on: corporate attitudes towards donations;
corporate donation practices; corporate donations in relation to attitudes and practice; where
corporate donations go; event sponsorship; payroll deductions; and employee volunteerism.

(ix) Canadian Centre for Philanthropy, Law^ Tax and Charities

This study was a follow-up to the Canadian Centre for Philanthropy's survey of attitudes
towards charitable giving in Canada conducted in 1987.^^ This study was commissioned by the
Imagine program of the Canadian Centre for Philanthropy in late 1989. It examined general
attitudes towards charitable donations and volunteering; the effect of factors such as the tax
deductibility of donations and the economic climate on attitudes towards giving; the public's
assessment of the social environment in Canada and the level of need for social services;
and corporate attitudes towards giving.

30
31

A. Arlett, P. Bell, and R. W. Thompson, Canada Gives: Trends and Attitudes Towards Charitable Giving and
Volunteers (Toronto: Canadian Centre for Philanthropy, 1988) (hereinafter referred to as ''Canada Gives"), ch. 2
"Individual Philanthropy".

Ibid., ch. 3 "Corporate Philanthropy".

Law, Tax and CharitiesiThe Legislative and Regulatory Environment for Charitable Non-profit Organizations
(Toronto: Canadian Centre for Philanthropy, 1990) Appendix E, Imagine Survey, 1990.

Canada Gives, supra, note 29, and related text.

(x) Josephine Rekart, Voluntary Sector Social Services in the 1980s

This study examines the impact of changes in government policy and government
expenditure on fifty-eight voluntary agencies which provided family and children services and
which received at least some of their funding, either in the form of contracts for services or grants,
from the British Columbia Ministry of Social Services and Housing for the period 1981 to 1986.

(xi) Samuel Martin, Financing of Humanistic Services and An Essential Grace

Professor Martin's purpose in each of these books was to analyze the delivery, by both the

charity sector and government, of the "humanistic services". The first book is a qualitative and
quantitative study of the sources of financing for the humanistic services in Canada for the quarter
century following World War II, with special emphasis on the early 1970s. Martin's research team
relied heavily on the standard sources of information (described above), as well as a number of
original surveys investigating patterns of giving among individuals and corporations. The second
book is more philosophical and historical in orientation, with a greater focus on the role of the
charity sector in the delivery of humanistic services. Martin's main preoccupation in writing the
second book was to assess the motivations and social philosophies that lie behind the various
patterns of giving in Canadian society. This study also relied on the traditional sources of informa-
tion, as well as a number of original surveys.

These books stand virtually unequalled in the Canadian scholarly writing on philanthropy
for the extent of original empirical work.

3. CONCLUSIONS AND RECOMMENDATIONS

It is apparent from the discussion in this chapter that our information on the sector is quite
poor. This occurs for two basic reasons. First, most of the detailed information and the bulk of
the studies on the charity sector deal with the donation and volunteering behaviour of individuals
and, to a much lesser extent, the donation behaviour of corporations. These sources, besides
being preoccupied with only one of many issues, tend to have a very strong advocacy flavour.
The second general observation is that much of the raw data available, both from public and
third-sector sources, is conceptually and/or methodologically weak.

J. Rekart, Voluntary Sector Social Services in the 1980s: A Preliminary Study of the Impacts of Economic Changes and
Shifts in Government Policy on Non-Profit Agencies Providing Family and Children Services in British Columbia
(Vancouver: Social Planning Research Council of British Columbia, 1988).

S.A. Martin, Financing of Humanistic Services (Don Mills, Ont.: McClelland & Stewart Ltd., 1975), and S.A. Martin,
An Essential Grace: Funding Canada's Health Care, Education, Welfare, Religion and Culture (Toronto: McClelland
& Stewart, 1985).

Martin, Financing of Humanistic Services, supra, note 34, at 19, stated that the purpose of the book was to examine all
organizations "whose common mode of operation was 'not-for-profit' and whose common objective was the betterment
of the community or society through the offering of health services, educational instruction, welfare services or aid to, or
the understanding and development of, the habits, skills, art, instruments, and institution of the Canadian people".

These two fundamental features of the existing sources of data make definite and precise
empirical conclusions very difficult. For this reason, we recommend that Statistics Canada
undertake a review of its statistical operation in the third sector, with a view to generating a
better framework for the collection and publication of information on the sector. We also make
the following specific suggestions for the improvement of the basic data.

(1) The information on corporate giving in Canada could be improved if, besides
donations, it attempted to measure corporate support for charity in the form of spon-
sorships, business expenses, and gifts in kind. One of the regulatory issues addressed
in this study is the legitimacy of business enterprises co-opting charities in their
marketing campaigns. At present, it is very difficult to measure the extent of this
phenomena. As well, the information could be presented in ways that reveal more
about corporate donation behaviour. For example, it would be helpful to be able to
analyze corporate donation behaviour according to the type of corporations, such as
close versus public type of industry, and size of corporation.

(2) The information provided on corporate giving in the IDPAR/CCBC annual survey of
corporations is deficient in a number of respects. There are, for example, a number
of problems relating to the size, validity, stratification, and year-to-year
comparability of the sample. This survey would be a much better source of
information were these methodological questions addressed more rigorously. Our
suggestion is that there is a need here for the professional and financial assistance that
some government agency, such as Statistics Canada, might provide.

(3) Our information on the patterns of individual giving and on some aspects of the
profiles of charitable organizations (for example, their sources of donation income)
was increased enormously by the Voluntary Action Directorate statistical study of
individual tax returns for 1986 and 1987. It is doubtful that the federal government
will have the resources to conduct surveys of this magnitude in the future. However,
some of the same information could be made available at a comparatively low cost if
the charitable receipts issued by charities were computer-coded and computer-
readable. This would permit Revenue Canada to record very useful information about
donation behaviour. Computer-coded tax receipts would also enhance the capacity of
Revenue Canada to police the sector.

(4) Information on the profiles of charitable organizations could be improved enormously
if the T3010 form were improved and if all or most of the information provided on it

See, also, Levens, supra note 1 . Most informed observers argue that more statistical and other sorts of information
generally is required on the civic economy, of which charities and nonprofits form only a part. In the view of these
observers, formal knowledge bases for the civic sector should be developed to parallel those which are available for the
market, personal and public sectors. For a recent study of the civic economy, see J. Quarter, Canada 's Social Economy:
Co-operatives, Non-profits and Other Community Enterprise (Toronto: James Lorimer & Co., 1992).

We do not include this recommendation in the body of our report since it goes well beyond our mandate.

Sqq supra, note 16.

and with it were publicly available. Additionally, better enforcement of the obligation
to file the T3010 form would make this source of information more reliable. ^^

(5) Some method should be devised for updating the category of registration for
charitable organizations under the Revenue Canada system. There does not appear to
be, at the present time, a method for reclassifying a charity whose classification may
have changed. A notorious example is the YMCA, which is currently classified as a
religious charity. Perhaps the best system would be to have charities respond to a
classification question on each annual return. A change in classification might result
in a new registration number.

(6) The CCBC's efforts resulted in the only publication available in Canada providing

39 it?

information on the levels of fundraising in Canada. Although this publication is
quite extensive, it is difficult to gauge its accuracy. The information it provides,
however, is enormously useful for grantors— foundations, corporations, individuals,
and governments alike— in planning their annual donation. It would be useful if the
data from which this type of publication is drawn were more comprehensive.
Accordingly, this is one argument in favour of a registration requirement for
fundraising campaigns. We return to this suggestion below in chapter 18.

(7) The resources and donation patterns of Canadian foundations is information that
should be widely available; it is, at present, due to the efforts of the Canadian Centre
for Philanthropy. Their Canadian Directory to Foundations is an excellent source of
information, which the government should continue to facilitate through
information-sharing and, resources permitting, financial assistance.

The Auditor General's Annual Report, 1990, supra, note 6, reported that over 31% of the 63,000 plus registered
charities had not filed their annual returns on time. The same study indicated that 17% of the random sample of files
examined had annual reports missing for the years 1982 to 1987.

Campaigns Outlook, supra, note 25. In Alberta, information filings under the Public Contributions Act, R.S.A. 1980,

c. P-26, used to provide information on Alberta campaigns. That statute was repealed in 1995 by S.A. 1994, c. C-4.5,

s. 57, and replaced by the Charitable Fund-raising Act, S.A. 1995, c. C-4.5. The reports are no longer available.

The Canadian Directory to Foundations (Toronto: Canadian Centre for Philanthropy).

CHAPTER 5

OVERVIEW OF THE CHARITY
SECTOR IN ONTARIO

1. INTRODUCTION

This chapter provides a detailed description of the charity sector in Ontario, relying on the
best available sources of information. The description is divided into four sections, as follovv's:
Patterns of Giving (Individual and Corporate); Profiles of Charitable Organizations;
Foundations; and Levels of Government Support for the Charity Sector.

2. PATTERNS OF GIVING (INDIVIDUAL AND CORPORATE)

(a) Introduction

Throughout this section of this chapter, we provide descriptions of both individual and
corporate donating behaviour by examining that behaviour with respect to three aspects:
magnitude (how much is given), generosity (how much is given relative to the donor's capacity
to give), and destination or direction (who are the beneficiaries of donations). For the purposes
of this report, the utility of this exercise lies in the light it sheds on the need for a more or less
aggressive regulatory or policing regime whose principal function is to protect donors. Such
facts as the relative sophistication of donors (indicated, in part, by the demographics of
individual giving), the principal destination of donations, and the relative economic importance
of donations should, we believe, have a significant influence on the design and size of any
public agency established to regulate or police the charity sector.

Other studies of similar scope are L. Smith, Canada's Charitable Economy: Its Role and Contribution (Toronto:
Canadian Foundation for Economic Education, 1992); D.R. Campbell, The Voluntary Non-Profit Sector: An
Alternative, Government and Competitiveness Project, Discussion Paper No. 93-13 (Kingston: Queen's
University, 1993); D.R. Campbell, The First General Map of Canada's Third Sector, Government and
Competitiveness Project, Discussion Paper No. 93-13 (Kingston: Queen's University, 1994); D. Sharpe, A
Portrait of Canada 's Charities: The Size, Scope and Financing of Registered Charities (Toronto: Canadian Centre
for Philanthropy, 1994) (hereinafter referred to as "Sharpe study"); and K.M. Day and R.A. Devlin, The Canadian
Nonprofit Sector (Ottawa: Canadian Policy Research Network and Kahanoff Foundation, 1996) [forthcoming].
The empirical work for the Commission's study was completed in the summer of 1991. However, some of the
data from these more recent studies has been used to update our profile of the charity sector in this chapter.

As part of the background work for this chapter, the Commission completed a study paper which provides a
survey of the results of the empirical work in existence as of August 1991, updated by a more extensive
bibliography. See Ontario Law Reform Commission, Study Paper 3: Conclusions From Existing Empirical
Studies of the Charity and Nonprofit Sector (199\) [unpublished].

[83]

In this section we also examine patterns of individual volunteering behaviour. This
examination is relevant to the extent that it provides information on the qualifications of the
people who run charitable organizations, and therefore on the sector's own administrative and
self-regulatory capabilities and on its capacity to respond to a regulatory regime of greater or
lesser complexity.

Two words of caution are worth emphasizing at the outset. First, as discussed in chapter 4,
the reliability of the various sources of data varies considerably. Therefore, the weight attached
to any empirical claim made in this chapter, or in any other study, ought to be adjusted
accordingly. This word of caution applies especially to the quantification of donations. One
recent study of donation behaviour, for example, found it necessary to multiply the donation
data from the aggregate T3010 data by a factor of 1 .5 to account for what the author of the study
perceived to be reporting inaccuracies. Second, we have not restricted ourselves to a single
source of data, and therefore the facts and figures provided throughout this chapter vary from
table to table. Readers are therefore cautioned to look at the provisos stated in the notes to the
tables and to recall the inherent limitations of the sources used. Given these two aspects of the
data that follow, our conclusions must remain more imprecise and tentative than desirable.

We start, by way of introduction, with Table 1 and Figure 1.1. These provide an indication
of the historical pattern of donation support for charitable organizations in Canada. By far the
largest source has been individual donations, which comprise between eighty-three and eighty-
eight percent of total donations for the period 1969-1985. Individual donations during this
period also show a somewhat stable pattern of both absolute and relative growth. Corporate
giving, by contrast, appears to fluctuate with the fortunes of the economy.

See Sharpe study, supra, note 1. On the methodology of this study, see, further, infra, text accompanying note 15.

Our sources of data are identified in the notes to the tables. All figures are developed from tables that are either
included in this chapter or in Appendix E. In the notes to the tables included here and in Appendix E, our sources
are identified using the following short titles: A. Arlett, P. Bell, and R.W. Thompson, Canada Gives: Trends and
Attitudes Towards Charitable Giving and Volunteers (Toronto: Canadian Centre for Philanthropy, 1988)
(^'Canada Gives'); J.F. Deeg, "How and What Canadians Contribute to Charity" (1984), 4 Philanthrop. (No. 1) 3
("Deeg"); D. Duchesne, Giving Freely: Volunteers in Canada (Ottawa: Statistics Canada, 1989) (^'Giving
Freely"); S.A. Martin, Financing Humanistic Service (Toronto: McClelland & Stewart, 1975) ("Martin (1975)");
S.A. Martin, An Essential Grace: Funding Canada 's Health Care, Education and Welfare, Religion and Culture
(Toronto: McClelland & Stewart (1985) ( "Martin (1985)"); Revenue Canada, Taxation Statistics (Individuals)
(various years as indicated) {"'Taxation Statistics" or "TS"); Revenue Canada, Taxation Statistics (Corporations)
(various years, as indicated) {^'Taxation Statistics" or "TS"); Sharpe, supra, note 1 ("Sharpe study"); Canada,
Voluntary Action Directorate, Donations to Registered Charities: Revenue Canada Taxation Data for 1986
(Ottawa: Secretary of State, 1989) and Canada, Voluntary Action Directorate, N. Duem (ed.), Donations to
Registered Charities: Revenue Canada Taxation Data for 1986 and 1987 (Ottawa: Multicultural ism and
Citizenship Canada, 1991) f VAD").

Figure 1.1

Distribution of Donations by Source: Individuals, Corporations and Foundations,

Canada, 1969-1985

90.0%
80.0%
70.0%
60.0%
50.0%
40.0% --
30.0% --
20.0% --
10.0%
0.0%

1969

Ind iv idu als
Co rporations
Foundations

1971

1973

1975 1977
YEARS

1979

1981

1983

1985

Table 1
Distribution of Donations by Source: Individuals, Corporations and Foundations, Canada, 1969-1985

Amount of Donations (all dollar fig

ures in mill

ions)

Percentage Distribution

Year

Individuals

Corps.

Found.

Total

Individuals

Corps.

Found.

1969

$ 667

$69

$38

$ 774

86.2%

8.9%

4.9%

1970

663

763

86.9%

7.9%

5.2%

1971

670

776

86.3%

7.9%

5.8%

1972

733

864

84.8%

9.4%

5.8%

1973

808

956

84.5%

9.7%

5.8%

1974

910

122

1,092

83.3%

11.2%

5.5%

1975

1,043

1,204

86.6%

8.0%

5.4%

1976

1,196

118

1,384

86.4%

8.5%

5.1%

1977

1,265

134

1,474

85.8%

9.1%

5.1%

1978

1,406

144

1,635

86.0%

8.8%

5.2%

1979

1,564

171

1,830

85.5%

9.3%

5.2%

1980

1,770

195

110

2,075

85.3%

9.4%

5.3%

1981

2,025

228

125

2,378

85.2%

9.6%

5.2%

1982

2,248

164

135

2,547

88.3%

6.4%

5.3%

1983

2,470

256

145

2,871

86.0%

8.9%

5.1%

1984

2,800

250

155

3,205

87.4%

7.8%

4.8%

1985

3,050

251

166

3,467

88.0%

7.2%

4.8%

Source: Canada Gives, c. 1, Appendix, Table II-I

Original Sources: Individual donations were estimated by Canada Gives from Revenue Canada Taxation Statistics and
Canada Expenditure Surveys. Corporate donations were were taken from Statistics Canada Corporation Taxation
Statistics. Foundation donations for the years 1983-1985 were taken from the Canadian Centre for Philanthropy and, for
earlier years, were estimated by Canada Gives.

(b) Individuals: Donations and Volunteering

(i) Historical Patterns of Individual Donations, 1946-1980

a. Magnitude

As one would expect, over the years, the burden of donation support for the sector has
shifted from the lower income ranges to the middle and upper income ranges (with over forty
percent of donations in 1980 coming from persons in the $10,000-$25,000 income range,
compared to under ten percent from the same group in 1946) (Figures 2.1 and 2.2). This pattern
is explained almost entirely by inflation.

Figure 2.1
Percentage of Total Donations by Income Class, Canada, 1946

SSO.OOOh

Under $3,000

$3,000 - $4,999
1 5'/.

$25,000 - $49,999
5 9%

$5,000 - $6,999

$7,000 . $9,999

$1 0,000 - $24,999

Figure 2.2
Percentage of Total Donations by Income Class, Canada, 1980

Under $ 3.000
1%

$ 3,000 - $ 4,999

'°''° $ 5,000 - $6,999
2%

$ 7,000 - $ 9,999
6%

$25, 0 00 -$49, 9 99
30%

$ 10,000 - $ 24,999
4 0 %

One interesting feature of the pattern of individual donations in the 1946-80 period,
illustrated graphically in Figure 2.3, is the marked decline in total donations from 1961 to 1970.
A significant portion of this decline was probably due to the introduction of the more rigorous

system of regulation of charitable organizations under the federal Income Tax Act, ^ introduced in
January 1967. The new central registration system, together with the reform of receipting
practices that preceded it in the early 1960s, appears to have been effective in eliminating
questionable and fraudulent receipting practices.

Figure 2.3
Total Donations, Selected Years, Canada 1946-1980

12 0 0
10 0 0

4 0 0
2 0 0

1946 1951 1956 1961 1966 1968 1969 1970 1974 1977 197

19 7 9 19 8 0

Figure 3.1 shows that the real value of donations /?er capita increased minimally over the
decade of the 1970s and increased only slightly in the early 1980s. This pattern suggests that the
capacity of charitable organizations to meet the demands placed on them by Canadian society,
as determined or affected by real donation dollars available to spend per Canadian, remained
roughly the same during this period. This is of some interest to the present study since it
indicates that the protection of donor dollars was economically of not much greater importance
at the beginning of the period than it was at the end.

Figure 3.1
Purchasing Power of Total Donations, per Capita, Canada, 1969-1985

120$ _^

100$

80$

60$ .^

40$

ML.

1969

1 971

1973

1 975

1977
Years

1 979

198 1

1983

19 85

See, now, R.S.C. 1985, c. 1 (5th Supp.).

For the history of the registration system, see, infra, ch. 10.

In sec. 3, infra, we shall see that the largest portion of revenues to the sector — in the order of 56.5% in 1993
according to the Sharpe study, supra, note 1 — came from government sources.

Figure 4.1 makes evident three fiirther facts relating to the historical pattern of individual
giving in Canada. It shows, as one might expect, that the amount of annual donations per donor,
by income class, rises substantially as one moves from lower to higher income classes, in every
year sampled in the period 1961 to 1980. In 1980, for example, donors with income of over
$50,000 gave, on average, $1,768, compared to $581 for donors earning $10,000 to $24,999.
More remarkable is the decline, from 1961 to 1970, in annual donations per donor in all income
groups, but especially in the two upper income groups. There are a number of possible
explanations for this decline, in addition to the one suggested above that the early- 1960s federal
reforms eliminated questionable receipting practices: an increased propensity on the part of
Canadians to consume or to save; the increasing burden of taxes; and the fact that, because of
inflation, all income ranges had fewer dollars to spend on charity. Finally of interest from
Figure 4.1 is the modest increase in annual donations per donor in the middle and lower income
classes and the levelling off or modest decline in donations for the two upper income groups, for
the period 1970-80. Three possible explanations for the former are: a greater number of
transfers, in the lower and middle income groups, of charitable donation deductions between
spouses to reduce one spouse's income to the level required to allow the other to claim him/her
as a dependent; the increased use of receipts by donors in the lower and middle income groups;
and, most probably, the fact that the average incomes of the lower and middle groups were
rising as fast as or faster than those of the upper groups.

Figure 4.1
Annual Donations per Donor, by Income Class, Canada, 1961-1980

QUndcr S3. 000

■ S3. 000 -

S4.999

a$5.000 -

S6.999

a$7.000 -

$9,999

■ SIO.OOO

- $24,999

aS2S.0O0

- $49,999

■ SSO.OOO

1961 1966 1968 1969 1970 1974 1977 1978 1979 1980

See N. White, Counterpoint, "A Response to 'How and What Canadians Contribute to Charity'" (1985), 5
Philanthrop. (No. 2) 39.

Compare, Martin (1975), supra, note 3, and Deeg, supra, note 3.

Martin (1975), ibid., and Deeg, ibid.

One last relevant fact is illustrated in Figure 5.1: the relative number of taxpayers claiming
tax deductions declined in every class in virtually every year sampled.

Figure 5.1
% of Tax Filers Claiming Charitable Deductions, by Income Class, Selected Years, Canada 1961-1980

90.0%

800% ..

70.0% -

60.0%..

50.0% ..

20.0%

10.0%

0.0%

Q Under $3,000
B $3,000 -$4,999
0 $5,000 -$6,999
□ $7,000 -$9,999
H $10,000 -$24,999
Q $25,000 -$49,999
■ $SO,00(H-

40.0% .. ^

30.0%

1961

1966

1970

1974

1978

1980

Year

Taken together with the claim that the real value of total donations per Canadian remained
about the same from 1970 to 1985 (Figure 3.1), Figures 4.1, and 5.1 suggest that the culture of
giving in Canada during the decade of the 1970s (and perhaps well before) may have been
stagnating. Although the sector's real donation income per Canadian remained about the same,
relatively fewer and fewer people in all income groups were supporting it, and in the upper
income levels, they were supporting it with modestly smaller donations. It is true, however, that,
according to several absolute measurements, such as total individual donations, total individual
donations adjusted for inflation, and total number of donors, the sector's donation support was
growing.

b. Generosity

The claim alleging a stagnating culture of giving is reinforced by some of the data
available to measure the generosity of Canadians over the 1946-80 period. As Figures 6.1 and
7.1 illustrate, donations measured both as percentage of income and of disposable income
declined during the 1946-70 period, and levelled off in the late 1970s at a historic low of

.5 percent of income.'^ The decline in generosity, measured thus, is a phenomenon witnessed in
every income class almost without exception.

Figure 6.1
Total Donations as % of Total Income, Selected Years, Canada, 1946-1980

1 979 1980

Figure 7.1
Total Donations as % of Total Dispoable Income, Selected Years, Canada, 1946-1980

1979 1980

Figure 8.1 indicates which of the two possible factors had the greater influence. It suggests
that stagnation in the culture of giving was accountable only in small measure by the people who
do give, giving less, since the average donation as a percentage of average income in all but the
lower income ranges stays roughly the same throughout the period. Rather, the stagnation was

The Sharpe study, supra, note 1, after adjustments, estimated a 2% donation rate in 1993. The reason for the
divergence between that estimate and ours is the different sources and different methodology used. Our figure is
undoubtedly low since it uses only receipted donations actually declared. The Sharpe study estimated that nearly
half of receipted donations are not declared and that a large portion of individual donations — $1.6 billion out of
$8.2 billion — are not receipted. The Sharpe study used adjusted T3010 data. We used unadjusted taxation
statistics. Despite the discrepancies in process and outcome, the point regarding stagnation stands.

due more to the decline in the proportion of the population who gave. Taking the analysis one
step further, it seems implausible to attribute much of this latter development to a lack of
confidence on the part of prospective donors in the efficiency, effectiveness, or honesty of the
sector, since not only does the available information suggest that the credibility of the sector is
not a problem in the eyes of the general public, but even if it were, all prospective donors can
readily see that there are a multitude of charitable organizations to which one could give without
any worry that the donation would end up advancing the cause of charity. This line of reasoning
tends to suggest that there is very little a regulatory or policing agency could have contributed to
affect these developments in the culture of giving.

Figure 8.1

Annual Donations per Donor as % of Average Income, by Income Class, Selected Years,

Canada 1961-1980

6.0%

5.0%

4.0% -_

■£ 3.0% __

*■ 2.0% ._
1.0% ._
0.0% __

1961

1966

1968

1969

1970 1974
Years

1977

1978

1979

1980

c Direction

By far the consistently preferred destination of individual donation dollars during the
decade of the 1970s and early 1980s was religion. Thus, for example, of the over $3 billion in
estimated individual donations in 1985, over $2.2 billion of them went to religious
organizations. This fact is also of some importance to this study since one could reasonably
argue that charitable donors donating to religions require little in the way of state-fostered
protection. We shall see, however, that the current patterns of giving show a marked increase in
relative support for other segments of the sector.

See Canadian Centre for Philanthropy, Law, Tax and Charities: The Legislative and Regulatory Environment for
Charitable Non-profit Organizations (Toronto: 1990), App. E, "Imagine Survey" (hereinafter referred to as
"Imagine Survey").

Figure 9.1
Donations to Non-Religious Charities as % of Total Individual Donations, Canada, 1969-1985

B
O

100.0%
90.0% ..
80.0% _.
70.0%
60.0% ..
50.0% ..
40.0% ..
30.0%
20.0%
10.0% J
0.0%

4-*^

1979

1981

1983

1985

(ii) Donations: Current Patterns of Individual Donations

a. Introduction

The following tables depict the recent and current situation in Ontario and Canada. We use
three sources of information throughout: Taxation Statistics for 1985, 1986, and 1987 ("TS");
VAD; and the Sharpe study. The reason we use three sources over several years is to
increase the strength of the limited empirical claims we make. While readers are again reminded
of the inherent limitations of each of these three sources, two further notes of caution are
required.

(1) The figures from the Taxation Statistics are taken from the line item "charitable
deductions" and therefore do not include donations included in "other deductions", such as gifts
to the Crown. The figures available from the VAD study include all donations to the following
types of recipients:

1 . Welfare Institutions

2. Health Institutions

3. Education Institutions

Supra, note 3.
Supra, note 3.
Supra, note 1 .

4. Religious Institutions

5. Benefits to Community

6. Other

7. Registered Canadian Athletic Associations

8. Colleges and Universities

9. Foreign Charitable Institutions

10. Gifts to Federal, Provincial and Municipal Governments

Note that only the first six classifications from the VAD study match the Revenue Canada
categorization (that is, Welfare, Health, Education, Religions, Benefits to the Community, and
Other). This is because the VAD study disaggregated colleges and universities and foreign
charitable institutions, and added athletic associations and gifts to government to the list. Due to
the manner in which the VAD statistics are presented, it was not always possible to include
items 7, 8, and 9 in the compilations that follow. As a matter of course, we excluded item 10.
Otherwise, for the reasons stated in chapter 4, one would expect the VAD statistics to be more
accurate. Readers should recognize that the figures cited in both the Taxation Statistics and the
VAD statistics are for receipted dondAxons as declared by tax filers. Estimates of donations from
other sources are often higher because they attempt to measure all donations, receipted and
unreceipted, and/or because they include receipted donations that are, for whatever reason, not
declared by tax filers.

(2) We use the Sharpe study to provide more current information. It purports to be
accurate as of 1993. However, the Sharpe study relied on T3010 data, not individual or
corporate taxation statistics. This source consistently reports higher donation income since it
includes all donations declared and undeclared, receipted and unreceipted. Further, the Sharpe
study manipulated the data in two ways. First the data was reorganized into slightly different
classifications, as follows:

1 . Places of Worship

2. Hospitals

3. Teaching Institutions

4. Other Charitable Organizations

5. Public Foundations

6. Private Foundations

This reorganization makes it more difficult to compare the Sharpe study data with the VAD
data. Second, the Sharpe study multiplied the T3010 data by a factor of 1 .5 to adjust for what it
regarded as downwardly biased reporting errors and, since it uses 1991 T3010 data, inflation.
For the most part, we refer to the Sharpe study only in notes, to provide additional commentary
on our own conclusions. However, to give the reader a sense of the magnitude of the divergence
in absolute values, the Sharpe study estimates total 1993 individual donations to be $8.2 billion.
The VAD study estimated total 1986 individual donations to be only $2.2 billion. The 1991 raw
T3010 data adjusted by the Sharpe study, however, states that total individual donations were
$4.7 billion (1986 dollars) of which $3.9 billion (1986 dollars) were receipted and $.8 billion

(1986 dollars) were unreceipted. It is hard to know where in this range the truth lies.
Obviously, our estimates are much too low, but it is also not clear whether the Sharpe estimates
are too high. The important point is that any conclusions to be drawn from any of this data must
be appropriately qualified. We rely on the taxation statistics and not on the T3010 data since our
objective is to analyze the demographic patterns of individual and corporate giving. Very few of
our conclusions are affected by the discrepancies in the quantification of donations.

b. Ontario in General

(1) Magnitude

Tables 10 and 12 and Figure 11.1 indicate several important facts concerning the
magnitude of current charitable donations in Ontario. First, the total amount of donations in the
relevant years is approximately $1 billion. Second, Ontario's total donations, as a proportion of
the Canadian total, is approximately forty-six percent, exceeding the Ontario proportion of the
Canadian population by about ten percentage points. What this indicates — that Ontarians donate
more per capita than Canadians in general — is confirmed in the higher total donations per tax
filer and per donor (Figure 12.1), and the higher proportion of tax filers reporting donations
(Table 13). Third, the average amount donated in Ontario is roughly $500 per donor per year, or
$135 per tax filer per year. These amounts (admittedly low estimates) are helpful in assessing
the required level of government involvement, in purely economic terms.

Table 10
Total Charitable Donations, Ontario and Canada

$ Thousands |

1985 (TS)

1986 (TS)

1987 (TS)

1986 (VAD)

Ontario

$ 905,604

$ 999,585

$1,144,038

$1,030,876

Canada

$1,994,046

$2,172,933

$2,441,136

$2,216,303

Ontario as % of Canadian total

45.4%

46.0%

46.9%

46.5%

Ont. pop. as % of Can. pop.

35.8%

35.9%

36.2%

35.9%

Figure 11.1
Charitable Donations per Donor and per Tax Filer, Ontario and Canada, 1985-1987

„j;j, ,,, 0 ntirio pe
-~«l Onl.r.o pe

Ttxfiler
D onor

500 ^

""" ""-"■" "' """ """■

-™-- -'■ >

1 C.n.d.pe
, ;frs C in I da pe

T.jfiler
D onor

400 _

300 -

200 .

. — -™ — -♦- — ~™ ™

V- — ~

19 8 5 (T S )

1987 (T S)

1986 (VAD)

Our source for these figures is the Day and Devlin study, supra, note 1.

Table 12
Number and Percentage of Tax Filers Reporting Donations, 1986 (VAD)

Number of Tax Filers
Reporting Donations

% of Tax Filers Reporting
Donations

Ontario

2,007,510

32.49%

Canada

4,654,180

28.14%

Note: 1986 VAD data excludes items 7, 8, and 9.

(2) Generosity

Ontarians as a group give a larger percentage of their total income and a larger percentage
of their disposable income than do Canadians in general, as a group (Figure 13.1) but,
interestingly, Ontarians are slightly less generous than Canadians in general if generosity is
measured by the average size of annual donations per donor as a percentage of average income
(Figure 14.1). This means that there are proportionately more donors in Ontario than in Canada
in general — confirming Table 12 — but that Ontario donors give a slightly smaller percentage of
their income.

Figure 13.1

Total Charitable Donations as % of Total Income & Total Donations
as % of Total Disposable Income, Ontario and Canada, 1985-1987

1 .00%
0.90%
0.80%
0.70%
0.60% T
0.50%
0.40% ..
0.30% ._
0.20% ..
0.10% .
0.00% .
1985

(TS)

■ONTARIO
CANADA

1986 (TS)

1987 (TS)
Years

1986 (VAD)

Figure 14.1
Average Size of Total Individual Donations as % of Average Income, Ontario and Canada, 1985-1987

2 24%
1985

(TS)

• O N T A R 10
■CANADA

1986 (T S)

198 7 (T S)

1 9 8 6 ( V A D )

Year*

(3) Direction

Figure 15.1 shows two things. First, although the bulk of donation dollars in Ontario go to
Religion (60.51 percent), the proportion is noticeably less than the proportion of donations to
Religion in the rest of Canada (69.35 percent). Ontario's culture of giving is, then, slightly more
secular in orientation. Second, the four preferred secular charities — Welfare (10.37 percent),
Health and Education (7.6 percent each), and Arts and Culture (1.75 percent) — are
disproportionately larger destinations in Ontario compared to the rest of the country.

Figure 15.1
Beneficiaries of Donations, Ontario and Canada, 1986 (VAD)

100.00%
90.00% .-
80.00% ._
70.00% ._
60.00% ..
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

I0NTAR10(%)
ICANADA (%)

(4) Conclusion

The figures provided thus far make possible a rudimentary analysis of how much of a need
there is for government supervision of the sector aimed at protecting donor dollars. That need,
we would argue, should be assessed, in part, on the basis of the amount of donation dollars at
risk. On the assumption that dollars donated to Religion ($685 million) and the United Way
($100 million) require little supervision, that would leave roughly $250 million worth of annual
donations in Ontario possibly open to the need for fiirther government scrutiny. A large portion
of these donation dollars, however, are donated to major public institutions such as hospitals and
universities and to obviously credible organizations such as health research organizations, social
planning councils, the Red Cross, and private schools. What remains — when Health, Education
and Universities are taken out — might be $100 million, or less, a significant sum but
considerably less than the $1 billion we started with.*^

The Sharpe study, supra, note 1, estimates the following percentages for Canada for individual donations: Places
of Worship (45%); Others (33%); Hospitals and Teaching Institutions (6%); and Public Foundations (12%). Since
the study estimates $8.2 billion in individual donations, 33% of that — $2.7 billion — by the same logic in the text,
is "at risk" nationwide. Ontario's share, approximately 45%), totals $1.2 billion. However, as in the text, that figure
should be adjusted downward further since it includes many obviously trustworthy charities. This is perhaps one
conclusion which may be affected by the discrepancy in quantification. The public agency that we recommend be

c. Donations as a Function of Province of Donor

(1) Magnitude

Figure 16.1 gives some indication of the size of the charity sector in Ontario compared to
its size in other provinces. One implication of Ontario's dominance as a source of individual
donations is that any regulatory initiatives in Ontario would very likely affect the sector Canada
wide. For example, national charities headquartered in Ontario that rely on Ontario donations
for, say, fifty percent of their revenues could very well respond to an intrusive and burdensome
regulatory regime by simply nationalizing the Ontario standards, especially if the standards
conformed to valid sector norms. Of course, national charities might just choose to move their
headquarters to another province, but to the extent that the aim of the unattractive regime was to
protect individual donations, it is unlikely that this exit option would be a completely successful
strategy, since the regime would still no doubt regulate the use of fiinds collected in Ontario and
it would undoubtedly continue to regulate solicitations in Ontario, regardless of the headquarters
of the soliciting charity. The exit option would, however, be a viable strategy for foundations,
private and public, new and old, which do not rely on ongoing donations as a source of funds.

Figure 16.1
Percentage Distribution of Total Donations by Province, 1986

BC PEI NS NB

0% 3% ,0/

The observation that total individual donations in Ontario are disproportionately large must
be balanced by various relative measurements which show that the culture of giving is as strong
or stronger in other provinces, and therefore as much in need — if at all — of government
protection. Thus, when compared with Ontario, annual donations, per donor, are higher in four

established in Part IV infra, might devote some effort to establishing up-to-date and accurate statistical profiles of
the sector.

other provinces (Figure 17.1); per tax filer, higher in two other provinces (Figure 18.1); and the
percentage of tax filers claiming deductions is higher or roughly equivalent in four other
provinces (Figure 19.1).

Figure 17.1
Annual Donations per Donor, by Province, 1986

a
_o
'•C

a
o
Q

600.00$

500.00$

400.00$ ..

300.00$ _

200.00$

100.00$ ^

0.00$

NFLD

QC ONT MAN

Provinces

ALTA

Figure 18.1
Annual Donations per Tax Filer, by Province, 1986

>.
a

B
^©
'S

c
o
O

200.00$ ^

180.00$

160.00$ _.

140.00$

120.00$

100.00$

80.00$

60.00$

40.00$ ._

20.00$ .

0.00$

NFLD PH

,..„„,

'"^ '>:

%i>^

W^-'
^

'fe

i -^

:• ^

V^:-.

'>"

^^-

■'.s-^

-x^.

;-^V

-3-f^

QC ONT
Provinces

SAS ALTA BC

Figure 19.1
Percentage of Tax Filers Reporting Charitable Donations, by Province, 1986

H 5.00%

i? 0.00%

NFLD

(2) Generosity

Our three measures of generosity confirm these points. Ontario falls to fifth and sixth
places when giving is measured as a proportion of total income (Figure 20.1) and as a proportion
of disposable income (Figure 21.1), respectively; Ontario falls all the way to ninth place when
average annual donations are expressed as a percentage of average income (Figure 22.1). These
facts confirm the point made above that a higher proportion of Ontarians make donations than
Canadians in most other provinces, but that the level of giving expressed relative to various
measures of capacity to give is lower.

Figure 20.1
Total Donations as % of Total Income, by Province, 1986

1.20%

1.00%

i 0.80% i

^ 0.60%

B 0.40%

o
•G

I 0.20%

0.00%

, y

NFLD PEI NS NB QUE ONT

Provinces

MAN

SAS ALT A BC

100

Figure 21.1
Total Donations as % of Total Disposable Income, by Province, 1986

^ 1

.40%
.20%
.00%
.80%
.60%
40%
20%
00%

NFLD

PEI

NB QUE ONT

Provinces

J^'

""'

/''

1^^

MAN SAS ALTA

Figure 22.1
Annual Donations per Donor as % of Average Income, by Province, 1986

3.50%

3.00% .

ir^

2.50% _

/■

'^'

'4"

^^g

ni)

'l"

:'•'

2.00% .

^t&

'i|v

.^.^

r/l'^

> ,

* -«* 1

1.50% .

{ \

«*«?

V- ;

- r'

, ! :

'y<

■J^

-^^'

1.00% .

--; '

>'>■

'^-

^^;

't''.

■^ '-<

;^4^

' '

\-#

y, {■

"'% @

'^^^

0.50% .

'^ji

<, ,

>
<

0.00%

C%'

%,:■

:lf

V'<y

I'jf,

•.■1

^■^

NFLD PEI NS NB QUE ONT MAN SAS ALT/

\ BC

ovincc

(3^ Direction

For various reasons of history, Quebec's pattern of giving is markedly different from that
prevailing in the rest of the country. The point made above regarding the slightly more secular
orientation of Ontario giving is highlighted again in Figure 23.1. Indeed, the reason the
Canadian average for donations to religious charities is as low as 69.35 percent is due to the
patterns of religious giving in Ontario and Quebec.

101

Figure 23.1
Destination of Donations as % of Provincial Total, 1986, Selected Provinces

80.00% ^

50.00% ..

30.00% ..

10.00% -

■ ONTARIO

■ QUEBEC
qMANITOBA
OALBERTA

■ BC.

(4) Conclusion

Three points are worth emphasizing. First, any regime in Ontario is going to affect national
charities in a significant way. However, second, it is inconceivable that Ontario's position as the
major source of funds will change, even if the regime in Ontario is perceived to be hostile or
overly aggressive by many. This is not to say, however, that some charities, especially private
foundations, would not leave. Third, it is clear that several other provinces have as much or
more interest in protecting donor dollars as Ontario.

d. Donations as a Function of Income

(1) Magnitude

Expressing giving patterns as a function of income provides some help in determining the
need for further public regulation of the charity sector aimed at protecting donor dollars. To
what extent are donors themselves capable of assessing the efficiency, effectiveness, and
honesty of the organizations to which they give? One may begin to address this question by
looking at the demographics of giving. Thus, we look at income, age, and occupation.

Just over thirty-five percent of total Canadian donations (over $775 million) come from
individuals earning between $10,000 and $30,000 per annum and over twenty-three percent
(over $520 million) from earners in the $60,000 plus per annum range (Figure 24.1). The size of

102

annual donations per donor increases with income, from approximately $330 for individuals in
the $10,000 to $20,000 annual income range to nearly $1,000 for individuals in the $60,000 to
$100,000 range, and over $3,000 for people who earn over $100,000 annually (Figure 25.1).

Figure 24.1
Percentage of Total Donations by Income Class, Canada, 1986

Income Class

Figure 25.1
Average Donations per Donor, by Income Class, Canada, 1986

In com e Classes

The proportion of donors in each income class increases as one moves from the lower to
the higher income ranges. (Figure 27.1). That proportion increases from 26.17 percent in the
$10,000 to $20,000 range to 70.25 percent in the $60,000 to $100,000 range, and over seventy-
five percent in the over-$ 100,000 income range. To some extent, these figures are distorted by
the fact that they are measurements of receipted and declared donations. One could quite
legitimately surmise that informal — unreceipted and undeclared — giving could well increase the
proportion of donors in all classes.

o
a.

103

Figure 27.1
Percentage of Tax Filers Reporting Charitable Donations, by Income, Canada, 1986

80.00%
70.00% ..
60.00% ..
50.00% ..
40.00% ..
30.00% ._
20.00% ..
10.00% ..
0.00% ._

lO*
V

Sm.

o <^.

o <".

id' 2

♦►^ 5^

o <".
o' <"

5&^

Income Class

f2j Generosity

The picture of this particular demographic variable is completed in Figures 28.1 and 29.1.
These tell us that although the high income earners as a group donate a higher percentage of
their income than the lower income earners — the range is from .17 percent to 1.91 percent
(Figure 28.1) — ^the personal cost of giving to the actual donors is much higher in the three
lowest income ranges (Figure 29.1).

Figure 28.1

Total Donations as % of Total Disposable Income, by Income Class, Canada, 1986

2.00%

1.80% __
1.60% ..
1.40% __
1.20% ..
1.00% ..
0.80% ._
0.60% ^.
0.40% _
0.20% __
0.00% ._

rm.

o 2>

o 2?

Income C I

ass

o S

o 2?

>
<

104

Figure 29.1
Annual Donations per Donor as % of Average Income, by Income Class, Canada, 1986

8.00%
7.00%
6.00% i
5.00%
4.00% ^
3.00%
2.00% .
1.00%
0.00%

o '^.

o <^.

K> 22

•<♦ *♦ «» ■«*

o <".

Income Class

(3j Direction

The figures available which indicate the direction of giving according to income show a
preponderance of donors in the lower ranges favouring religion, and a significantly larger
proportion of people in the $60,000 plus ranges preferring welfare, health, and education
(Table 30.1). From the point of view of the beneficiaries, the pattern is the same: a
comparatively larger proportion of the donations to religion come from people in the lower
income ranges and a comparatively larger proportion of the donations to welfare, health, and
education charities comes from people in the higher income ranges (Table 31.1).

Figure 30.1
Destination by Income as Vo of Total Class, Canada, 1986

80.00% .

70.00% .

60.00%

b 50.00% .

i 40.00% .

30 00%

20.00%

10.00%
0.00% .

- ft

^ ,t

£L^

iL_

qwelfare

■ HEALTH
QEDUCATION
qRELIGION
HCOMMUNITY
QOTHERS
BARTS t. CULT.
QATHLETIC
QUNIVERSITY

■ FOREIGN

s s s

Income Clasi

105

Figure 31.1
Beneficiaries per Income Class, Canada, 1986

300,000$ .

•

250,000$

J 200,000$

>f Donation (

100,000$ .

50,000$

_□ ^

-1

ii [^

n ,h

BL-

IL f^

^ M

iL.

a-.

Q WELFARE

■ HEALTH

O EDUCATION
QRHUaON

bcommuntiy

qOTHERS
a ARTS A. CULT.
O ATHLETIC
qUNIVERSHY

■ FOREIGN

< $5,000

$10,000-$ 19,999 $30,0OO-$34,999 $40,000-$44,999

Income Cass

$50,000-$59,999

> $100,000

(4) Conclusion

We draw two tentative conclusions. First, assuming for the moment that higher income
earners have a greater capacity for vetting charitable organizations than do lower income
earners, the fact that the bulk of donations in the less than $5,000 to $39,999 per year income
ranges go to religion (between seven and fourteen percentage points more than the national rate
of 69.35 percent) tends to indicate less of a need for a government agency to supervise the sector
for the benefit of donors with the (assumed) lower capacity to screen charitable organizations for
themselves. One could turn this observation on its head, of course, and argue that the donation
pattern is skewed towards religion in these income ranges just because of the lack of capacity to
screen charitable organizations. If this were true, one would expect to hear more from charitable
organizations in favour of greater government supervision. Second, it is noteworthy that by at
least one measure of donor sophistication — the usage of tax receipts — sophistication increases
with wealth. The rate of tax receipt usage, taken together with the fact that the higher income
ranges have a greater propensity to support secular charities, suggests that there are in fact two
cultures of giving in Canada: wealthy and secular, on the one hand, and not-so-wealthy and
religious, on the other.

e. Donations as a Function of Age

(1) Magnitude

The largest supporters of the charity sector measured by total annual donations are
individuals in the forty to fifty and fifty to sixty age ranges, followed closely by the thirty to
thirty-nine, sixty to sixty-nine, and seventy and over age groups (Figure 32. 1).

106

Figure 32.1
Source of Total Donations, by Age Group, Canada, 1986

UNDER 20

20-29

60-69
18%

40-49
20%

However, the picture changes considerably when one looks at the average size of annual
donations by age group. The average annual donations of people in the seventy-plus group are
the largest, at $755; the amount of average annual donations declines substantially with each
drop in age grouping (Figures 33.1 and 34.1).

Figure 33.1
Annual Donations per Donor, by Age Group, Canada, 1986

800.00$

700.00$ „

600.00$ ._

500.00$
<f>
« 400.00$

300.00$ _.
200.00$ __
100.00$
0.00$

-Tn^

UNDER
20

20-29 30-39 40-49

Age Groups

50 - 59

60 -69

70 &
OVER

107

Figure 34.1
Annual Donations per Tax Filer, by Age Group, Canada, 1986

350.00$
300.00$
250.00$ i
200.00$

^ 150.00$ ..

100.00$ ..

50.00$ _.

0.00$

■^

-^ 1 —

UNDER 20 - 29

^ '■ '"»■""' \ nsmiwrnm ^

30-39 40-49 50-59 60-69

Age Groups

70 &
OVER

The level of giving of the various age groups is confirmed by Figure 35.1, which tracks
receipted and declared donations, ranging from over forty-two percent for the over-seventy age
group to just over seventeen percent for the twenty to twenty-nine age group.

Figure 35.1
Percentage of Tax Filers Reporting Charitable Donations per Age Group, Canada, 1986 (VAD)

45.00%
40.00%
35.00% ..
30.00% _.

M 25.00% i

■^^

S 20.00% _.

u
a

^ 15.00% ..
10.00%
5.00% J.
0.00%

^ ^A^^

lilfMIIIIIVillill

■

-WJ

^ V,',

I||m||I|||||B

V ^

imjiiiiii

UNDER
20

20-29

30-39 40-49 50-59

Age Groups

60-69

70 &
OVER

(2) Generosity

From Figure 37.1, it is readily apparent that there is also a marked correlation between age
and generosity, with relatively more people in higher age groups donating significantly higher
proportions of their income.

•a
e

c«
U
cT

^ ©

Pi =

V —

U (ft
3 3
.^ B

B
O

' %oi-s

o
H

* y3A0aNV%SI

%SI-Ol

yo9-p

> %t'-e

%€-3

%3-I

'/ol-O

sj9y{Bdxexio uopjodojj

109

(3) Direction

Figure 38.1 permits several interesting observations. First, religion as a destination is
(roughly) equally supported by all age groups over thirty (as is welfare and community).
Second, "others" as a destination receives markedly more support from people in age groups
under forty than over forty. This pattern may be indicative of a preference in younger donors for
less well-established categories of charitable giving, such as environmental organizations and
sports organizations. Third, education is most strongly supported by people in the forty to fifty
age range (perhaps because they have school-age children). Fourth, health is most strongly
supported by donors in seventy-plus range, followed closely by the sixty to seventy, then the
fifty to sixty, age ranges. This latter pattern, interestingly, tends to confirm a point made by
some economic theorists of the sector who regard donations as a form of voluntary price
discrimination, with the older age groups showing a willingness to pay more for health as they
move closer to the end of their life. On this and related points, see further, chapter 9.

Figure 38.1
Proportional Destination of Donations, by Age Group, Canada, 1986

350,000$

300,000$ ..

250,000$

« 200,000$ ..

•| 150,000$

100,000$ ..

50,000$ ..

UNDER 20

70 & OVER

110

(4) Conclusion

The four points made under section 2(b)(ii)e(3) "Direction" are the most relevant and
interesting with respect to "age" as an explanatory factor.

/ Donations as a Function of Occupation

Employees, as a category, are the largest single source of donations with over fifty percent
of total donations (Figure 39.1). Yet their annual donation per donor — $379.80 — is among the
lowest (Figure 39.2). Although a high proportion of employee donations go to religion, a good
deal go to secular organizations, thus indicating a very important need in the sector to canvass
for funds widely among "ordinary" working people. The donations of farmers, fishermen,
pensioners, and salesmen are very heavily skewed to religion; those of self-employed
professionals and investors, relatively speaking, are skewed to more secular organizations
(Figure 39.3). The latter group also tends to be in the highest annual donation per donor groups.
If one assumes that donors in this group are more sophisticated and in less need of protection,
then the fact that more of their giving is skewed away from religion is fortuitous, since whatever
screening that needs to be done can be done by them, not the state. Conversely, if one assumes
that of all the categories, religion requires the least supervision and if one assumed that
fishermen, farmers, and pensioners have a lower capacity for screening, then the donating
preferences of the latter are also a fortuitous match.

Figure 39.1
Source of Donations, by Occupation, Canada, 1986

Professionals P ro perty Owners

5% 1%

Busines s Owners
11%

Em plo yees
4 8%

P e ns k) ners

Ill

Figure 39.2
Average Annual Donation per Donor, by Occupation, Canada, 1986

$600.00

$500.00 -.

$400.00 _

£ $300.00 __

^ $200.00

$100.00

$0.00

2 E

O ^

d o.

O a.

It
O E

£ a-
O O

.2;

c
ID

a.
E

■d i^

Q- o

O ccupation

Donation

\J»

KJt

Fanners

Fishermen

Professionals

Self-Employed Salesmen

Business Proprietors

B
»

e
B

Investors

Property Owners

Investment

Pensioners

Unclassified

3
«•♦

©'

3
O

«■*■

a*
♦-<

S
ns
a

»s

a
so

■

o
o

r
O

n
>

r
■n

H
O

H
><

113

(iii) Volunteering: Current Patterns

In this subsection we look briefly at the demographics of volunteering. Volunteer work is
as much a source of support for the sector, and as much a part of the tradition of charity, as
giving in the form of gifts; indeed, in many ways, it is more central to notions of charity than is
donating money. While this is true, volunteering does not present any serious problems that are
in any way central to the present study. The present utility of the following information is that it
provides a profile of the people working in the organizations which accept and deploy
donations. This information may be helpftil in determining the extent to which the sector can run
on trust, since, one might surmise, what motivates volunteers to volunteer would also motivate
them to be effective and honest with donated money. This information will also help determine
how capable the sector is of responding to a more or less complex regulatory regime. All of the

17 18

information in what follows is taken from Giving Freely and from the Sharpe study.

The Sharpe study, relying on its own survey of Canadian charities, estimated that
Canadian charities rely on a volunteer base of 4.5 million volunteers per year, equivalent to
sixteen percent of the Canadian population. This does not mean that 4.5 million individuals
volunteered; only that charities rely on a volunteer base of this size.

Figure 40.1 illustrates one fact of relevance to our study. Ontario's proportion of
volunteers in Canada is roughly equal to its proportion of the country's population: Ontario has
thirty-five percent of the country's volunteers and 36.8 percent of its population. This contrasts
sharply with what was observed for donations above. The level of volunteering is much higher
in British Columbia, Saskatchewan, and Manitoba; these are three provinces, it will be recalled,
where the measures of generosity were also higher than the national average.

Another general observation is that there is a noticeable gap between rates of volunteering
for men versus women. In some provinces, the gap is very wide (seventeen percentage points
in Prince Edward Island), and in other provinces, it is non-existent (Quebec), or noticeable but
small (five percent in Ontario). Interestingly, the gap is smallest in the country's two largest
provinces. One could reasonably speculate that these patterns reflect the different stages of
deterioration of traditional male/female social roles, and the consequent transformation of social
organizations.

The patterns of the participation rates for men and women across various age groups is
interesting. The highest rates of volunteers, for both sexes, are in the thirty-five to fifty- five age
range.

Supra, note 3
Supra, note 1

See, also, Figure 41.1, infra.

114

Figure 40.1
Volunteers, by Province, as % of National Total, 1987

MAN
6%

Figure 41.1
Rates of Volunteering by Age and Sex, Canada, 1987

-♦ — MEN
-»~ WOMEN

15-19 years 20-24 years 25-34 years 35-44 years 45-54 years 55-64 years 65 and over

Age Groups

Interestingly, volunteer rates are also positively correlated to levels of education and household
income (Figures 42.1 and 43.1).

115

Figure 42.1
Volunteers by Educational Attainment and Sex, Canada, 1987

50%

e
e

-• — MEN
-■—WOMEN

Primary school Highschool Some Postsec

only postsecondary certif/diploma

Educational Attainment

University
degree

Figure 43.1
Volunteers by Household Income, Canada, 1987

-♦ — MEN

-•—WOMEN

Under

$ 10,000-

$20,000-

$30,000-

$40,000-

$60,000

$ 10,000

$ 19,999

$29,999

$39,999

$59,999

or mo re

Household Income

Finally, Table 44 provides an indication of the motives of volunteers. Altruism, the desire
to work, and the advancement of family are the major influences.

116

Table 44
Reasons for Volunteering, Canada, 1987

TOTAL
VOLUNTEERS

VERY
IMPORTANT

SOMEWHAT
IMPORTANT

NOT TOO
IMPORTANT

NOT AT ALL
IMPORTANT

NOT
STATED

Meeting people, companionship

100%

35%

39%

14%

Fulfilling religious obligations or
beliefs

100%

23%

21%

18%

32%

Learning new skills

100%

29%

36%

16%

11%

Helping others

100%

63%

29%

Helping a cause one believes in

100%

60%

28%

Feeling that one has accomplished
something

100%

54%

32%

Doing something one likes to do

100%

55%

31%

Helping to maintain and promote
one's own heritage or language

100%

15%

22%

23%

33%

Having influence in community
affairs

100%

11%

28%

27%

Improving one's job opportunities

100%

19%

20%

19%

34%

Feeling an obligation to help other
volunteers

100%

17%

39%

21%

15%

Using one's own skills and
experience

100%

36%

42%

11%

Doing work that benefits one's
own children, family, or self

100%

43%

26%

11%

13%

Feeling one owes something to
one's community

100%

21%

40%

19%

13%

Doing something with one's
spare time

100%

20%

31%

21%

22%

Source; Giving Freely.

Direction of volunteering is indicated in Figure 45.1. Once again, religion leads, followed
closely by sports, education, health, and social services, but interestingly the relative importance
of religion as a destination for volunteers is nowhere near what it is for donations. Men
predominate in sports and recreation organizations, environment and wildlife organizations, and
employment and public benefit organizations; women predominate in the remaining
organizations (the majority), but especially in health.

c«

■73
S

B
B

u
o

D.
>%

O
>

J31P0

s8jo |euoi)eai3]ui
puB uSisjoj

sspsnCpue mbi

3J!IPI!AV

pue jusoiuojiAu^

pdjejs
)ou JO psijiiuspiufi

3jn)|n3 pire syy

)S3J3iui oiuomoos
pue )U3iiiXo[dai3

)IJ3U3q

3i|qnd pus .<)3i30s

uieaiop-i)|n)^

S33I.U35 JBIOOS

miB3H

)U3UldO|3A3p

ipnox puB uoi}B3np3

U0!)B3J33'^ pUB SUOd^

guoqvziuvSjo tnoiSip'^

suoiib7iub9jo iiv

O O O o 33B)iia3J3A) o O O

118

Figure 46.1 indicates that the vast majority of volunteers are involved in fundraising and
administrative work. (On a generous interpretation of these two terms, one would include, from
Figure 46.1, the terms "fimdraising, canvassing for funds", "providing information",
"organizing events", "sitting as a board member", "recruiting volunteers", and "office work".)

Figure 46.1
The Top Ten Activities of Volunteers, Canada, 1987

3000

2 2500 _.

2000 __

1500 ._

1000 .

500 ^

u.i

D> O

« 1

.S 5 .£

ill
IP

" i

2 o

rj a
O

II
5 s

CC > o
O

Type of Activity

"z "u

o o

i {<

(iv) Corporate Giving

One might expect that donations from the business sector would require little in the way of
state protection: corporate donors normally should have the wherewithal to vet charitable
organizations for their effectiveness and bona fides. Still, one service government might usefully
perform for corporate (and individual) donors would be to provide information on fiands sought
by charitable organizations. Here, we review briefly some of the salient features of corporate
giving.

a. Magnitude

Corporate donations measured in real dollars varied between a low of $200 million and a
high of $359 million between 1969 and 1987. ThQper capita value of donations varied between

119

$8.30 and $14. As observed previously, there is a marked correlation between corporate giving
and the fortunes of the economy (Figure 47.1).^°

Figure 47.1
Purchasing Power of Corporate Donations, Canada, 1969-1987

Years

The largest sources of corporate donations are the financial industries sector and the
manufacturing sector (Figure 48.1).

Figure 48.1
Percentage and Distribution of Donations by Major Industrial Group, Canada, 1985

3 5.0%

30.0% .
25.0% ..
20.0% ._
15.0% ..
10.0% ..

5.0% ..

0.0% ._

±1

O .SJ
U. li.

Major Induitrial Group

The Sharpe study, supra, note 1, estimated total corporate giving in 1993 to be $1.24 billion, $1 billion of which
was receipted.

120

b. Generosity

A convenient measure of the generosity of corporations is to express donations as a
function of pre-tax corporate profits. Figure 49.1 shows some variability but an overall trend of
decline, paralleling that noticed in the case of individual donations.

Figure 49.1
Corporate Donations as % of Corporate Profits, Canada, 1969-1987

0.80%

0.70%

0.40% ^

S^ 0.30% _
0.20%
0.10%
0.00%

■•— <M (-> •^- lO <0

CO a> ^ — <M C^

ir> io

CO CO CO CO CO CO CO CO

o> o o> o> o> o o^ o o ^> o o o> o> o> o o> o> CO

Year

There is also a great deal of variation between sectors, with two of the poorer performers in total
dollars donated — ^the retail sector and the agricultural sector — performing at the upper end of
this measurement (Figures 50.1 and 51.1).

0.70%
0.60% ._

^ 0.50% _

^ 0.40%

n
H
i 0.30% ._

J 0.20% ._
0.10% _.
0.00% ._

Figure 50.1
Donations as % of Profits by Major Industrial Group, Canada, 1985

•- o
u

Major Industrial Gro

>
up

121

0.80%
0.70%
0.60% _

£ 0.50% _

ft.

f2 0.4 0%

fc 0.3 0% ..
e
i? 0.20% ._

0.10% __

0.00%

Figure 51.1
Donations as % of Profits by Major Industrial Group, Canada, 1987

.^1

o o «

•- o
o

Industrial Group

c. Direction

By far the largest recipient of corporate donations in both 1979 and 1989 was health and
welfare, followed closely by education, then culture (Figures 52.1 and 53.1).

Figure 52.1
Destination of Corporate Donations, 1979

Other

Civic Causes
9%

Education
23%

Health and Welfare
43%

122

Figure 53.1
Destination of Corporate Donations, 1989

Civic Causes
7%
Unclassified
2%

Other

Education
25%

Health and Welfare
46%

3. PROFILES OF CHARITABLE ORGANIZATIONS

(a) Registration Statistics

All of the statistics in this subsection are taken from the Revenue Canada registration
statistics for the years indicated.

Figures 54.1 and 55.1 indicate that Ontario's share of registered charities declined between
1980 and 1990, from over thirty-nine percent to just under thirty- five percent. The largest
increases in the relative number of registered charities occurred in Quebec and Newfoundland,
perhaps an indication of the transformation of charities in these provinces from church
organizations to secular organizations.

123

Figure 54.1
Percentage Distribution of Registered Charities by Province, 1980

NKLD N S
2% 5% P l^ '

1 %

Figure 55.1
Percentage Distribution of Registered Charities by Province, 1990

Figures 56.1 and 56.2 indicate a noticeable movement away from religious charities to
secular charities in the decade of the 1980s. This shift is also evident in some of the donation
statistics examined above in section 1 — Figure 9.1 showed a very slight decline in donations to
religious organizations during the first five years of the decade, with donations to religious
organizations hovering at around seventy-five percent of total donations, and Table 15 indicated
a more severe drop in religious donations as of 1986 to just under seventy percent of total
donations. If these statistics are indicative of a continuing trend towards the secularization of the
sector in Canada, then the case for the public regulation of the sector may need to be addressed

Revenue Canada, Taxation, in A Better Tax Administration in Support of Charities, Discussion Paper (Ottawa:
November 1990), at 8, states that only 26% of the approximately 5,000 new registrations every year are religious
organizations. According to the same source, welfare, education, and benefit to the community groups constitute
two-thirds of the new registrants. Documenting the same transition, the Report of the Auditor General of Canada
to the House of Commons: Main Points (Ottawa: Department of National Revenue, Taxation and Finance, 1991),
at 254, provides the following data.

124

again when this transformation reaches the point where the influence of religious organizations
in the sector is no longer sufficient to assure or contribute significantly to its integrity.

Figure 56.1
Registered Charities by Category, 1980

Figure 56.2
Registered Charities by Category, 1990

Tables 57 and 58 indicates the makeup of the charity sector by category and by province in
1990. As can be seen, some categories are disproportionately high or low in some provinces
compared to those provinces' share of total registrations. For example, "religion" is high in
Prince Edward Island and Newfoundland, "welfare" and "other" charities are high in Quebec.
Ontario's percentages for each category are more or less equal to its proportion of total
registrations, except for "community", which is proportionately low.

Number of Registered Charities

Percentage Increase f

Directory

Assets

Number
Reporting

% of Total
Assets in
Directory

Grants

Number
Reporting

% of Total
Grants in
Directory

Western
Canada

B.C.

8.6%

$ 505,224,699

12.7%

$42,953,311

12.4%

Alta.

5.6%

303,219,037

7.6%

51,923,677

15.0%

Sask.

1.8%

13,624,179

0.3%

1,491,061

0.4%

Man.

4.5%

192,477,398

4.8%

13,970,763

4.0%

Total

195

20.5%

1,014,545313

194

25.4%

110338,812

194

31.8%

Central
Canada

Ont.

558

59.1%

1,663,269,520

554

41.8%

153,237,963

553

44.2%

Que.

161

17.0%

1,222,914,661

161

30.7%

79,148,688

161

22.8%

Total

719

76.1%

2,886,184,181

715

72.8%

232386,651

714

67.0%

Atlantic
Canada

N.B.

1.4%

36,834,226

0.9%

1,826,942

0.5%

N.S.

1.2%

37,845,610

0.9%

2,035,171

0.6%

P.E.I.

0.0%

Nfld.

0.0%

2,117,968

0.0%

120,356

0.0%

Total

3.0%

76,797,804

1.8%

3,972,469

1.1%

Grand
Total

944

99.6%

3,977,527,298

939

99.7%

346,697,932

938

100.0%

(Only active foundations are included in this analysis.)
Source: Directory (1 1th ed.), Table 1

(iii) Distribution of Grants by Region, 1988

Charitable organizations in Ontario received over fifty percent of foundation grants in
1988, and over forty percent of total funds granted (Table 70). No figures are available for 1994.

Ibid

134

Table 70
Distribution of Grants of $2,500 and Over by Region, Fiscal Year End, 1988

Province

%of
Population

%of
Grant Money

% of Number
of Grants

Ontario

36%

42%

52%

Western Canada

29%

28%

29%

Quebec

26%

16%

Atlantic Canada

8.8%

Northern Canada

0.2%

Source: Directory (9th ed.), Table 2.

(iv) Destination of Grants by Charitable Sector, 1988

Charitable organizations in the social service sector received the highest level of support
from foundations in 1988 with twenty-three percent of total grants, and an average grant of
$34,149. Health and education each received eighteen percent of foundation grants with average
grants of $35,302 and $41,363 respectively. Sports and recreation, and international charity
organizations seem relatively neglected by foundations: their grants accounted for a mere
two percent and one percent respectively, of all foundation grants. This may be due in part to the
questionable status of these types of organizations, especially the former, under the traditional
law of charities. Religious organizations have traditionally been funded by individual donations,
as previously presented statistics show. It is worth noting, therefore, that fifteen percent of 1988
foundation grants were awarded to religious organizations, at an average of $28,807 per grant.
Charitable organizations in the arts and culture sector received twelve percent of foundation
grant money at an average of $35,393 per grant. The science and technology sector received
larger than average grants at $53,404 per grant, but these grants account for only ten percent of
all foundation grants.

(v) Top Fifty and Top Ten

fl. By Assets

The fifty largest foundations in Canada in 1994, based on assets , had combined assets of
over $2.69 billion. This represented over sixty-seven percent of the assets of the foundations

listed in the Centre's directory. These fifty foundations awarded over $174 million in 1994,
accounting for over fifty percent of all grants made by the Centre's active foundations in that
year. The three largest foundations based on assets are the J.W. McConnell Family Foundation,

The Canadian Centre for Philanthropy's study relied on the T3010 forms which do not oblige reporting charities
to indicate what method of asset valuation was used. Hence much precision in the information is lost. See
Directory (1 1th ed.), supra, note 24.

Directory (11th ed.), ibid., Table 2, at vi. Asset figures may be lower than they are in reality, because some
foundations indicate the book value as opposed to the market value of their assets.

135

Vancouver Foundation, and The Chastell Foundation. Of the fifty largest foundations, half are
located in Ontario.

Table 71
Top Fifty Foundations — Assets, 1994

No.

Foundation Name

Year
Est'd

City

Assets

Grants

#of
Grants

McCormell Family Foundation;
The J.W. (1993)

1937

Montreal

$371,000,000

$16,072,800

Vancouver Foundation (1993)

1943

Vancouver

355,602,470

22,001,209

779

Chastell Foundations (1993)

1987

Montreal

133,632,404

13,631,866

192

Hospital for Sick Children Foundation;
The (1993)

1972

Toronto

109,179,000

15,233,000

Dormer Canadian Foundation (1993)

1950

Toronto

81,178,270

2,227,845

Winnipeg Foundation (1993)

1921

Winnipeg

81,104,662

4,022,471

175

Kahanoff Foundation; The (1992)

1979

Calgary

74,068,598

4,037,305

EJLB Foundation; The (1993)

1983

Montreal

65,300,200

2,409,702

123

McLaughlin Foundation; The R. Samuel
(1993)

1951

Toronto

63,300,000

3,438,359

n/a

Macdonald Stewart Foundation; The
(1993)

1967

Montreal

62,538,194

5,559,875

Coutu: La Fondation Marcelle et Jean
(1993)

n/a

Montreal

58,600,861

1,956,769

114

Physicians' Services Incorporated
Foundation; The (1993)

1970

North York

58,161,248

2,804,008

Bronfman Family Foundation; The
Samuel and Saidye (1992)

1952

Montreal

58,109,655

4,086,383

Bickell Foundation; J.P. (1993)

1951

Toronto

55,600,000

3,251,310

182

DeSeve; Foundation J.A. (1993)

1967

Montreal

55,488,550

3,867,500

107

Eldee Foundation (1992)

1961

Montreal

45,928,415

3,072,318

101

Ivey Foundation; The Richard (1993)

1947

London

45,866,429

1,144,750

Webster Foundation; R. Howard (1990)

1967

Montreal

44,746,175

4,647,750

131

Laidlaw Foundation (1993)

1949

Toronto

40,562,903

1,925,694

201

Bell Foundation; Max (1993)

1965

Toronto

40,167,000

1,706,000

Molson Family Foundation; The (1993)

1958

Montreal

39,832,188

3,235,000

Morrow Foundation: F.K. (1993)

1944

Toronto

38,263,663

2,199,700

Gordon Charitable Foundation; Walter
and Duncan (1993)

1965

Toronto

38,133,941

1,412,287

Associated Medical Services Inc. (1993)

1976

Toronto

36,878,761

n/a

Atkinson Charitable Foundation; The
(1993)

1942

Toronto

35,210,152

1,099,400

Lawson Foundation; The (1993)

1956

London

34,687,531

1,740,828

104

Kinnear Foundation: The Henry White
(1993)

1979

Toronto

34.257,273

1,577,851

100

Bums Memorial Fund (1993)

1939

Calgary

33,450,551

1,854,885

Edmonton Community Foundation; The

1989

Edmonton

32,391,501

1,327,308

174

Counselling Foundation of Canada (1993)

1959

Toronto

31,173,249

2,166,742

136

No.

Foundation Name

Year
Est'd

City

Assets

Grants

#of
Grants

Windsor Foundation; ITie (1993)

1960

Halifax

27,007,012

1,195,022

Chan Foundation of Canada (1993)

n/a

Vancouver

26,364,400

484,235

Sill Foundation Inc.; Thomas (1993)

1987

Winnipeg

26,253,375

1,020,953

Jewish Community Foundation of Greater
Montreal (1993)

1971

Montreal

26,101,511

638,953

Law Foundation of Ontario; The (1990)

1973

Toronto

26,004,506

8,100,870

Lunenfeld Charitable Foundation; The
Samuel (1993)

1954

Toronto

24,500,000

1,957,878

Meighen Foundation: The Catherine and
Maxwell (1992)

1959

Toronto

24,197,475

1,114,500

n/a

Law Foundation of British Columbia; The
(1993)

1969

Vancouver

23,626,759

12,294,061

McLean Foundation; The (1993)

1945

Toronto

22,907,113

1,116,000

198

Crabtree Foundation; The Harold (1993)

1951

Ottawa

22,799,644

1,107,050

133

Calgary Foundation; The

1955

Calgary

21,543,766

1,548,211

135

Bombardier; Fondation J. Armand (1993)

1967

Valcourt

21,342,226

752,625

263

Levesque; Fondation Jean-Louis (1993)

1961

Montreal

20,488,490

1,104,193

Ivey Fund; The Richard and Jean (1993)

1965

London

19,719,459

722,750

Hogg Family Foundation; The George
(1993)

1978

Montreal

19,137,914

885,156

Jackman Foundation (1993)

1964

Toronto

18,500,000

967,000

187

Weston Foundation; The W. Garfield
(1992)

1987

Toronto

17,563,491

2,939,500

Dunn Foundation; The Sir James (1993)

1967

St. John

17,237,305

967,000

Tanenbaum Charitable Foundation; The
Joseph (1993)

1967

Scarborough

16,946,994

507,180

Eaton Foundation; The (1993)

1958

Toronto

16,528,231

1,694,887

340

TOTAL

$2,693,183,515

$174,826,939

5,070

Source: Directory (11th ed.), Table 2, at vi.

b. By Grants

The fifty largest Canadian foundations, based on grants, awarded a total of $236.5 million
in 1994. This represented over sixty-eight percent of total foundation grants. These fifty
foundations had assets totalling $2,372 billion, or sixty percent of the assets of all the
foundations. The three largest foundations by grants were the J.W. McConnell Family
Foundation, the Vancouver Foundation, and the Alberta Foundation for the Arts.

137

Table 72
Top Fifty Foundations - Grants, 1994

No.

Foundation Name

Year
Est'd

City

Assets

Grants

#of
Grants

Vancouver Foundation (1993)

1943

Vancouver

$355,602,470

$22,001,209

779

Alberta Foundation for the Arts (1993)

1991

Edmonton

12,172,584

16,513,066

n/a

McConnell Family Foundation; The J.W.
(1993)

1937

Montreal

371,000,000

16,072,800

Trillium Foundation (1994)

1982

Toronto

15,294,883

201

Hospital for Sick Children Foundation;
The (1993)

1972

Toronto

109,179,000

15,233,000

Chastell Foundation (1993)

1987

Montreal

133,632,404

13,631,866

192

Law Foundation of British Columbia; The
(1993)

1969

Vancouver

23,626,759

12,294,061

Royal Bank of Canada Charitable
Foundation (1994)

1992

Toronto

100,000

10,672,720

1000

Law Foundation of Ontario; The (1990)

1973

Toronto

26,004,506

8,100,870

Alberta Law Foundation (1993)

1973

Calgary

11,675,101

7,011,717

Wild Rose Foundation (1994)

1984

Edmonton

8,800,000

5,600,000

293

Macdonald Stewart Foundation; The
(1993)

1967

Montreal

62,538,194

5,559,875

Webster Foundation; R. Howard (1990)

1967

Montreal

44,746,175

4,647,750

131

Recreation, Parks and Wildlife
Foundation (1992)

1976

Edmonton

3,838,091

4,633,432

645

Bronfman Family Foundation; The
Samuel and Saidye (1992)

1952

Montreal

58,109,655

4,084,383

Kahanoff Foundation; The (1992)

1979

Calgary

74,068,598

4,037,305

Winnipeg Foundation; The (1993)

1921

Winnipeg

81,104,662

4,022,471

175

De Seve; Foundation J. A. (1993)

1967

Montreal

55,488,550

3,867,500

107

McLaughlin Foundation; The R. Samuel
(1993)

1951

Toronto

63,300,000

3,438,359

n/a

Bickell Foundation; J.P. (1993)

1951

Toronto

55,600,000

3,251,310

182

Molson Family Foundation; The (1993)

1958

Montreal

39,832,188

3,235,000

Eldee Foundation (1992)

1961

Montreal

45,928,415

3,072,318

101

Weston Foundation; The W. Garfield
(1992)

1987

Toronto

17,563,491

2,939,500

Physicians' Services Incorporated
Foundation; The (1993)

1970

North York

58,161,248

2,804,008

EJLB Foundation; The (1993)

1983

Montreal

65,300,200

2,409,702

123

Carthy Foundation (1993)

1967

Calgary

76,905

2,266,660

166

Donner Canadian Foundation (1993)

1950

Toronto

81,178,270

2,227,845

Morrow Foundation; F.K. (1993)

1944

Toronto

38,263,663

2,199,700

Counselling Foundation of Canada (1993)

1959

Toronto

31,173,249

2,166,742

Wood Gundy Charitable Foundation; The
(1993)

1967

Toronto

2,147,632

347

Lunenfeld Charitable Foundation; The
Samuel (1993)

1954

Toronto

24,500,000

1,957,878

No.

Foundation Name

Year
Est'd

City

Assets

Grants

#of
Grants

Coutu; La Fondation Marcelle et Jean
(1993)

n/a

Montreal

58,600,861

1,956,769

114

Laidlaw Foundation (1993)

1949

Toronto

40,562,903

1,925,694

201

Bums Memorial Fund (1993)

1939

Calgary

33,450,551

1,854,885

Lawson Foundation; The (1993)

1956

London

34,687,531

1,740,828

104

Bell Foundation; Max (1993)

1965

Toronto

40,167,000

1,706,000

Eaton Foundation; The (1993)

1958

Toronto

16,528,231

1,694,887

340

Marder Family Foundation (1992)

1976

Toronto

3,194,403

1,600,350

356

Manitoba Law Foundation; The (1993)

1986

Winnipeg

3,500,000

1,579,557

Kinnear Foundation; The Henry White
(1993)

1979

Toronto

34,257,273

1,577,851

100

Pattison Foundation; The Jim (1992)

n/a

Vancouver

4,779,321

1,568,215

Calgary Foundation; The (1993)

1955

Calgary

21,543,766

1,548,211

135

Molson Companies Donations Fund
(1994)

1973

Toronto

300,801

1,450,446

596

Gordon Charitable Foundation; Walter
and Duncan (1993)

1965

Toronto

38,133,941

1,412,287

Edmonton Community Foundation; The
(1993)

1989

Edmonton

32,391,501

1,327,308

174

Muttart Foundation; The (1993)

1953

Edmonton

8,740,069

1,319,688

Berman Family Foundation (1992)

1974

Toronto

950,965

1,268,640

Silverman Family Foundation; The Saul
A. (1993)

1967

Toronto

6,223,083

1,205,885

Windsor Foundation; The (1993)

1960

Halifax

27,007,012

1,195,022

Bronfman Family Foundation; The
Edward (1992)

1989

Toronto

14,867,489

1,176,077

TOTAL

$ 2,372,451,079

$236,504,162

7,762

Source: Directory (1 1th ed.). Table 3, at vii.
(b) CLASSIFICATION OF FOUNDATIONS
(i) Family Foundations

Family foundations are the most common type of foundation in Canada, accounting in
1990 for ninety percent of all foundations in Canada. Some are very large: forty-three of the
fifty largest foundations based on assets are family foundations. Most, however, tend to be
small, and tend to grant smaller sums to a greater variety of charities.

The largest foundation in Canada is the Montreal-based J.W. McConnell Family
Foundation. On its own, in 1994 it accounted for 14.6 percent of the total assets of all active
Canadian foundations, and its grants accounted for 9.3 percent of all grants awarded in Canada.
Like the McConnell Family Foundation, most of the larger family foundations in Canada are
based m Montreal (the CRB, Macdonald Stewart, Samuel & Saidye Bronfman Family, Molson
Family, De Seve, RHW, and Eldee foundations). Toronto has the second largest concentration
of major family foundations (the Donner Canadian, R. Samuel McLaughlin, F.K. Morrow,

139

Bickell, and Joseph Tanenbaum foundations). The Kahanoff Foundation is based in Calgary.
Most of the major family foundations were established in the 1950s and 1960s.

(ii) Community Foundations

There are, at last count, twenty-nine active community foundations in Canada.^^ The
Vancouver Foundation is the largest with $355.6 million assets. The Winnipeg Foundation,
established in 1921, is the oldest active foundation in Canada. It is also the second largest
community foundation with assets of $81.1 million and grants of $4.02 million in 1994.

Over half of the ten largest community foundations were established before the 1960s,
namely in Winnipeg (1921), Victoria (1936), Vancouver (1943), Peterborough (1953),
Fredericton (1967), Calgary (1967), Thunder Bay (1971), and Saint John (1977). The
Metropolitan Toronto Community Foundation was established in 1981, making it the youngest
of the major community foundations.

(iii) Corporate Foundations

Corporate foundations are legally independent entities, but generally remain very closely
tied to the corporation with which they are associated through interlocking board memberships.
The main function of corporate foundations is to permit better planning of corporate giving.
Corporate foundations are often not endowed, but operate simply as intermediaries in the
distribution of the "parent" corporation profits.

In the United States, Japan, and several European countries, corporate foundations have
been operating effectively since the mid-1960s. Many of the largest Canadian corporate
foundations were established shortly thereafter, in the late 1960s and in the 1970s. There are, at
last count, only twenty-one active corporate foundations in Canada today.

As of 1988, six of the largest corporate foundations, based on assets, were located in

3 1

Ontario. The J. Armand Bombardier Foundation and the Dominion Textiles Foundation were
the only two major corporate foundations in Quebec. Alberta is the home to the Nelson Lumber
Foundation and the Carthy Foundation. The Richardson Century Fund is the only major
corporate foundation in Manitoba.

The J. Armand Bombardier Foundation was the largest corporate foundation in 1988 with
$9,372 million in assets. The Noranda Foundation was the most generous corporate foundation.

On community foundations in Canada, see M. Sharpe, "The Community Foundation" (1991), 10 Philanthrop.
(No. 1) 26. The Canadian Centre for Philanthropy defines community foundations as follows: "Community
foundations normally share the five following characteristics; funds are derived from the contribution of many
donors, usually through bequests; grant programs are designed to benefit the particular city or region served;
acfivities are regularly reported to the public; the governing body represents broad segments of the community;
and the use of funds may be altered if purposes designated by donors become impracticable."

Quebec and Ontario Paper, Dominion Securities, Allstate, Royal LePage, Mitsui Canada, and Molson Companies.

with grants of $2,908 million in 1988. It is interesting to note that many of the corporate
foundations with the largest assets are not the most generous. This may be explained by the
different methods of running a corporate foundation: the most generous foundations may not
have a significant amount of assets, but are run as pass-through foundations, whereas the
foundations with the most assets are building an asset pool for donations in the future.

The ten largest corporate foundations based on assets, had combined assets of $23,204
million in 1988, which accounted for a mere 0.8 percent of assets of all foundations. Grants
given by corporate foundations totalled $3,397 million in 1988, or 1.3 percent of grants of all
foundations.

The ten largest corporate foundations based on grants, had assets of $16,507 million in

1988, accounting for 0.6 percent of all foundation assets. They granted a total of $7,821
million, which represented 2.9 percent of all foundation grants.

(iv) Special Interest Foundations

There are a good number of special interest foundations in Canada, especially in the areas
of health and law. Many are based in Toronto (Associated Medical Services Inc., Hospital for
Sick Children Foundation, Law Foundation of Ontario, and Physician's Services Incorporated).
Others are based in the western provinces the (Alberta Law Foundation, Law Foundation of
B.C., M.S.I. Foundation (Alberta), Manitoba Law Foundation, and Manitoba Medical Service
Foundation).

Seven of the ten largest special interest foundations were established in the 1970s; the Law
Foundation of B.C. was founded in 1969, the Ottawa-based Law for the Future Fund in 1984,
and the Manitoba Law Foundation in 1986.

The ten largest special interest foundations had total assets of $244,689 million in 1988,
accounting for 8.9 percent of the assets of all foundations. These foundations granted $35,898
million, or 13.3 percent of the total foundation grants made in 1988.^^

(v) Government Foundations

The following are some of the government foundations listed in the Canadian Directory to
Foundations: Trillium Foundation (Ontario); Wild Rose Foundation (Alberta); Alberta

32
33
34

Directory (9th ed.), supra, note 24, Table 1 1 , at xiii.
Ibid., Tabk 12, at xiii.

There has been significant growth in the number of hospital foundations in recent years. See M. Wright, "Why
Are so Many Charities Establishing Their Own Foundation?— The Hospital Experience", in Legal and Tax Issues
Affecting Charities (Toronto: Canadian Centre for Philanthropy, 1985), who notes that the number of hospital
foundations had increased from 21 to over 100 from 1982 to 1984.

Directory, (9th ed.), supra, note 24, Table 13, at xiii.

141

Foundation for the Literary Arts; and Recreation, Parks and Wildlife Foundation (Alberta).
Three quarters of these are in Alberta. Government foundations are a recent phenomenon, all
except the Recreation, Parks and Wildlife Foundation (1976) were established in the 1980s.

Government foundations awarded a total of $21,359 million in 1988, which accounted for
eight percent of grants of all foundations. These foundations generally have very few assets.
The Trillium Foundation, for example, has no assets at all, but awarded almost $15 million in
1988. These foundations are largely funded with lottery profits, which are usually directly and
completely awarded to charitable organizations without ftirther investment.

5. LEVELS OF ONTARIO GOVERNMENT SUPPORT FOR THE CHARITY
SECTOR

In this, the last section of empirical studies, we present the data available from the
provincial government public accounts on provincial government grants and payments to the
charity sector for three fiscal years, 1989-90, 1988-89, and 1987-88. We look at the three most
significant granting ministries: Citizenship; Culture and Communications; and Community and
Social Services. One note of caution is in order. The manner in which the public accounts are
presented does not distinguish between nonprofit and charitable organizations. However, they
do help to present some idea of the magnitude of grants and relative significance of the sector to
the various ministries' activities.

Table 73

1989-1990 1

Ministry

Total amount

of grants to

charities

Grants to

municipalities,

towns, cities

and counties

Total

expenditures of

Ministry

Total government
spending

A/C

Citizenship

$ 6,293,915

$ 0

$ 46,577,469

$20,976,509,333

.135127887

Culture and
Communications

237,704,934

$ 4,979,628

314,294,942

$20,976,509,333

.756311674

Community and
Social Services

2,941,606,791

1,224,737,574

5,062,309,397

$20,976,509,333

.581080009

Table 74

1988-1989 1

Ministry

Total amount

of grants to

charities

Grants to

municipalities,

towns, cities

and counties

Total

expenditures of

Ministry

Total government
spending

A/C

Citizenship

$ 22,526,849

$ 40,188

$ 45,914,585

$27,929,285,807

.490625124

Culture and
Communications

144,018,535

$ 7,087,884

236,324,623

$27,929,285,807

.561859931

Community and
Social Services

3,586,501,352

982,219,147

4,311,701,136

$27,929,285,807

.83180674

Ibid., Tabk 14, atxiv.

142

Table 75

1987-1988 1

Ministry

Total amount

of grants to

charities

Grants to

municipalities,

towns, cities

and counties

Total

expenditures of

Ministry

Total government
spending

A/C

Citizenship

$ 25,517,334

$ 290,217

$ 38,510,448

$35,463,213,771

.662608079

Culture and
Communications

168,759,454

$ 16,688,749

227,457,872

$35,463,213,771

.741937188

Community and
Social Services

2,400,158,999

912,129,965

3,774,757,425

$35,463,213,771

.635844566

6. CONCLUSIONS AND RECOMMENDATIONS

We draw a number of tentative conclusions from the empirical analysis in this chapter.

(1) Our analysis suggests that the culture of giving in Canada is going through a period
of stagnation or decline. The available information on the credibility of the sector
together with the existence of well-established, obviously efficient, and obviously
honest institutions suggests that there is very little that a regulatory regime which
targeted credibility generally could do to reverse the decline. However, regulation
targeting credibility in specific areas of charitable activity, such as international
charity, for example, might well be justified. This general conclusion does not,
however, suggest that there may not be other good reasons for the government to
increase its regulation of the sector. These other reasons include policing the tax
expenditure, protecting charitable purpose organizations from fraud, enhancing the
public profile of the sector, and emphasizing the importance of practising in the
sector with regard to good citizenship.

(2) The empirical information suggests a classification of the sector for possible
regulatory purposes in at least one respect. It is clear that religion is a case apart.
Religion is by far the most favoured destination of donor dollars, although there
appears to be a recent trend of secularization in the sector as a whole. The
demographic information is also quite distinctive: a very large proportion of
donations from donors in the lower income brackets go to religion, and there is
proportionately equal support for religion in all age groups.

(3) The empirical information also suggests a division among types of foundations along

the lines presently used in the Income Tax Act. Private foundations or family
foundations are by far the most significant foundations in terms of asset size and

Supra, note 4.

143

total number of grants awarded. The other foundations — public, corporate, special
interest, and government — are much fewer in number and much smaller in size.

(4) The information on the revenues of the sector indicates an evolution towards greater
support overall by government grants compared to donations. However, these
statistics may be misleading since large numbers of charitable organizations do not
receive any government grants at all.

(5) The information on registrations substantiates the claim that the sector is in a process
of evolution towards greater secularization.

(6) The information on expenditures indicates that surprisingly few organizations use the
services of professional fundraisers. It also shows that the vast majority of
organizations are able to comply with the twenty percent limit that Revenue Canada
places on administrative expenditures.

PART II: PUBLIC POLICY AND THE CHARITY SECTOR

CHAPTER 6

A WORKING DEFINITION OF
CHARITY

1. INTRODUCTION

There are a number of serious difficulties with the current common law definition of
"charity". These are examined in detail in the two next chapters. In this chapter, the Commission
sets out the rudiments of a real definition in section 2, then identifies the main policy implications
of that definition in section 3. The discussion in this chapter provides the basis for an evaluation of
the current difficulties in the law and the basis for our proposed reforms. We suggest, however,
that reform is better effected through further case law development than through statutory
enactment. As a consequence, our discussion in this chapter and the next two is intended more for
lawyers, government officials, and the judiciary, than for the legislature.

2. DEFINITION OF CHARITY

(a) The Connotations of "Charity", "Philanthropy", and "Altruism"

One approach to the problem of defining "charity" is to begin by noticing various
differences in the meaning of two related terms, "charity" and "philanthropy". "Charity", in its
main connotation, signifies acts of kindness and consideration that demonstrate concern for the
poor and needy; "philanthropy" signifies acts of generosity that demonstrate regard for the

On the definition of "charity", see, generally, N. Brooks, "Charities: The Legal Framework" (Ottawa: Secretary of State,
1983) [unpublished]; M.C. Cullity, Q.C., "The Myth of Charitable Activities" (1990), 10 Est. & Tr. J. 7; T.G. Watkin,
"Charity: The Purport of 'Purpose'", [1978] Conv. 277; G.H.L. Fridman, "Charities and Public Benefit" (1953), 31
Can. B. Rev. 537; N.P. Gravell, "Charitable Trusts and Ancillary Purposes", [1978] Conv. 92; L.B. Chisolm and
D.R. Young, "Introduction" to "What is Charity? Implications for Law and Policy: A Symposium" (1989), 39 Case
W. Res. L. Rev. 653; F.H. Newark, "Public Benefit and Religious Trusts" (1946), 62 L.Q.Rev. 234; E.B. Bromley,
"Contemporary Philanthropy — Is the Legal Concept of 'Charity' Any Longer Adequate", in D.W.M. Waters (ed.),
Equity, Fiduciaries and Trusts (Scarborough: Carswell, 1993) 59; D. Baker, "Rethinking Charity: What Do We Owe
Each Other?" (1991), 10 Philanthrop. 33; and P. Mitchell, "The Political Purposes Doctrines in Canadian Charities
Law" (1995), 12 Philantrop. (No. 4) 3.

[145]

146

achievements of human kind in general. The first conception emphasizes feelings of empathy for
people in emotional, economic, or physical distress; the latter is moved by respect for the higher
endeavours of humanity, such as the sciences, philosophy, the arts, and sports. The abstraction
uniting these two terms is that they are both concerned with (1) doing good (2) for others. The
structure and content of "charity" and "philanthropy" in these senses are, at this level of
abstraction, the same. The differences lie at a deeper level: in the identification of the beneficiaries
or the clientele of each (the disadvantaged versus the National Ballet, for example); in the types of
human well-being pursued (economic and social capacity versus aesthetic and intellectual
capacity, for example); and in the emotions associated with each (concern for the poor versus
respect for the achievements of science, for example).

There are pejorative connotations of both terms that "altruism", a general term that
comprehends both, avoids. "Charity" is sometimes taken to connote pity or disdain for its
beneficiaries; by "philanthropy" some people understand aesthetic conceit, or plutocratic and
aristocratic arrogance. Perhaps to avoid aspects of the first connotation, ''caritas" in Corinthians
1:13 is invariably translated as "love" not "charity". "Charity" also evokes a religious connection,
and in Judeo-Christian religious traditions, among others, in its highest form it is the love of God.
"Philanthropy" is more secular. It is commonly associated, for example, with the benefactions of
the great robber-baron philanthropists of the United States in the late nineteenth and early
twentieth centuries. In the Aristotelian/Thomist tradition, charity is the principal element of the
virtue of friendship; philanthropy or "liberality" is an aspect of the virtue of temperance and, in
particular, identifies how wealthy persons should spend their money.

Despite these clear differences in both positive and pejorative connotations, "charity" is used
by the law to express both meanings. "Altruism" is almost as useful a term in this same context,
and it will be used for the purposes of this chapter only in the quest for a real definition. "Charity"
and "philanthropy", in this chapter only, are used in the narrower senses.

See D.H. McMullen, S.G. Maurie, and D.B. Parker, Tudor on Charities, 6th ed. (London: Sweet & Maxwell, 1967),
at 1, citing Morice v. Bishop of Durham (1804), 9 Ves J. 399 (S.C); 32 E.R. 656, aff d (1805), 10 Ves J. 522, 32 E.R.
947 (L.C.): "In its widest sense 'charity' denotes all the good affections that men ought to bear towards each other. In its
most restricted sense it denotes relief of the poor." See, also, Chisolm and Young, supra, note 1, for a similar distinction.
This distinction formed the main basis of the argument of the tax commissioners in Commissioners for Special Purposes
of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28 (H.L.) (subsequent references are to [1891]
A.C.) and surfaces from time to time in proposals to narrow the scope of the definition. See, for example, B. Whittaker's
minority opinion in U.K., National Council of Social Service, Charity Law and Voluntary Organizations: Report of the
Goodman Committee (London: Bedford Square Press, 1976), at 145. Scots law recognizes a narrower definition of
charity as well. See C. de B. Murray, The Law of Wills in Scotland {E(^\nh\xxg\\■. W. Green & Son, 1945), at 71-74.

For the latter perspective, see, for example, L. McQuaig, Behind Closed Doors (Markham, Ont.: Penguin Books, 1987),
at 57: "[0]ne is struck by how much of the money seems to go to the very established cultural and educational
institutions and how little to anything directly helping the poor"; T. Odendahl, Charity Begins at Home: Generosity and
Self-interest Among the Philanthropic Elite (New York: Basic Books, 1989); and L.M. Salomon, J.C. Musselwhite Jr.,
and C.J. DeVita, Partners in the Public Service: Government and the Non-Profit Sector in the Welfare State
(Washington: Independent Sector and the United Way Institute, 1989).

147

Interestingly, the law also marks a distinction between "charity" and "philanthropy"'* for
certain purposes. That distinction is also manifest in many of the opinions expressed in
submissions to the Commission. Some of the submissions from organizations that do charitable
work argued that philanthropic work is "different" and somewhat less worthy of favourable
consideration. For many on the philanthropy side of the divide, the feeling was mutual, at least to
the extent that these organizations accepted the fact that a substantive divide exists. Among the
submissions from philanthropically oriented organizations, there were also differences of opinion
as to whether, for instance, sports is as worthy as medical research. Finally, there was a body of
opinion that religion is a case apart altogether, perhaps a third category.

Despite these differences of opinion, we take the structural and substantive identity of the
two aspects of altruism, (1) doing good (2) for others, as the starting point of a real definition. The
present difficulty is to identify first the meaning of "doing good", and second the meaning of
"others".

(b) The Meaning of "Doing Good"

To answer the first question, we must look beyond the purely material aspects of the
particular thing or service donated, since wealth in almost any form can be used altruistically. The
important issues are the designated purpose and/or the actual use of the donated wealth. The first
question, then, is: What purposes or what uses are altruistic?

On the whole, the law does a tolerably good job answering this question. Instead of offering
a definition, however, the law merely lists three general purposes, and a fourth catch-all purpose:
(1) the relief of poverty; (2) the advancement of religion; (3) the advancement of education; and
(4) the advancement of "other causes beneficial to the community." This is helpful as far as it
goes, but a list is not a definition. We need to know what unites the items on the list. This question
is usually avoided by judges and textbook writers alike, even if the fourth category has always
implicitly suggested a possible answer.

The philosopher John Finnis, writing in the natural law tradition, contributes helpfully in
responding to this question. Finnis identifies a range of human goods almost identical in scope and
meaning to the common-law list. Their unifying factor in his view is that they are "basic forms of

For charities established for the relief of poverty, the public benefit requirement is less stringent. For a discussion of the
rule, see Re Scarisbrick; Cockshatt v. Public Trustee, [1951] 1 Ch. 622, [1951] 1 All E.R. 822 (C.A.). See the "poor-
relations" cases discussed infra, ch. 8.

See Inland Revenue Commissioners v. Baddeley, [1955] A.C. 572, at 583, [1955] 1 All E.R. 525, at 528 (H.L.), per
Viscount Simonds: "[N]o comprehensive definition of legal charity has been given either by the legislature or injudicial
utterance." See, also, in Incorporated Council of Law Reporting for England and Wales v. Attorney-General, [1972]
Ch. 73, at 88, [1971] 3 All E.R. 1029, at 1036 (C.A.) per Russell L.J.

Commissioners for Special Purposes of the Income Tax v. Pemsel, supra, note 2, at 583.

See J. Finnis, Natural Law and Natural Rights (Oxford: Clarendon Press, 1980) ch. 4. See, also, G. Grisez, Beyond the
New Morality? The Responsibilities of Freedom, 2d ed. (Notre Dame: University of Notre Dame Press, 1980). For more

148

human flourishing to be pursued and realized" in all practical activity. The basic human goods on
Finnis' more complete list are our ultimate purposes; they are the ones that give all our
right-thinking actions their point, making them intelligible to ourselves and others. Finnis argues
that there are a limited number of such goods. Life is one of them and, using life as an example,
he argues that we understand the life-saving or life-sustaining actions of a doctor because we
know without doubt that life is to be pursued. Nobody asks, "Why does the doctor want to save
the patient's life?" That question is unanswerable except to say, "That life is to be pursued is
self-evident: any sane person is capable of seeing that life as such is worth having". Finnis lists
life, knowledge, play, aesthetic experience, friendship, religion, and practical reasonableness as
goods per se nota. We would add work to this list. In moral theory, these basic goods form the
first principles of practical reason in making choices. What is helpful in the theory for present
purposes are the similarities — ^with some modification — between Finnis' categories and the
common-law classification of charitable purposes, and, more important, Finnis' isolation of what
it is that unites the things on the list, that is, that they are self-evident and underived human goods.

By "life", Finnis means "every aspect of vitality which puts a human being in good shape for

self-determination". Hospitals, medical schools, the work of surgeons and nurses, famine relief,

soup kitchens, road safety laws, etc., all participate in the good of life. By "knowledge", Finnis

means, simply, the good we achieve when we get "to the truth of the matter", or the good we

identify when we speak of "knowledge for its own sake", or what we mean when we say, "It

would be good to find ouf . Thus, for example, we consider the well-informed person, to that

extent, to be well off, and not only for the profitable use he can make of his knowledge. Truth, in

short, is self-evidently worth pursuing. By "play", Finnis means "performances which have no

point beyond the performance itself, enjoyed for its own sake". The performance may be

"solitary or social, intellectual or physical, strenuous or relaxed, highly structured or relatively

informal, conventional or ad hoc". It is sufficient to explain the behaviour of people involved in

a game to say, "They enjoy playing". The good of "aesthetic experience" points to the self-evident

goodness, "the to-be-pursuedness" of beauty. The good of sociability or "friendship" can range

from a minimum of peace and harmony among persons, to acting for the sake of one's friend. By

"religion", Finnis means the "establishing and maintenance of a proper relationship between

1 1
oneself and the divine", the arrangement of all orders in an ultimate order of things. Secular

humanism has brought with it scepticism over whether religion is a basic human good. Finnis

argues that the sceptic must admit, at the very least, that whether in fact God exists or not, the

question of God's existence is crucially important for everyone. Finally, there is "practical

reasonableness" or reasonableness, the basic good of being able "to bring one's own intelligence

to bear effectively... on the problems of choosing one's actions and life-style and shaping one's

recent statements of the theory, see R. George, Making Men Moral (Oxford: Clarendon Press, 1993), and J. Boyle, G.
Grisez, and J. Finnis, "Practical Principles, Moral Truth, and Ultimate Ends" (1987), 32 Am. J. Juris. 99.

8
9

Different versions of the theory have formulated the self-evident goods in different ways.

Finnis, supra, note 7, at 86.

Ibid., at 87.

Ibid.

Ibid., at 89.

149

own character... [T]his involves that one has a measure of effective freedom;... it [also] involves
that one seeks to bring an intelligent and reasonable order into one's own action and habits and
practical attitudes."

Altruism, then, is the provision of the material, social, or emotional means to pursue these
basic human goods — these common or universal goods — to others so that they may flourish.
When we help the poor, our object is to provide them with the material advantages of shelter and
sustenance (life), as well as the means to pursue the other goods (knowledge, play, religion).
Material or financial support for a primary school provides the means for others to pursue not only
the good of knowledge, but, especially among children, the good of practical reasonableness, that
is, the ability to live a balanced, well-ordered life. Donations to hospital foundations go
exclusively to the purposes hospitals pursue, such as care of the sick or health research, the point
of which is to contribute to health of others.

There are as many ways to assist others in the pursuit of these goods as there are people with
the resources to do so. In fact there are many more: the variety in specificity of these goods is as
rich as the human imagination; they are certainly richer than the hundreds of cases cited in the
always lengthy definition chapters of charity law texts. There is a logic about the connection
between the goods and any particular instantiation which Finnis attempts to capture in the concept
of "determination" or "implementation". A community, through its laws, provides the conditions
for the coordination of the pursuit by its members of these human goods, and therefore a law, in
the natural law tradition, is a determination or implementation of these goods. Similarly, altruistic
projects, that is, projects formally intended to help and which actually do help others to pursue
these goods, are also, according to the definition being advanced, determinations or implementa-
tions of the goods. In both cases, practical intelligence is engaged to design and implement a
project (of law or charity) that actually instantiates or is a determination of the good.

One aspect of the divide, noted previously, between "charity" and "philanthropy" may now
be more easily explained. The divide is based not on a ranking of these goods, but, in part, on the
degrees of deprivation of the means of flourishing in the beneficiaries. The economically destitute
are bereft of any means; the young dancer's chances of perfecting his art are merely diminished
by his lack of resources. True, we can easily imagine cases in which our sympathy and, therefore,
even our altruism is directed more strongly towards the promising dancer who lacks means, than it
is towards the derelict who will not change his ways. Nonetheless, there are degrees of need and
degrees of deprivation of the means to live a fulfilling life. "Charity" in the narrow sense
identifies the most wanting end of the continuum, "philanthropy", the least. The critical observa-
tion is that what seemed to be a difference in kind is now seen as only a difference in degree.
Perhaps this explains the law's wisdom in its more inclusive use of "charity".

Ibid., at

150

The second half of our working definition of altruism required that whatever was determined
to be good had to be done "for others". Benefits to oneself, one's family, one's relatives, or one's
friends are more a matter of obligation (moral or legal) or affection than altruism, even though it
is often said that charity begins at home. Indeed, the obligational aspect is recognized by the
income tax system in its treatment of the family as, in part, the taxable unit. "Altruism" connotes
dispositions towards individuals that are more remote in our affections or to whom we are not
otherwise obligated. "Strangers" is perhaps too strong a word to express the distance required, but
it is helpful because it does emphasize that some such distance is mandatory.

The requirement of emotional and obligational distance seems easy to accept. Interestingly,
it raises a more difficult question regarding the general relevance of the motives of a donor,
because, in part, it is the motives of the donor that we are focusing on in requiring an emotional
and obligational distance. To be purely altruistic, we seem to be saying, an act has to have as its
motive, as well as its form and actual effect, the doing of good for strangers. True altruism, like
true liberality or true justice, in this view, is a disposition of the will before it is anything else.

Perhaps this maxim explains the anomalous "poor relations" cases mentioned. For further discussion, see infra, ch. 8.

There is a provocative suggestion in economic literature that an act of charity is just another consumption preference of
the donor. L.A. Blum, Friendship, Altruism and Morality, paperback ed. (London: Routledge & Kegan Paul, 1982), at 5
characterizes a related view in the Kantian tradition this way:

To act from altruistic feeling or emotion is to act out of an inclination or desire. Though the inclination is
towards the good of another, action thus prompted is fundamentally egoistic in its motivation. For the agent
acts beneficently only because he happens to have a particular inclination to promote the others' good.

That purity of will as the foundational element is affirmed in St. Paul, Corinthians I, 1:13.

Consider also Maimonedes, "Eight Degrees of Charity":

The first and lowest degree is to give, but with reluctance or regret. This is the gift of the hand, but not of the
heart.

The Second is to give cheerfully, but not proportionately to the distress of the sufferer.

The Third is to give cheerfully, and proportionately but not until solicited.

The Fourth is to give cheerfully, proportionately, and even unsolicited, but to put it in the poor man's hand,
thereby exciting in him the painful emotion of shame.

The Fifth is to give charity in such a way that the distressed may receive the bounty, and know their
benefactor, without their being known to him...

The Sixth which rises still higher, is to know the objects of our bounty but remain unknown to them...

The Seventh is still more meritorious, namely, to bestow charity in such a way that the benefactor may not
know the relieved persons, nor they the names of their benefactors...

The Eighth and the most meritorious of all, is to anticipate charity by preventing poverty; namely, to assist
the reduced fellowman, either by a considerable gift, or a sum of money, or by teaching him a trade, or by
putting him in the way of business, so that he may earn an honest livelihood, and not be forced to the dreadful
alternative of holding out his hand for charity.

151

Clearly, the case of helping the economically destitute will usually fit this difficult criterion, since
any act of aid to the destitute almost certainly has to have as its principal motive helping a
stranger/ Just as clearly, however, much philanthropic work is motivated by considerations other
than or in addition to simply doing good by others, for example, self-aggrandizement, social
status, or personal gratification. In this way, an inquiry into motives may help to understand the
distinction between charity and philanthropy: these classifications identify two poles on a second
continuum, a continuum expressing the purity of the motives of people who help strangers.
Charity is at one end, since an act of this nature is invariably quite close to the ideal of pure
altruism; philanthropy is at the other, since an act of this nature is probably less purely altruistic in
motive.

The legal, if not the moral, practice, however, is very reticent about engaging in any overt
consideration of a donor's true motives. For obvious reasons, the law generally focuses only on
the donor's formal purpose and the actual effect. Consequently, the law does not recognize any

But compare this statement from Re Campden Charities (1881), 18 Ch. D. 310, at 327, 50 L.J. Ch. 646 (C.A.): "We
know that the extension of doles is simply the extension of mischief "

In Attorney-General v. Tyndall (1764), Amb. 614, (Ch. D.), Lord Healey stated that "it is indifferent to the donors in
what species they give their money: not service to the poor but vanity is their motive".

See American Law Institute, Restatement (Second) of Trusts (Washington, D.C.: 1957) §368:

If the purposes to which the property is by the terms of the trust to be devoted are charitable purposes, the
motive of the settlor in creating the trust is immaterial.... Even if the motive of the testator in disposing of his
property is to spite his heirs, the trust is none the less a charitable trust if the purposes are charitable.

The motives of the donor, as an object of inquiry in the determination of whether a gift is charitable, is rejected categori-
cally at the outset of the chapter on charitable trusts in A.W. Scott, The Law of Trusts, 3d ed. (Boston: Little, Brown &
Co., 1967). Professor Scott noted that lawyers tend to become somewhat "lyrical" when they attempt to define what is a
charitable trust. He cited the case of Vidal v. Girard's Executors, 2 How. 127, 1 1 Towel, ed. 205 (1844), in which the
lawyer arguing in favour of upholding a trust created by Mr. Stephen Girard to found a secular school for orphan
children argued:

[W]hatever if given for the love of God, or for the love of your neighbour, in the catholic and universal
sense — given from these motives and to these ends — ^free from the stain or taint of every consideration that is
personal, private or selfish.

Professor Scott remarked that, although this "striking statement may appeal to the ear, it is wholly unsound as a
definition of a charitable trust". Scott confinued, at 2767:

From the legal point of view, perhaps no definition could be worse than this. It makes the matter depend
upon the motive of the donor rather than the purpose to which the property is to be applied. It is well settled
that the motive of the donor is immaterial. A trust is nonetheless charitable although the donor was actuated by
a desire to glorifying himself or by a desire to spite his relatives. ...St. Paul, it is true, in his tribute to the virtue
of charity, was speaking of the motive rather than the purpose; but St. Paul was not attempting to define
charitable trusts or to deal with the question of their validity under the Anglo-American system of
jurisprudence.

Despite these very strong statements, however, the existing law occasionally does have recourse to the motives of the
donor as a relevant determining consideration. The Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), is implicitly sceptical
regarding the motives of "philanthropy" in imposing a much more stringent disbursement regime on foundafions than
on operating charities. In addition, in some circumstances courts are forced to look beyond the apparent charitable form
of a transaction to discern its true motive and, thereby, its true nature. Thus, in R. v. Burns, [1988] 1 C.T.C. 201, 19
F.T.R. 275 (sub nom Burns v. Minister of National Revenue) (F.T.D.); afTd [1990] 1 C.T.C. 350, 35 F.T.R. 121« (C.A.),

152

general distinction between charity and philanthropy on this ground either. Nonetheless, the
distinction is an important one which ought to be borne in mind in any discussion of the law of
charity aimed at its reform.

The observation that charity and philanthropy can be understood as situated on two
continuums (first, the degrees of deprivation of the means of living a fulfilling life and, second,
the purity of the donor's motives) is evidenced in an interesting and provocative way in the good
of religion. The secular humanist argues as follows: "Religion is mere superstition, not really a
good, and therefore its absence can in fact cause no real or permanent (only temporary and
psychological) deprivation. Moreover, the good — if it is good — is generally consumed by the
members of the faith. Their donations, therefore, go to themselves. In sum, there is no good, and
even if there is, it is not for others." Yet, contrary to the sceptic's conclusions about what the law
should be, the law treats religion perhaps as the most favoured basic human good of all. This
degree of difference of opinion makes for an interesting debate. The sceptic's reading of religion
is based on his explicit denial of the self-evident proposition that religion is good. A more positive
view maintains that donations for the support of religious institutions are not, as it were, one half
of an exchange transaction in which the institution offers psychological comfort in return for
membership dues.

3. POLICY IMPLICATIONS OF THE REAL DEFINITION

There is obviously a great deal more to be said before these arguments for a real definition
of charity — we revert to that term — are acceptable philosophically. The immediate objective in
identifying the elements of a real definition is, thus, more limited. The present purpose is to
develop a definition that provides the basis for a critique of the common-law definition and the
basis for reform proposals. To summarize what has been said about a definition so far: the truly
charitable act is the act whose form, actual effect, and motive are the provision of the means of
pursuing a common or universal good to persons who are remote in affection and to whom no
moral or legal obligation is owed. In applying this definition to evaluate a project, we might
proceed, first, by identifying the goods or intended goods; second, by asking whether the
particular project is (really) a determination of one or more of the goods; third, by asking whether
the project benefits only strangers; and fourth, rarely, by questioning whether the project is also
motivated by the desire to be charitable. There are several policy implications of this conception
of charity.

First, this idea provides considerable help in understandmg the law's categorical distinction
between charity and politics. In a liberal democracy, politics is the process of a society's
collaborative effort to make law, to come to some agreement or understanding on a particular
determination of the good. By definition, then, a political opinion is not a determination of the
good itself. To take a side in a political debate, to support a cause in the political arena, is to argue
about in what the good consists, under the circumstances, and to encourage the government to

it was held that the taxpayer's donation to the Canadian Ski Association was made in response to the Association's
expectations that the gift would be made in exchange for ski instructions for the taxpayer's daughter. See, also, Homa v.
Minister of National Revenue, [1969] Tax A.B.C. 961, where an ostensible gift to an institution providing education to
the son of the taxpayer was held not to be a charitable donation.

153

legislate or spend accordingly. In a liberal democracy, only the institutions established for the
purpose of making law may say which parties have hit upon the best balance or the best
formulation, under the circumstances. The liberal-democratic process of law-making itself
assumes that any reasonable opinion as to what the law should be, might be right, and
concomitantly, each side in the debate must from the outset be prepared to accept that it might be
wrong. These are some of the presuppositions of political discourse in a liberal society. A just law,
by contrast, represents not only a society's settled convictions as to what purposes, acts, or
provisions, if any, are determinations of the good, but is by definition (if it is a just law) a
determination of the good. Likewise, and this is the point, a charitable act is also a determination
of the good. Thus, in this way, the distinction between politics and charity parallels the distinction
between politics and law: the debate about the content of the good and a determination of the good

itself are two different things.

Second, the distinction between politics and charity, just described, is largely formal. It
relies primarily on the logic of the acts described, and not on the motives underlying them, to
make the required distinction. Thus, the formal description of the charitable act (doing good for
others) and the formal description of the political act (agitating to affect public awareness or to
change the law or policy) are different, even if the motives underlying these activities — to help
others — are often identical. Similarly, practising politics and practising law (interpreting and
applying law) are formally distinct activities, even if each is properly motivated by the desire to
see justice done. Interpreting and applying the law or pursuing its application, although motivated
by the desire to help others or to see justice done, is likewise formally distinct from charity. The
recognition of these formal distinctions is important to the integrity of each of the activities
identified. People who argue that there is no distinction between politics and charity generally
make the mistake of failing to distinguish the activities at the level of their form. This mistake is
as harmful to the activity of politics as it is to charity: it fails to differentiate between what is being
done and why it is being done.

Third, acts do not present themselves in the world with labels identifying their true form. To
understand what kind of act is performed in a particular case requires an evaluation that makes use
of all the available evidence, including evidence relating to motive and intention. This evaluation
or judgment will be more or less valid for cases on the margin, but easily justified for core
instances. Neither the open-textured quality of this exercise nor its perennial difficulty detract
from the validity of the formal distinctions just established.

Fourth, some acts which appear political — or commercial or otherwise non-charitable — may,
in fact, be formally charitable. Acts which appear political, but which are ancillary and incidental
to an act of charity, or are necessary or purely instrumental to it, are essentially charitable. Thus,
to pick a mundane example, the donor's writing of the donation cheque and placing it in the
envelope are instrumental to the donor's act of giving and therefore a part of his charitable act. Or,
more importantly, an organization which is legally required to be exclusively charitable (and

Only in the circumstance where the political effort is aimed at overturning an unjust law, such as Amnesty International
working against legalized torture in Chile, or where that effort can be said to be purely instrumental to a charitable
purpose, is it essentially altruistic.

154

therefore do only charitable acts) does not jeopardize that status by engaging in apparently
political activities which are, in fact, merely ancillary and incidental to its charitable activities.
Similarly, in another important example, when such an organization runs its annual bazaar or
charity golf tournament, or invests its savings to generate income, or engages in fundraising, these
activities are best described as formally charitable — as fundraising or investing for charity — not
businesses, since these activities are purely instrumental to the altruistic purposes and activities of
the organization, and are therefore, in essence, charitable.

Fifth, this definition allows one to see that the assessment of whether an act is charitable is a
very context-specific question. It helps in coming to an understanding of how certain specific
projects come to be included or excluded in the common-law case law on charities. Ideally, the
decision-making process ought to engage the community's collective wisdom about the content of
the good, under the circumstances, and whether the particular project chosen by the donor in fact
tends to its achievement or whether it is plainly impractical. That the motivation is charitable in
the sense described is often sufficient for a positive answer. But this is not always so. A project
may seem properly motivated, but still not be charitable because it is badly designed or
misconceived. For example, there are a number of instances where judges have decided that the
donor's project, although charitably motivated, was not practically useful. An interesting example
of this is Re Shaw}^ This case dealt with a bequest by the author G.B. Shaw to ftmd research into
the practicability of implementing a forty-letter alphabet. Harman J. held that the trust was not
charitable because, among other reasons, the objective once achieved would be of insufficient
"utility". ^^ Understandably, however, courts are also reluctant to question explicitly the
intelligence of charitably motivated persons, so often this issue of the practical usefulness of a
project is handled with subtlety and care. Frequently, it is dealt with using a proxy rule, but this
merely masks the true reason for the decision and often leads to considerable doctrinal
conftision.

Sixth, this context specificity of proper determinations of the good indicates that very little is
to be gained by the law in attempting to define charity in any but the most general terms.
Although it does not preclude searching for something more definitive than the Pemsel definition,
it does suggest that significantly more specificity may well be impossible and, in any event,
probably would be unhelpftil in achieving any greater clarity in the law.

Seventh, we can also understand some of the confusion in the case law if we look at the
historical practice of the courts in light of this definition. We can see how inconsistent the practice

Re Shaw; Public Trustee v. Day, [1957] 1 W.L.R. 729, [1957] 1 All E.R. 745 (Ch.D.); on appeal [1958] 1 All E.R. 245n
(C.A.).

This latter test is formulated in the Restatement (Second) of Trusts, supra, note 19, §368, as follows: a purpose is
charitable only if "its accomplishment is of such social interest to the community as to justify the property to be devoted
to the purpose in perpetuity".

In Re Shaw, supra, note 21, for example, Harman J. held that the objects were also invalid because the pursuit of
knowledge, without a teaching element, was not a charitable purpose. This holding is now agreed to have been
mistaken.

155

really was or is, and in this process try to understand why, for example, such things as sports,
recreation societies, or the Jewish and Catholic religions were improperly excluded from the list.^'*
The judicial policy on sports and recreation societies is partially explained by the pretension to
seriousness of Victorian judges and their consequent scepticism about the good of play. The
position on certain religions is simply a reflection of the chauvinism, or even bigotry, of English
society at that time. In these examples we see the community, through its judges, struggling to
articulate its best determinations of the good, sometimes failing due to its own, obvious (in
retrospect) limitations. This approach now provides a basis for arguing why some associations
concerned with the preservation of the natural environment, for example, might be charitable: a
heightened awareness of the implications of pollution on the quality of life generally leads to a
recognition that the preservation of the natural environment requires a concerted communal effort,
and that the ultimate object of such an effort is the preservation of life.

4. CONCLUSION

This attempt at a real definition of charity, however tentative, does suggest several broad
parameters regarding the legal definition of "charity" and the advisability of adopting a statutory
definition. We reiterate these broad conclusions in here.

(1) Two broad distinctions emerge from the discussion:

(a) One distinction is that there is a noticeable difference between two types of
charitable activity: one designating acts motivated by a desire to help the poor;
the other designating acts motivated by a desire to advance human achievement
or quality of life. It may or may not be advisable, for reasons of social policy,
for instance, to favour the former over the latter (with a larger tax subsidy or a
less severe restriction on political activity, for example ). The possibility of
drawing a distinction suggests that doing so in a statute is at least feasible. The
nature of the distinction, however, which we characterize more as a matter of

Some of these impediments were removed and charitable trusts in favour of Jewish, Roman Catholic, and Protestant
Dissenters were permitted in a series of statutory reforms in the early to mid-nineteenth century. See Roman Catholic
Relief Act, 1813, 53 Geo. 3, c. 128 (U.K.); Roman Catholic Chanties Act, 1832, 2 & 3 Will. 4, c. 115 (U.K.); Religious
Disabilities Act, 1846, 9 & 10 Vict., c. 59 (U.K.), Nonconformists' Chapels Act, 1844, 7 &S Vict., c. 45 (U.K.); Places
of Worship Registration Act, 1855, 18 & 19 Vict., c. 81 (U.K.); and Roman Catholic Charities Act, 1860, li & 24 Vict.,
c. 134 (U.K.).

Compare Hobson v. Minister of National Revenue (1959), 59 D.T.C. 21 1, 21 Tax A.B.C. 433, in which it was held that
the Audubon Society, whose main purpose was to stimulate an interest in the need for conservation, was not charitable.

See, for example, D. Baker, "Viewpoint — Rethinking Charity: What Do We Owe Each Other" (1991), 10 Philanthrop.
(No. 1) 33. Baker argues that equal subsidization by the tax system distorts charitable giving since those with the
resources to give, give to philanthropy rather than charity. Thus he states, at 35, that "[a]t the same time as we allow
these elite interests to drive the public agenda, fueled by the tax subsidy..., much harsher treatment is accorded to the
'political' activities of charities, particularly those that seek to advance the interests of members of disadvantaged
groups in society". In a similar vein, see I. Morrison, "Redefining 'Charities' in the Income Tax Act", [1982-83]
Philanthrop. (Winter) 10; H.G. Intven, "Viewpoint — Political Activity and Charitable Organizations", [1982-83]
Philanthrop. (Winter) 35.

156

degree than as a matter of kind, also suggests that utilizing it in a statutory
definition may be fraught with difficulties in application. Moreover, because
this was an attempt at a real definition — that is, a definition which people would
be inclined to accept after reflection on the true meaning of charity — there
undoubtedly would also be considerable political difficulty in drawing lines that
appear to rank charitable activities.

(b) The other distinction is between charity and politics. Our argument defined this
as a difference in kind. As such, any statutory or other legal definition must
respect it or fall into serious confusion. It is a separate question, however,
whether a charitable organization should be permitted to undertake political
activities, and if so, to what extent. The line suggested in the discussions so far
is that political activity be permitted only to the extent that it is purely
instrumental to a charitable purpose and, therefore, essentially charitable. Thus,
for example, the expression used to designate permissible political activities in
the Income Tax Act — ^those that are "ancillary and incidental to its charitable
activities" — is, in the Commission's view, basically correct. Beyond that, an
organization ceases to be exclusively charitable in purpose. Whether this is
desirable will depend on why the legislator may want organizations to remain
exclusively charitable.

(2) Religion emerged as a possible third category. By its own interpretation — in our view,
the only proper interpretation where matters of legislative policy are in issue — religion
does not involve charity in the sense of (1) doing good (2) for others, as clearly as
does, for example, relief of poverty. Yet, in addition to being a traditional well-spring
of such charitable activity, practising a religion is good. Although not other-regarding
in the same sense as other types of charity, religion is nonetheless other-regarding in its
worship of God, obeying His law, and constructing and maintaining a sanctuary for

His worship.

(3) The argument for a real definition also suggests that any statutory definition, first, be
broadly inclusive — it ought to include the good of play and aesthetic experience, for
example — and, second, be general, since whether an act is a determination of a good
can be determined only in light of all the circumstances. The fact remains that the
common-law test as laid down in Pemsel is already quite general. Moreover, Canadian
courts, if not elements of the public administration, have already shown themselves
quite open to ftirther sensible developments,^^

Supra, note 19.

In any event, there are very substantial constitutional protections which must be considered.

See, for example, Re Laidlaw Foundation (1984), 48 O.R. (2d) 549, 13 D.L.R. (4th) 491 (Div. Ct.).

157

(4) The attempt at a real definition is, by nature, conceptually oriented. Nothing yet has
been said about function or social policy. Thus, any particular statutory definition,
besides complying with the constraints suggested here, may also have to answer to its
function in the relevant statute and the social policies underlying that statute.

(5) The motive of the donor and the practicality of his or her project as well as the donor's
formal purpose are considerations that influence our evaluation of the donor's act as
charitable. The legal practice, for obvious reasons, generally avoids overt consideration
of the first two elements. They are, nonetheless, indispensable in understanding that
practice.

(6) Acts which are instrumental to, or are ancillary or incidental to, charitable acts are
essentially charitable. This level and type of apparently political activity, of apparently
commercial or business activity, of fundraising activity, and of investment activity are
best understood as essentially charitable.

CHAPTER 7

THE LEGAL DEFINITION OF
CHARITY: THE CURRENT
APPROACH AND PROPOSALS
FOR REFORM

1. INTRODUCTION

Over the years, the legal definition of "charity" has been influenced substantially by the
policies underlying the particular areas of law in which the term has been used. Part of the
importance of the discussion in chapter 6 lies in the effort to see beyond these distorting
influences. The real definition illuminates the broader conceptual limits by which any
particular statutory definition must abide. In this chapter, however, the Commission argues
for a more substantive role for the real definition than this. In section 2 of this chapter, we
contend that the legal definition of charity should be identical for all policy domains, and
therefore that policy function ought not to play any formally explicit role in the development
or formulation of that definition. We also recommend against the adoption of a statutory
definition of charity. In section 3, we set out the basic elements of the common-law definition
and recommend improvements based on or derived from the real definition. We reiterate the
point made at the beginning of chapter 6 that these improvements should be implemented by
courts and administrators, not by legislators. We conclude in section 4 with a summary of our
main observations concerning the reform of the basic elements of the legal definition of
charity. In the following chapter, we take up particular problems in the case law on the
definition of charity.

2. DEFINITION AND FUNCTION

An historical example illustrates the point about the influence of policy on the
development of the legal definition of charity. The example concerns the Mortmain Act,
1736, a statute that was enacted in the United Kingdom in an age of anti-clericalism. Its

An Act to Restrain the Disposition of Lands, whereby the same become Unalienable, 1 736, 9 Geo. 2, c. 36 (U.K.)
(hereinafter referred to as the Mortmain Act, 1 736).

[159]

160

principal provisions, in effect, prohibited devises of land to charity. Parliament feared that
clerics administering the sacrament of last rights would play on the conscience of dying
persons by encouraging them to devise their lands to the church in order to save their souls,
thereby depriving the "rightful heirs" of their inheritance. The policy of this statute — a
suspicious attitude towards the value of religious charity — was best implemented by adopting
a broad definition of charity. A famous case on the meaning of "religion", Thornton v.
Howe^ illustrates the result of this thinking. In this case, land was left in trust for the printing,
publishing, and propagation of the sacred writings of the late Joanna Southcote, who had
claimed that she was with child of the Holy Ghost and that of her the second Messiah was to
be bom. The court held the trust was charitable for a religious purpose, and therefore invalid
because of the statute.

The decision is sometimes cited as an example of the toleration of the law, but as one
author notes, that toleration was the "kiss of death".

Long after the decline in influence of the policy concerns which motivated the
Mortmain Act, 1736, the heritage of case law it spawned survives to influence the "legal"
meaning of "charity". Most observers, for example, readily acknowledge that it has
contributed to the acceptance of a much wider definition of what counts as a religious
purpose than might otherwise have been the case. Some texts, remarkably, do not even

On mortmain and charitable uses law generally, see Ontario Law Reform Commission, Report on Mortmain,
Charitable Uses and Religious Institutions (Toronto: Ministry of Attorney General, 1976). See, further,
A.H. Oosterhoff, "The Law of Mortmain: An Historical and Comparative Review" (1977), 27 UT.L.J. 257, and
G. Jones, History of the Law of Charity 1532-1827 (London: Cambridge University Press, 1969).

Jones, ibid.

(1862), 54 E.R. 1042, 31 Beav. 14.

H. Picarda, The Law and Practice Relating to Charities, 2d ed. (London: Butterworths, 1995), at 101.

See, ftirther, H.A.J. Ford and W.A. Lee, Principles of the Law of Trusts, 2d ed. (Sydney: Law Book Co., 1990),
at 826:

[Thornton v. Howe] has been approved of judicially and administratively in a number of cases so as to
favour religious activities of many kinds, including those of controversial sects.... [T]he Charity
Commissioners in England have ruled charitable the highly controversial church known as the
Unification Church otherwise called The Moonies.

The authors cite Bowman v. Secular Society Ltd., [1917] A.C. 406, [1916-17] All E.R. 1 (H.L.); Re
Hummeltenberg; Beatty v. London Spiritualistic Alliance, [1923] 1 Ch. 237, [1923] All E.R. Rep. 49; Re Price-
Midland Bank Executive & Trustee Co. v. Harwood, [1943] Ch. 422, [1943] 2 All E.R. 505; Re Knight, [1937]
O.R. 462, [1937] 2 D.L.R. 285 (H.C.J.); Re Pinion; Westminster Bank v. Pinion, [1965] Ch. 85, at 98, [1964] 1 All
E.R 890 (C.A.) (subsequent references are to [1965] Ch.); Congregational Union of N.S.W. v. Thistle thwayte
(1952), 87 C.L.R. 375, [1952] A.L.R. 729 (Aus.); and Re Watson; Hobbs v. Smith, [1973] 1 W.L.R. 1472, [1973]
3 All E.R. 678, as examples of the broadening influence of mortmain legislation. See also H. Picarda, "New
Religions as Charities" (1981), 131 New L.J. 436, and J.P. Moore, "Piercing the Religious Veil of the So-Called
Cults" (1980), 7 Pepperdine L. Rev. 665. In the United States the definition of religion is wider still on account of
the influence of constitutional jurisprudence under the first amendment: "Congress shall make no law respecting
the establishment of religion or prohibiting the free exercise thereof: U.S. Const, amend. I. In England the 1989
White Paper on charities considered seriously but rejected the adoption of a statutory provision defining charity so

161

mention the fact that the wide definition of religion was employed, in that case, in the way
described above.

Historically, however, the main function of the definition of charity has not been its role
in mortmain legislation. Rather, its main function has been, and one of its two main functions
continues to be, its role in the law of charitable purpose trusts. Under the law of trusts, and
subject to a few minor exceptions, only charitable purpose trusts are valid and enforceable.
Property devoted in trust to any other nonprofit purpose, therefore, automatically reverts
under trust law to the settlor or testator, since, exceptions aside, such a trust is void. With this
result, imposed under trust law, comes the significant benefit of state enforcement of the trust
through the exercise of the parens patriae jurisdiction of the Crown, which in Ontario (and
other common law jurisdictions ) has been, in part, developed and transformed by statute. ^^

The importance of this role of "charity" is diminished considerably today by the fact
that the vast majority of Canadian charities are organized as corporations, not as charitable
purpose trusts: whether a nonprofit corporation is charitable is entirely irrelevant to the
question of its viability or legal status. Thus, the other main function of "charity" — to
determine the eligibility of certain organizations for state-financed subsidies and other state-
sponsored privileges — is by far the more important one today.

The most significant area of law in this regard is Canadian income tax law. "Charity" is
used in this context to determine the eligibility of certain organizations and certain trusts for
the taxation advantages of charitable status, that is, the tax credit and tax deduction for
donations to charity, and the tax-exempt status of charitable organizations and charitable
trusts under federal and provincial income tax laws. But charitable status entails other state-
conferred privileges as well: eligibility for gaming licences pursuant to the provisions of the

as to restrict the types of religious purposes included. See U.K., Charities: A Framework for the Future (Cmnd.
694, 1989) (hereinafter referred to as the "1989 White Paper"), at 7-9. See, also, M.R. Chesterman, Charities,
Trusts and Social Welfare (London: Wiedenfeld & Nicolson, 1979), at 54-58.

See, for example, J. Warburton and D. Morris, Tudor on Charities, 8th ed. (London: Sweet & Maxwell, 1995).

This area of the law of trusts will be taken up in more detail infra, chs. 12 and 16.

For example, in England and Wales, the Charity Commissioners exercise concurrently some of the powers of the
Attorney General. See, for example. Charities Act, 1993, c. 10 (U.K.), ss. 27, 32, and 63(2).

See Charities Accounting Act, R.S.O. 1990, c. CIO.

It is not known how many Canadian charities are incorporated or how many are organized as trusts. As suggested
supra, in ch. 4, it would be helpful if information like this were compiled by the federal government through the
annual information return that charities are required to file.

However, it should be noted that the Office of the Public Trustee currently does exercise some authority over the
contents of the letters patent of incorporation. See Office of the Public Trustee and Ministry of Consumer and
Commercial Relations, Not-for-profit Incorporator's Handbook (Toronto: Queen's Printer, 1989), at 47-48. For a
further discussion see infra, ch. 16.

162

Criminal Code\^^ exemptions (for some) from property tax and retail sales tax under,
respectively, the Assessment Act and the Retail Sales Tax Act; preferential treatment under
the Goods and Services Tax Part of the Excise Tax Act', and eligibility for discretionary
government grants under several provincial statutes, including the Charitable Institutions
Act"

In one respect the state interest in the two main modem contexts is, broadly construed,
the same. In both cases the state is concerned with bestowing a benefit — viability and
enforcement in the case of the law of trusts, and the direct or indirect financial (or other)
subsidy in the case of the various privileges — on a desired or meritorious social activity. This
identity in state interests might seem to entail an identity in function, and, therefore,
constitute a strong justification for a single legal definition of "charity". Thus, perhaps in line
with this thinking, all the areas of modem statutory law identified so far use only the

uncodified common-law definition of "charity", as developed in the tmst law context.

Beneath this unity, however, many commentators see significant tensions. They
discem important differences between the two main bodies of law, and they argue that these
differences place undue stress on the common definition. For example, although viability
entails the enforcement subsidy, that subsidy is nowhere near as costly as the tax subsidy.
Consequently, many charity law observers note a tendency towards a liberal interpretation
when viability is the sole issue, since the effect of a negative answer in that context is usually
to upset the evident intentions of a testator; and a tendency towards a strict interpretation in
the tax area, since the effect of a positive answer in that context is a further widening of the
fiscal breach. Altematively, some observers have maintained that the substantial cost and
overwhelming importance of the tax subsidy argues in favour of a narrower definition
altogether.

15
16
17

R.S.C. 1985, c. C-46. Section 207(\){b), as rep. & sub. by R.S.C. 1985, c. 52 (1st Supp.), s. 3, s. 12(1), provides
for an exception from the general prohibition against games of chance and lotteries "for a charitable or religious
organization, pursuant to a licence issued by the Lieutenant Governor in Council..., to conduct and manage a
lottery scheme in that province if the proceeds from the lottery scheme are used for a charitable or religious object
or purpose".

R.S.O. 1990,c.A.31.

R.S.O. 1990,c. R.31.

R.S.C. 1985, c. E-15, Part IX, as en. by S.C. 1990, c. 45, s. 12(1).

R.S.O. 1990, c. C.9.

The only statute in Ontario containing a definition is the Chanties Accounting Act, supra, note 10, s. 7. In that
statute it is used as part of the new mortmain provisions only.

For example see N. Brooks, "Charities: The Legal Framework" (Ottawa: Secretary of State, 1983) [unpublished],
and G. Cross, "Some Recent Developments in the Law of Charity" (1956), 72 Law Q. Rev. 187.

In Dingle v. Turner, [1972] A.C. 601 at 624-25, [1972] 1 All E.R. 878 at 890 (H.L.) (subsequent references are to
[1972] A.C), Lord Cross stated that he thought that the decisions in Re Compton; Powell v. Compton, [1945] 1
Ch. 123, [1945] 1 All E.R. 198 (C.A.) (subsequent references are to [1945] 1 Ch.), and Oppenheim v. Tobacco

163

In addition to the two main areas of law mentioned, there are laws restricting the powers
of "charitable" organizations to own land (a hold-over from the mortmain laws)^' and

businesses; there have been and continue to be laws creating a jurisdiction in a public
agency to supervise and regulate "charitable" organizations. As well as viability and
enforcement, there are also other benefits at common law extended to charitable purpose
trusts, such as exemptions from the rule against inalienability^'* and the rule against
remoteness of vesting. Finally, there are many areas of statutory law which use the

■ye

classification "charitable" or "charity" for some specific purpose. Interestingly, given the
relative insignificance, from a social and fiscal policy point of view, of the restrictions on
land ownership, the only statute containing a definition of charity is the one which restricts
the land-owning powers of charitable organizations.

It could be argued that these other areas of law also contribute to the need for more than
one definition of charity. For example, one might expect that any statutory scheme containing
a jurisdiction to regulate or supervise fundraising for a charitable purpose might stipulate a
wider definition, because its policy objective would apply with equal force to non-charitable
nonprofit purpose frindraising as well.

Securities Trust Co., [1951] A.C. 297 [1951], 1 All E.R. 31 (H.L.) (subsequent reference is to [1951] A.C.) were
"pretty obviously influenced by the consideration that if such trusts as were there in question were held valid they
would enjoy an undeserved fiscal immunity". Three of the four judges who concurred with Lord Cross, however,
expressly disagreed with this comment. In Re Resch's Will Trusts; Le Cras v. Perpetual Trustee Co., [1969] 1
A.C. 514 at 540, [1967] 3 All E.R. 915 at 921 (P.C), Lord Wilberforce stated that the test for charity was whether
the object is "in modem times, accepted as a public benefit suitable to attract the privileges given to charitable
institutions". It is clear that he meant the tax privileges. In National Anti-Vivisection Society v. Inland Revenue
Commissioners, [1948] A.C. 31 at 52, [1947] 2 All E.R. 217 at 225 (H.L.) (subsequent references are to [1948]
A.C), Lord Wright also made reference to the relevance of tax privileges to the decision to confer charitable
status. Also, E.B. Bromley, "Contemporary Philanthropy — Is the Legal Concept of 'Charity' Any Longer
Adequate?", in D.W.M. Waters (ed.). Equity, Fiduciaries and Trusts 1983 (Scarborough: Carswell, 1993) 59,
at 96, argues:

Any legal concept of charity adequate for the future must come to assign some significance to the fiscal
and tax benefits which attach to charitable status,... [I]t seems that fiscal benefits must become a factor in
the minds of the court because it is a factor in the minds of the man in the street and the State.

21
22
23
24
25

Supra note 18.

Charitable Gifts Act, R.S.O. 1990, c. C. 8.

Charitable Accounting Act, supra, note 10.

See, fiirther, infra, ch. 12 for this and other examples of benefits of this type.

See federal and provincial statutes listed infra, in Appendix B. See, for example. Re Co-operative College of
Canada and Saskatchewan Human Rights Commission (1975), 64 D.L.R. (3d) 531, [1976] 2 W.W.R. 84 (Sask.
C.A.) (applicability o^ Fair Employment Practices Act, R.S.S. 1965, c. 293 to defendant college depended on
whether college was entitled to exemption as charity under Act).

See Charities Accounting Act, supra, note 10, s. 7. This statutory provision was first enacted in 1909 as The
Mortmain and Charitable Uses Act, S.O. 1909, c. 58, s. 2(2) (hereinafter referred to as the ''Mortmain and
Charitable Uses Act (1909)"). A previous statute had used a list of purposes taken from the Statute of Elizabeth,
infra, note 33, and a concluding proviso "and any other purposes similar to those hereinbefore mentioned": The
Mortmain and Charitable Uses Act, 1902, S.O. 1902, c. 2, s. 6.

164

Despite the force of these arguments, it is the recommendation of the Commission, on
balance, that something like the status quo on the question of definition be maintained.
Subject to the criticisms set out in the remaining sections of this chapter, the Commission,
therefore, endorses the common-law definition and the common-law methodology. We do
not think that more than one definition of charity is required or advisable, and we do not

Most studies and commentators support this position. The 1989 U.K. White Paper, supra, note 6, at 6, concluded:

The Government consider that an attempt to define charity. ..would be fraught with difficulty, and might
put at risk the flexibility of the present law which is both its greatest strength and its most valuable
feature.

See, also, B. Bittker and G.K. Rahdert, "The Exemption of Nonprofit Organizations from Federal Income
Taxation" (1976), 85 Yale L.J. 299 at 331-32:

Despite the vagueness of the term and the divergent activities which it embraces, the unadorned
reference to 'charitable purposes' in s. 501(c)(3) has created only minor problems of interpretation for
tax planners, administrators, and the courts. ..It is not likely that a detailed statutory definition would
eliminate these residual problems of distinguishing between 'charitable' and 'non-charitable'
purposes. ..by an unending process amending the Code to settle every boundary dispute as it arises.

See, also, A.W. Scott, The Law of Trusts, 3d ed. (Boston: Little, Brown & Co., 1967) (hereinafter referred to as
''Scott on Trusts"), Vol. IV, at 2855-56:

The truth of the matter is that it is impossible to frame a perfect definition of charitable purposes.
There is no fixed standard to determine what purposes are charitable. [A] definition... [cannot] include
what should be included and exclude what should not be included. Matters of grave policy like this
cannot be solved by definifion.

See, also, G.W. Keeton, "Some Problems in the Reform of the Law of Charities" (1960), 13 Current Legal Probs.
22, at 23:

It is difficult to see what value could be gained from enacting the Pemsel definition. In the long run,
there is probably no alternative to the work of rationalisation being undertaken by appellate courts.

By contrast, in Britain the Report of the Committee on the Law and Practice Relating to Charitable Trusts
(Cmd. 8710, 1952) (hereinafter referred to as the ""Nathan Report) recommended, in para. 140, that the text of
Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28,
(H.L.) (hereinafter referred to as ""Pemser) (subsequent references are to [1891] A.C.) be codified, but that the
codification provision explicitly affirm that no change in the law was thereby intended. This recommendation was
not accepted in the subsequent government White Paper {Government Policy on Charitable Trusts in England and
Wales), nor by Parliament in the subsequently enacted Charities Act, 1960, 8 & 9 Eliz. 2, c. 58 (U.K.). The U.K.
report. National Council of Social Services, Charity Law and Voluntary Organisations (London: Bedford Square
Press, 1976) (Chair: Lord Goodman) (hereinafter referred to as the ''Goodman Report), recommended a
reformulation of the list of charitable objects. See Appendix F for this list. Appendix F contains a variety of
possible definitions from various sources. The Report of the Royal Commission on Income Tax (Cmd. 615, 1920)
(hereinafter referred to as the Colwyn Commission) recommended the adoption of a definition in order to make
clear that the legal definition included more than just the relief of poverty. A subsequent government committee
recommended against the adoption of a definition since "there was no real need.. .as the existing provision had not
given rise to any very great problems of interpretation": Income Tax Codification Committee (Cmd. 5131, 1936).
The Board of Inland Revenue, however, had recommended to the Colwyn Commission that the legal definition be
restricted to relief of poverty and physical distress, principally on the basis that the tax benefit was "a concealed
subsidy" which was not under state control. See Brooks, supra, note 19, at 25-26. See, also, B.E.V. Sabine, A
History of Income Tax (London: Allen & Unwin, 1966). In The Royal Commission on the Taxation of Profits and
Income, Final Report (Cmd. 9538, 1955), the majority of commissioners recommended in favour of a narrower
definition, to limit the tax subsidy. A minority recommended an even more restricted definition on the basis that

165

believe that it is necessary or advisable to adopt a definition or definitions by statute. We
think, despite the cogency of the foregoing remarks about function, that it would be a serious
error to explicitly modify the defmition of "charity" according to the statutory context, with
the effect that an organization's classification as a charity would depend on the definition in
the particular statutory regune at issue. This is not to say, however, that there cannot be or
should not be differentiation m treatment among charities of different kinds. We only suggest
that the general category "charity" have uniformity in meaning across all the relevant
domains of law.

We make this recommendation for three reasons. The first is the need for regulatory
simplicity. Several defmitions— and it should be emphasized that the adoption of even a single
statutory defmition for all provincial laws still results in at least two different defmitions, one

at the federal level and one at the provincial level — ^would, in our view, cause far more
harm (from confusion) than any benefit derived from differentiation in meaning according to

context. The second is realism. As the attempt at a real defmition illustrates, "charity" is an
intelligible concept. In our view, its legal meaning should not, therefore, diverge from its real
meaning if the only gain to be had is better targeting of certain statutory regimes. More
precise targeting can be achieved, if desu*ed, by differentiation among types of charity. The
third reason is that a statutory defmition or defmitions would just as likely hinder judicial
decision-making as help it. Since the range of objects that can be charitable is so incredibly
diverse, any statutory defmition more specific than the Pemsel test would, in all probability,
just confuse matters.

the taxation advantages were tax expenditures and therefore were justifiable only insofar as the charities relieved
the state itself of some other expenditure.

This is so even //"the broad language of the Pemsel decision, supra, note 27, is used in the provincial law (that is,
even if the provincial statute is a mere codification of the common-law definition). Note that the change in the
definition in the Ontario mortmain legislafion in 1909 (see Mortmain and Charitable Uses Act (1909), supra,
note 26) fi^om a definition based on the Statute of Elizabeth, infra, note 33, to one based on Pemsel, led one court
to conclude that there had been a liberalization in the meaning of "charity" in Ontario, even in areas of law having
nothing to do with mortmain. See Re Orr (1917), 40 O.L.R. 567 at 585 (App. Div.) (rev'd on other grounds {sub
nom Cameron v. Church of Christ, Scientist) (1918), 57 S.C.R. 298, 43 D.L.R. 668), where Meredith C.J.O., in a
judgment concurred in by three of the other four members of the court presiding, stated (at 597):

The course of provincial legislation leads clearly, I think, to the conclusion that the Legislature of
Ontario adopted this latter change in the law for the purpose of preventing the English doctrine. ..from
being applied in Ontario.

See, also. Re Laidlaw Foundation (1984), 48 O.R. (2d) 549, 13 D.L.R. (4th) 491 (Div. Ct.) (subsequent references
are to 48 O.R. (2d)), and Re Levy Estate (1989), 68 O.R. (2d) 385, 58 D.L.R. (4th) 375 (C.A.) (subsequent
references are to 68 O.R. (2d)). See A.H. Oosterhoffand E.E. Gillese, Text, Commentary and Cases on Trusts, 4th
ed. (Toronto: Carswell, 1992), at 808, which criticizes the reasoning in Re Orr and in the cases that followed it.

See G.W. Keeton and L.A. Sheridan, TJie Modern Law of Charities, 2d ed. (Belfast: Northern Ireland Legal
Quarterly, 1971), at 51: "It is desirable, if not essenfial, to preserve a single definition of charity, whether for
purposes of validity, rafing or taxation; but that does not mean that all charities should necessarily be treated
equally for [all] purposes.

For a similar conclusion, see Brooks, supra, note 19, at 40-50.

166

If, however, the Legislature believes that for reasons of clarity in the law or for some
other reasons, a statutory codification of the common-law definition is required, then we
recommend that statutory definition to be a mere codification of the Pemsel test or, better yet,
a modestly improved version of it. We say this for two reasons: first, this type of approach
will minimize confusion between the federal and provincial regimes, and second, a general
definition, such as the one in Pemsel, will give courts sufficient scope to make sound
decisions on a case-by-case basis.

What follows in the remainder of this chapter, therefore, is as much a vindication of the

common-law definition, as a critique, although many criticisms are offered. To the extent
that we criticize the common law, however, the thrust of our remarks does not, lead to any
recommendation for statutory reform.

3. THE COMMON-LAW DEFINITION

(a) INTRODUCTION

The common-law definition is similar in structure to the real definition. It evaluates
projects by examining whether they propose to do charity. It thus asks whether the project
aims at charity (what good or goods are proposed?) and whether the proposed project will
result in a benefit (is the project effective or practically usefiil?) to the public (does it benefit
strangers?). Our discussion, in this section, is divided as follows. In subsection (b) we
examine the general tests applied by the law to determine what purposes count as charitable,
and in subsection (c) we examine problems relating to the notion of "public benefit". In the
following chapter, we examine particular problems relating to each of the possible categories
of charity recognized or not recognized under the tests set out in subsection (b).

As will be seen, there is a good deal of confusion in much of the common law analysis
on the topic of the meaning of "charity". This is only to be expected from a methodology that
is nearly 200 years old and that has served many purposes in many different jurisdictions.
One major source of confusion is, however, worth flagging at the outset. The common law
equivocates in a harmful and confusing way in its use of the terms "public" and "benefit".
These two terms are used to identify each of the required elements in the three principal
aspects of the test, that is: whether the purpose pursued is charitable (of ''public benefit);
whether the project chosen is of sufficient practical utility (of "public benefit); and whether
someone other than the donor or those related to him/her are benefitting (of "benefit to the
public").

This was the recommendation of the Goodman Report, supra, note 27, at 16.

For other critical commentaries on the definition of charity, see 1. Morrison, "Redefining 'Charifies' in the Income
Tax Act", [1992-83] Philanthrop. (Winter) 10; R.W. Bentham, "Charity Law and Legislation: Recent
Development" (1962), 15 Current Legal Probs. 159; G.H.L. Fridman, "Charities and Public Benefit" (1953), 31
Can. B. Rev. 537; N. Bentwich, "The Wilderness of Legal Charity" (1933), 49 Law Q. Rev. 520; J.C. Brady, "The
Law of Charity and Judicial Responsiveness to Changing Social Need" (1976), 27 N. Ir. Legal Q. 198.

167

(b) What Purposes Are Charitable?

(i) Introduction

We examine three existing approaches that attempt to answer this question. The second
and third of these are the most influential, but all three approaches are basically related, so it
would be a mistake to think of any of them as discrete.

(ii) Statute of Elizabeth Test

One source for the legal definition of "charitable purposes", especially dominant until
the 1950s and still used by some courts today, is the preamble to the Statute of Charitable
Uses, more commonly known as the Statute of Elizabeth. The preamble is a non-exhaustive
list of projects classified by the law, at the time of its enactment, as "charitable":

Whereas lands.. .goods.. .chattels.. .and money, have been.. .given. ..by Sundry. ..well-disposed
persons.. .for.. .The relief of aged, impotent and poor people; the maintenance of sick and maimed
soldiers and mariners; the maintenance of schools of learning, free schools and scholars in
universities; the repair of bridges, ports, havens, causeways, churches, sea banks and highways;
the education and preferment of orphans; the relief, stock or maintenance of houses of correction;
the marriage of poor maids. The supportation, aid and help of young tradesmen, handicraftsmen
and persons decayed; the relief or redemption of prisoner or captives; the aid or care of any poor
inhabitants...

As is well known, the preamble of the Statute of Elizabeth was never intended to
provide a comprehensive definition of "charity". The statutory preamble was intended only to
define the jurisdiction of a commission established under the statute to investigate and
enforce "all and singular such gifts, allocations, assignments for any of the charitable and
godly purposes before [in the Preamble] rehearsed". The formal title of the statute described
its purpose as: "An Act to redress misemployment of Lands, Goods, and Stock of Money
heretofore given to certain Charitable Uses". The charitable trusts that were the target of the
statute were twofold: charitable trusts in favour of the poor and charitable trusts to support
public works. These trusts were singled out for legislative action because they had become
the object of much "squandering and defalcation" "by reason of frauds, breaches of trust
and negligence in those that should... employ the same",^^ at a time when government was
interested in acting to help alleviate the social consequences of poverty and to improve the

1601, 43 Eliz. 1, c. 4 (U.K.) (hereinafter referred to as the ''Statute of Elizabeth").

Ibid.

Ibid

168

public infrastructure. There was, thus, much that was thought at the time of the statute's
enactment to have been charitable — most importantly religion — that was intentionally left off
the list.^^ In cases unrelated to the statute, English courts at the time continued to use a more
general and inclusive common law definition that had been developed by the Court of
Chancery. That definition included the advancement of religion as a charitable object and
equated "charity" with a broadly inclusive notion of "public benefit".

Generally, the approach of the modem courts, which rely on the statute as their
starting point, has been to ask whether an activity falls within the spirit and intendment of this
statutory preamble, or, failing that, whether it is analogous to one of the enumerated
purposes, and, in either case, whether it is beneficial to the community. Alternatively, but to
the same effect, courts ask whether the purpose under consideration falls within the equity of
the statute. This approach dates back to the early nineteenth century to the case of Morice v.
Bishop of Durham, where, on account of the then prevailing scepticism as to the value of
charitable activity coupled with a preference for the succession rights of a testator's next-of-
kin, it was said that the legal definition of charity was not coterminous with the common
meaning of charity. The statutory preamble was selected as establishing the more restrictive

39
40
41

This fact is well known, if frequently overlooked. In Gilmour v. Coats, [1949] A.C. 426 at 442, [1949] 1 All E.R.
848 at 852 (H.L.) (subsequent references are to [1949] A.C), Lord Simmonds stated:

It is a commonplace that that statute. ..was directed not so much to the definition of charity as to the
correction of abuses which had grown up in the administration orcertain trusts of a charitable nature.

One commentator has suggested that the statute is remarkable for the way it defines charity so that state purposes,
as opposed to religious purposes, are emphasized as core to the meaning of "charity". It thus marks the "beginning
of [charity] as a voluntary partnership, between the citizen and the State, to fund and achieve social objectives":
Bromley, supra, note 20, at 64-65. On the omission of religion, see, further, F.H. Newark, "Public Benefit and
Religious Trusts" (1946), 62 L.Q.R. 234, and Picarda, supra, note 6.

See Bromley, supra, note 20 and Jones, supra, note 2, at 57-58.

See Jones, ibid., at 57-58, 120.

Recently, Canadian courts have shown some hesitation about starting with the Statute of Elizabeth. In Re Laidlaw
Foundation, supra, note 28, at 582, Southey J. stated that "it was highly artificial and of no real value in deciding
whether an object is charitable. ..to pay lip service to the Preamble of a statute passed in the reign of Eliz. I". In Re
Levy Estate, supra, note 28, at 392, the following comment was made: "[T]he preamble to the Statute of
Elizabeth.. .no longer defines charitable trusts in this province." But Stone J., in Native Communications Society of
B.C. V. Minister of National Revenue, [1986] 3 F.C. 471 at 478, [1986] 2 C.T.C. 170 at 173 (F.C.A.), stated: "A
purpose, to be a good 'charitable' one, must possess a charitable nature within 'the spirit and intendment' of the
preamble." See, also, MacGuigan J. in N.D.G. Neighbourhood Association v. Minister of National Revenue
(1988), 85 N.R. 73, [1988] 2 C.T.C. 14 (F.C.A.).

(1804), 32 E.R. 656, 9 Ves. J. 399 (Sir William Grant M.R.); afTd (1805), 32 E.R. 947, 10 Ves. J. 521 (Lord
Eldon L.C.).

See Jones, supra, note 2, at 133. Note that where personalty was involved, as in Morice v. Bishop of Durham,
supra, note 42, and, therefore, where the matter was outside the purview of the Mortmain Act, 1 736, supra, note 1,
a narrower definition was more helpftil in advancing the interests of the next-of-kin since any bequest on trust for
some non-charitable purpose would fail and the property would go to the next-of-kin.

169

and appropriate legal meaning. At first instance in that case, the Master of the Rolls, Sir
William Grant, stated: :^^

Do purposes of liberality and benevolence mean the same as objects of charity? That word in its
widest sense denotes all the good affections men ought to bear towards each other; in its most
restricted and common sense, relief of the poor. In neither of these senses is it employed in this
Court Here its signification is derived chiefly from the Statute of Elizabeth (stat. 43, Eliz. c. 4).
Those purposes are considered charitable, which that Statute enumerates, or which by analogies
are deemed within its spirit and intendment; and to some such purpose every bequest to charity
generally shall be applied.

This view was confirmed in the Chancery Court by Lord Chancellor Eldon, who stated that
the law of charity was confined to "either such charitable purposes as are expressed in the
Statute (stat. 43 Eliz., c. 4), or to purposes having analogy to those"."*^ This view
distinguished the charitable trust from the public trust.

Initially, the central cases of a valid charitable purpose under the method of the
preamble were the relief of poverty through ahns-giving and the relief of the indigent through
the provision of medical care, employment, and education, together with a restricted class of
other objects of general public utility, such as the repair of bridges and canals. Sir Samuel
Romilly, counsel for one of the parties in Morice, usefully summarized the new definition by
identifying four main objects, only slightly broader in scope than the two existing
categories.

1st, relief of the indigent; in various ways: money: provisions: education: medical assistance; &c.:
2dly, the advancement of learning: 3dly, the advancement of religion; and, 4thly: ...the
advancement of objects of general public utility.

The only major point of departure from the preamble in Romilly's classification was the
addition of the advancement of religion. His fourth category, "general public utility", was
meant to include only the public works mentioned in the statute.

45
46

48
49

Bentwich, supra, note 32, at 522, has referred to the definition as having "that worst root of title, an ancient and
obsolete Statute".

Morice v. Bishop of Durham, supra, note 42, at 404-05 (9 Ves.).

Morice v. Bishop of Durham, supra, note 42, at 541 (10 Ves.).

Jones, supra, note 2, at 133, wrote: "That case and its successors have bequeathed to future lawyers the thankless,
often impossible, task of distinguishing the charitable gift., .from the gift which is merely for the public benefit."

Morice v. Bishop of Durham, supra, note 42, at 532 (10 Ves.).

Lx)rd Romilly argued, ibid., at 531 (10 Ves.), that the following purposes, although for the benefit of the public,
were not charitable: "the establishment of a Cabinet of Natural History, Anatomical Exhibitions, Galleries of
Pictures, to be open to the public: a legacy to the African Society, for acquiring information in the interior of
Africa to contribute to raise the degraded state of society in that part of the world." All of these, however, would
certainly be classified as charitable purposes today, which shows a significant difference between his
understanding and ours.

170

Over time the class of objects included as being within the spirit and intendment of the
list of purposes in the preamble, or analogous thereto, grew. The vague methodology of the
approach left considerable scope for courts to respond to and express the prevailing
sentiments of their times, to the point where numerous commentators have noticed definite
trends in the case law: in some eras the courts have been quite restrictive, in others quite
liberal.^' Throughout the ascendancy of this method, generalizations were not discouraged
nor prohibited, and most textbooks published during the height of its influence attempted at
least a categorization of the charitable objects recognized by law. But this approach
eschewed, and still eschews, attempts to define "charity". As a result, the "legal" meaning of
charity under the preamble has the reputation of being highly "technical" because it is
reposed in obscure arguments, contained in a multitude of cases, about the "spirit and

intendment" of the statute. Since the logic was always to distinguish the "legal" from the
"common" meaning of charity, courts always had a convenient way to express negative
decisions. They could always say: "To the non-lawyer, perhaps, this activity may be
charitable; nevertheless at law it is not because it is not within the spirit and intendment of the
statute."

The conventionality of the scope of the definition is acknowledged openly by the courts. Lord Wright's remarks in
National Anti-Vivisection Society v. Inland Revenue Commissioners, supra, note 20, at 42, are illustrative:

Where a society has a religious object, it may fail to satisfy the test if it is unlawful, and the test may
vary from generation to generation as the law successively grows more tolerant.. ..Again. ...trusts may, as
economic ideas and conditions and ideas of social service change cease to be regarded as being for the
benefit of the community. And trusts for the advancement of learning or education may fail to secure a
place as charities, if it is seen that the learning or education is not of a public value.

Lord Simonds, in the same case at 69-70, said:

If to-day a testator made a bequest for the relief of the poor and required that it should be carried out in
one way only and the court was satisfied by evidence that that way was injurious to the community, I
should say that it was not a charitable gift, though three hundred years ago the court might upon
different evidence or in the absence of any evidence have come to a different conclusion.

See, for example, OosterhofF and Gillese, supra, note 28, at 805-09, where the authors observe that the English
cases in the 1940s and 1950s were much stricter in their approach due, the authors speculate, to a strict
constructivist legal tradition and a greater need for tax revenues following the war. The authors also observe that a
more "lenient attitude" has been adopted recently both in England and Canada, as evidenced in the "poor
employees" cases (see Jones v. T. Eaton Co., [1973] S.C.R. 635, 35 D.L.R. (3d) 97, and Re Laidlaw Foundation,
supra, note 28, where there is a broader interpretation of the fourth limb of Pemsel test supra, note 27. See, also,
Fridman, supra, note 32, at 538.

"The morass of case law expands from year to year and even a novice may place side by side decisions which can
be reconciled only by an audacious straining of language": Keeton and Sheridan, supra, note 29, at 24. "Often it
may appear illogical and even capricious. It could hardly be otherwise when its guiding principle is so vaguely
stated and is liable to be so differently interpreted in different ages": Gilmour v. Coats, supra, note 38, at 443,
(Simonds J.). Picarda, supra, note 5, at 6 says (citing National Anti-Vivisection Society v. Inland Revenue
Commissioners, supra, note 20): "The legal meaning of the word differs from the popular meaning, and it has
been said on the highest authority that charity in the legal sense is a word of art of precise and technical meaning."

171

An excerpt from Lord Reid's decision in Scottish Burial Reform & Cremation Society v.
Glasgow Corp. provides a useful summary of the approach under the statute and its current
status:

The preamble specifies a number of objects which were then recognised as charitable. But in
more recent times a wide variety of other objects have come to be recognised as also being
charitable. The courts appear to have proceeded first by seeking some analogy between an object
mentioned in the preamble and the object with respect to which they had to reach a decision. And
then they appear to have gone further and to have been satisfied if they could find an analogy
between an object already held to be charitable and the new object claimed to be charitable. And
this gradual extension has proceeded so far that there are few modern reported cases where a
bequest or donation was made or an institution was being carried on for a clearly specified object
which was for the benefit of the public at large and not of individuals, and yet the object was held
not to be within the spirit and intendment of the Statute of Elizabeth I.

As this passage clearly intimates, the Statute of Elizabeth test has latterly developed into
something of a "shibboleth", something to be said and gotten out of the way, before moving
on to the Pemsel test or directly to the decision. It would be a mistake, however, to dismiss
it too hastily, since the case law it has spawned is still influential. Also, despite important
developments over the last forty years, there remains a fundamental affinity between this test
and the next two: they all purport to eschew definition, and they all attempt to make
categorical distinctions between what is charitable and what is merely of "public benefif .

(iii) "PemseFTQSi

The more common strategy in the case law is to start with the test laid down by Lord
Macnaghten in Pemsel. In his speech in that case, referred to above. Lord Macnaghten
said:

How far then, it may be asked, does the popular meaning of the word 'charity' correspond with its
legal meaning? 'Charity' in its legal sense comprises four principal divisions: trusts for the relief
of poverty; trusts for the advancement of education; trusts for the advancement of religion; and

53
54
55
56

[1968] A.C. 138, at 147, [1967] 3 All E.R. 215, at 218 (H.L.) (subsequent references are to [1968] A.C.).

See Bromley, supra, note 20. "Shibboleth" is Bromley's word.

Supra, note 27.

Ibid., at 583. It is widely believed that Lord Macnaghten took this definition from the argument of Samuel
Romilly, counsel for the defendant in Morice v. Bishop of Durham, supra, note 42. The American Law Institute,
Restatement (Second) of Trusts (Washington, D.C.: 1957), §368, gives a similar definition:

Charitable Purposes include (a) the relief of poverty; (b) the advancement of education; (c) the
advancement of religion; (d) the promotion of health; (e) governmental or municipal purposes; (f) other
purposes the accomplishment of which is beneficial to the community.

The Restatement, ibid., also identifies the fourth limb as the common element: "The common element of all
charitable purposes is that they are designed to accomplish objects which are beneficial to the community."

172

trusts for other purposes beneficial to the community, not falling under any of the preceding
heads.

This list of four things, essentially (and legally) charitable, is, in various forms, also
found in several statutes across the common law world.

In drawing up the Pemsel list, Lord Macnaghten appears to have thought that he was
merely classifying the items on the much lengthier Statute of Elizabeth list. Like Sir Samuel
Romilly before him, Lord Macnaghten may have intended that the fourth general category
merely address those items on the statute's list which had not been captured in the first three.
Many commentators thus suggest that Lord Macnaghten had no intention of changing the
definition or the methodology of the common law. Thus, there is considerable authority that
any purpose falling under the fourth head of Pemsel must also be within the spirit and
intendment of the statute. Others, however, have argued that Pemsel effected, and was

intended to effect, a significant liberalization of the common-law approach. These
commentators suggest that the Pemsel test ushered in an era in which the relevant question
became, or was to become, simply, whether the activity under consideration is "beneficial to
the public", with this key phrase expanded to include "objects of a hedonistic nature that
contribute to the quality of life" of rich and poor alike.

See cases cited in Ford and Lee, supra, note 6, at 851-52, and D.W.M. Waters, Law of Trusts in Canada, 2d ed.
(Toronto: Carswell, 1984) at 583-84.

In a dissent in Pemsel, supra, note 27, at 568, Bramwell L.J. voiced the objection in this way:

I think the judgment on this should be reversed. As the majority of your Lordships think otherwise
the State will be a subscriber of £17 a year to supporting, maintaining, and subsidising 'the missionary
establishment among heathen nations of the Protestant Episcopal Church ...'.

Goodman Report, supra, note 27.

Thus, after setting out his four heads, Macnaghten L.J. in Pemsel, supra, note 27, at 583, said:

The trusts last referred to are not the less charitable in the eye of the law, because incidentally they
benefit the rich as well as the poor, as indeed, every charity that deserves the name must do either
directly or indirectly.

Says one commentator (Bromley, supra, note 20, at 75):

In my opinion it is a fundamental misunderstanding to talk about the 'spirit and intendment' of the
Preamble as being congruous with PemseFs 'beneficial to the community'. They reflect divergent if
not conflicting philosophies.

The phrase in our text is taken from the Goodman Report, supra, note 27, and is quoted by Bromley as
characteristic of the new approach ushered in by Pemsel. In another passage, Bromley (at 60) argues that the
Pemsel decision represented

a significant break from the Preamble and reflect[ed] the philanthropy of late nineteenth century
England rather than Elizabethan England. Pemsel mark[ed] a turn away from concern for the poor
being the pervasive and dominating consideration of the law of charity to other purposes beneficial to
the community which could incidentally benefit the rich.

173

In practice, the Pemsel test continued to foster a very fact-specific judicial approach,
with courts arguing by analogy to other cases where organizations or purposes similar to the
ones in issue had or had not been found charitable. As with the approach that used the
preamble as the starting point, the object was not to deduce what was and was not a charity
from a real definition, but to use the list and the case law which developed from it as
suggestive of the main types of things that were charity.

A statement from Lord Wilberforce's speech in Scottish Burial Reform & Cremation
Society v. Glasgow Corp. provides a useful summary of the Pemsel approach:

Lord Macnaghten's grouping of the heads of recognised charity in Pemsel's case is one that has
proved to be of value and there are many problems which it solves. But three things may be said
about it, which its author would surely not have denied: first that, since it is a classification of
convenience, there may well be purposes which do not fit neatly into one or the other of the
headings; secondly, that the words used must not be given the force of a statute to be construed;
and thirdly, that the law of charity is a moving subject which may well have evolved even since
1891.

In general, therefore, it may be said that the method under a conservative interpretation of the
Pemsel test is to start with the Statute of Elizabeth and/or the Pemsel test, preferably the
latter, then look to the rich case law for analogies and for precedents both for and against. A
conservative interpretation might resist overturning old precedents — such as the exclusion of
sports or the pursuit of knowledge in the absence of a teaching element — refusing to extend
the general fourth category. But there are many variations on this theme, and the approach
overall is thought to be open and liberal.

(iv) "Purposes Beneficial to the Public" Test

There is a tendency m some more recent cases towards a third approach which may be
characterized as a near-fijll retreat from the position set out in Morice v. Bishop of Durham
and a near-complete dilution of the restrictiveness of Pemsel's fourth category. ^^ Whereas
Morice posited a categorical distinction between charitable purposes and purposes merely
beneficial to the public, the third approach comes very close to collapsing this distinction

The latter, argues Bromley (at 61), is what Sir Samuel Romilly set aside as "liberality"; "assisting individuals, not
in a state of indigence, but possessing the comforts of life, is liberality; but not charity": Morice v. Bishop of
Durham, supra, note 42, at 532 (10 Ves.).

61
62
63

Supra, note 53, at 154.

Supra, note 42.

As suggested in the previous section, some commentators trace this development to Lord Macnaghten's speech in
Pemsel, supra, note 27. Consider also art. 1270 of the Civil Code of Quebec:

A social trust is a trust constituted for a purpose of general interest, such as cultural, educational,
philanthropic, religious, or scientific purpose.

174

altogether. Lord Russell, in Incorporated Council of Law Reporting for England and Wales v.
Attorney-General,^^ described this new test in the following manner:

[T]he Courts, in consistently saying that not all ['objects of general public utility'] are necessarily
charitable in law, are in substance accepting that if a purpose is shown to be so beneficial or of
such utility it is prima facie charitable in law, but have left open a line of retreat based on the
equity of the Statute in case they are faced with a purpose. ..which could not have been within the
contemplation of the Statute.

And in the same case Sachs L.J. said:

I do not propose to consider the instant case on the basis of analogies. The analogies or 'stepping
stones' approach was rightly conceded on behalf of the Attorney-General not to be essential: its
artificiality has been demonstrated in the course of the consideration of the numerous authorities
put before us. On the other hand, the wider test — advancement of purposes beneficial to the
community or objects of general public utility — has an admirable breadth and flexibility which
enables it to be reasonably applied from generation to generation to meet changing circumstances.

These two formulations of the third approach use the statute or the Pemsel list and the case
law only as a final means of invalidating the trust. What counts according to this new
formulation is whether the purpose under consideration is beneficial to the public, very
broadly conceived. Only the traditionally excluded objects, such as political objects and
objects contrary to public policy, would be excluded for certain. By this test many well-
established exclusions would be eliminated. The logical possibility, however, of refusing to
acknowledge some charitable purpose trusts when the reasons are otherwise thin would still
be available to courts.

(v) Conclusion

We make four points by way of conclusion.

First, in point of fact, the law does not attempt and has never attempted to define
"charity". It has merely provided a method for identifying charitable purposes. The trend of
the law, however, has been to develop an increasingly open interpretation of the fourth
category of the Pemsel test, which could be taken as a definition if it were positioned as such.
For example, the emerging or implicit definition might be: "charitable purposes are purposes
of public benefit, including...".

Second, the Commission suggests that the real definition, set out in the previous
chapter, provides the proper interpretation of what the law should accept as purposes that are

[1972] Ch. 73, [1971] 3 All E.R. 1029 (subsequent references are to [1972] Ch.).
Ibid., at 88.
Ibid., at 94.

175

beneficial to the public. We suggest that the definition provides the basis for understanding
how the fourth category has been judicially expanded in recent years to include things such as
publishing of law reports and sports, and also how it ought to be expanded further. We
suggest that it also provides the basis for understanding what ought to be excluded.

Third, the phrase "benefit to the public" is too vague and equivocal to be used as the
catch phrase for this element of the definition. As stated above, and as will be developed
further below, this phrase is currently used to name the three critical elements identified in
our real definition, that is, the nature of the good pursued, the practical utility of the project
chosen, and the character of the beneficiary of that benefaction. For a clear development in
the law these three elements must be distinguished in legal argument and in court decisions.
We would, therefore, prefer that this element of the test be cast more clearly as an inquiry
into whether the project at issue advances a common good. In our view, this is what, with
perhaps one exception, is meant by a "charitable purpose" or by a purpose that is beneficial
to the public. The remaining elements would examine whether the project advances the good
in a practical or useful way, and whether it benefits strangers.

Fourth, one significant theme in the history of the fourth category ("other" purposes of
charity) is whether what we labelled "philanthropy" in chapter 6 "liberality" to use Lord
Romilly's word — belongs in that category. The core purposes in the traditional interpretation
have always been the relief of poverty, the advancement of religion, and public works (in a
very narrow sense). The historic trend has been to add philanthropy, in our sense of the word.
We see no reason to object to this development, but we do regard it as support for the
proposition that, for limited purposes, the distinctions might still be made. Our examples for
this possibility at the end of chapter 6 were the relaxation of the rules regulating the political
activity of charities, or some charities, in the narrow sense of that word, and an increase in the
tax subsidy to these groups.

(i) Introduction

The common-law test also requires that there be a public, as opposed to a private,
benefit. This part of the inquiry is often put: Is the project of "public benefif or of "benefit,
to the public" or to "a sufficient segment of the community"? The connotations of the
formulation of this part of the common-law test are that the issue is, in part, a question of the
number of people who benefit and, in part, whether the people who benefit are members of
the public, as opposed to, for example, the friends and family of the donor. This part of the

67
68

Public works do not fit easily into this definition. This problem is discussed infra, in ch. 8.

There is precedent for the latter in the current income tax regime which favours gifts to the Crown by permitting a
credit for the full amount of the gift even if this exceeds the 20% of income limit applicable to other charitable
gifts. To some extent, the classifications used in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), also serve as a
precedent for differential treatment.

176

common-law test is used as well to facilitate consideration of the practical utility — the
"benefit" — of the project.

There is considerable confusion in the case law over the meaning and significance of
this element of the common-law test. This confusion is acknowledged by most commentators.
As long ago as 1953, Professor Fridman wrote:

The concept of public benefit is intangible and nebulous; its effects can only be represented as
variable and unpredictable. Imprecision has resulted in illogical and capricious decisions,
sometimes impossible to reconcile.

In Dingle, Lord Cross spoke critically of this part of the test:

The phrase a 'section of the public' is in truth a vague phrase which may mean different things to
different people. In the law of charity judges have sought to elucidate its meaning by contrasting
it with another phrase: 'a fluctuating body of private individuals.' But I get little help from the
supposed contrast for as I see it one and the same aggregate of persons may well be describable
both as a section of the public and as a fluctuating body of private individuals.

There are several reasons for this confusion. One of them is the common law's equivocation
in the use of the terms "public" and "benefit". Another is that of the three aspects of the test
just mentioned — the number of beneficiaries, the emotional and obligational distance of the
donor from the beneficiaries, and the practical utility of the project — the Commission would
argue that only the latter two are strictly relevant. Based on our real defmition of a charitable
act — an act that (1) advances a common or universal good (2) in a practical or useful way
(3) for the benefit of strangers — our suggestion is that the number of beneficiaries is never
formally relevant. It often is a useful indicum, however, on the question of emotional and
obligational distance.

We do not recommend statutory reform of this part of the test either. We think the view
of the law advanced in the following paragraphs is already to a great extent established, either

• 71

implicitly or explicitly, in many of the decisions and much of the doctrinal writing. Our
objective in this part of the chapter is merely to marshall the material into an intelligible
definition and, thereby, to contribute to the clarification of the law. Our discussion is
consequently divided into two parts: a description of the confusion, and a restatement of the
true rule. In the description we look, first, at the "section of the community" element of this
part of the common-law test, then second, at its "benefif element. A leading Australian text
on the law of trusts states the common-law test in a way that succinctly and completely

69
70
71

Fridman, supra, note 32, at 539.

Dingle v. Turner, supra, note 20, at 623.

On the public benefit element of the test, see S.G. Maurice, "The Public Element in Charitable Trusts" (1951), 15
Comp. Conv. & Prop. L.N.S. 328; G.H.L. Fridman, "Doubt and Certainty in the Law of Charities" (1955), 33
Can. B. Rev. 898; P.S. Atiyah, "Public Benefit in Charities" (1958), 21 Mod. L. Rev. 138; and T.G. Watkin,
"Charity: The Purport of 'Purpose'", [1978] Conv. 277.

177

expresses both these elements. We, therefore, adopt that formulation as a representative
statement of the current law:

There can be no charity without public benefit, that is benefit must be shown, and the benefit
must be for the public or community as a whole or for an appreciable, but unascertained and
indefinite, portion of it.

Our argument is that these two elements are better expressed by our distance requirement and
our practical utility requirement.

(ii) Confusion Over the "Public Benefit" Test

0. ^'Section of the Public "

Two English decisions of the late- 1940s and early- 1950s provide influential
formulations of the "section of the public" element of the "benefit to the public" test. In one

case, Re Compton, there was a bequest "for the education of Compton and Powell and
Montague children to be used to fit the children. ..to be servants of God serving the nation". In
the other case, Oppenheim v. Tobacco Securities Trust Co., there was a trust for the
education of the children of the employees of a group of associated companies having in
combination over 100,000 employees. In drawing the required distinction between a public
and a private benefit, the two courts in these two cases focused on the existence of a personal
relationship, by blood or by, employment, and on the size of the section of the community
identified. In Re Compton, Lord Greene held against the validity of the trust, saying:

[A] gift under which the beneficiaries are defined by reference to a purely personal relationship
to a named propositus cannot on principle be a valid charitable gift. And this, I think, must be
the case whether the relationship be near or distant, whether it is limited to one generation or is
extended to two or three or in perpetuity. The inherent vice of the personal element is present
however long the chain and the claimant cannot avoid basing his claim on it.

72
73

74
75

Ford and Lee, supra, note 6, at 829.
Supra, note 20.
Supra, note 20.
Supra, note 20, at 1 3 1 .

178

The court in Oppenheim, likewise, held against the validity of the trust on the basis that it did

7f» 77

not meet the "public benefit" test. In that case Lord Simonds said:

These words 'section of the community' have no special sanctity, but they conveniently
indicate first, that the possible... beneficiaries must not be numerically negligible, and secondly,
that the quality which distinguishes them from other members of the community, so that they
form by themselves a section of it, must be a quality which does not depend on their relationship
to a particular individual.. .A group of persons may be numerous but, if the nexus between them is
their personal relationship to a single propositus or to several propositi, they are neither the
community nor a section of the community for charitable purposes.

This test is generally referred to as the Compton or the Compton/Oppenheim test. It has two
parts, both of which are problematic. One part requires that the beneficiary class not be
defined by reference to a "personal relationship to a named propositus". The other requires
that the size of the beneficiary class not be negligible.

(1) "Personal Relationship to a Named Propositus "

To the extent that the Compton/Oppenheim test requires an investigation of any
relationship between the donor and the beneficiary class, it is roughly the same as our
requirement that there be emotional and obligational distance. Understood that way, there is
nothing objectionable about the test. However, as formulated by Lord Greene in the passage

77
78

The problem of the validity of trusts such as those in Oppenheim v. Tobacco Securities Trust Co., supra, note 20,
and in Re Compton, supra, note 20, was alleviated by a change in the class ascertainability rules applicable to
private trusts by the decision of the House of Lords in McPhail v. Doulton, [1971] A.C. 424, [1970] 2 All E.R.
228 (H.L.). Also significant was the acceptance of a less stringent test for public benefit in the case of charitable
trusts aimed at the relief of poverty in Dingle v. Turner, supra, note 20, and by the recognition in Re Denley 's
Trust Deed, [1969] 1 Ch. 373, [1968] 3 All E.R. 65, that a trust expressed to be for charitable purposes, but of
actual benefit to an identifiable group of individuals who therefore have an interest in enforcing it may, on that
account, be a valid private trust.

Oppenheim v. Tobacco Securities Trust Co., supra, note 20, at 306.

See Davies v. Perpetual Trustee Co., [1959] 2 All E.R. 128 (P.C); [1959] A.C. 439; Will of Scales, [1972] 2
N.S.W.L.R. 108; Re Evans, [1957] St. R. Qd. 345; and Re Mills (1981), 27 S.A.S.R. 200, for applications of the
test in Australia.

The case law is clear that self-help trusts are invalid because they fail to satisfy this element of the "public benefit"
test. See Came v. Long (1860), 2 De G.F. & J. 75, 45 E.R. 550 (L.C.); Re Hobourn Aero Components Ltd. 's Air
Raid Distress Trust Fund; Ryan v. Forrest, [1946] Ch. 154, [1946] 1 All E.R. 501; Lord Nuffield v. Inland
Revenue Commissioners; Goodenough v. Inland Revenue Commissioners (1946), 175 L.T. 465, 28 Tax Cas. 479;
Waterson v. Hendon Borough Council, [1959] 1 W.L.R. 985, [1959] 2 All E.R. 760 (Q.B.D.); Re Clark's Trust
(1875), 1 Ch. D 497, 45 L.J. Ch. 194; Braithwaite v. Attorney-General, [1909] 1 Ch. 510, 78 L.J. Ch, 314; and Re
Mead's Trust Deed; Briginshaw v. National Society of Operative Printers & Assistants, [1961] 1 W.L.R. 1244,
[1961] 2 All E.R. 836.

Similarly, gifts to help friends in need or to family members are also not charitable: Re Doering, [1948] O.R. 923,
[1949] 1 D.L.R. 267 (H.C.J.) (a gift "for the educafion of the male descendants in the male line" held to be not
charitable). But the requirement of distance has somefimes been overlooked (see Spiller v. Maude (1864), 5 New

179

just quoted (a "personal relationship to a named propositus"), the test is seriously misleading.
If it is literally construed — and there has been a tendency to take this formulation literally —
then the test excludes gifts in favour of any class identified by a relationship with any named
person, not just those classes identified by their relationship with the donor, as in our test.
Thus, a gift for the advancement of education for the benefit of "employees of the Crown",
for example, is excluded. That is the first problem.

(2) Size of the Class

The second problem is that the Compton/Oppenheim test formally requires
consideration of the size of the beneficiary class. As a preliminary matter, it is unclear
whether the test requires consideration of the size of the class oi possible (meaning eligible)
or of ultimate beneficiaries. Lord Simonds' statement emphasizes the size of the possible

beneficiary class of those eligible. But his words have been interpreted by some to require
an ultimate beneficiary class of a certain size. A clear statement of the view that the size of
the ultimate beneficiary class is relevant is contained in the Restatement (Second) ofTrusts:^^

Rep. 30, 11 L.T. 329; subsequent proceedings (1881), 32 Ch.D. 158n; Pease v. Pattinson (1886), 32 Ch.D. 154,
[1886-90] All E.R. Rep. 507; and Re Buck; Bruty v. Mackey, [1896] 2 Ch. 727, [1895-99] All E.R. Rep. 366), and
there are several notorious exceptions: the "poor relations" exception, the "poor employees" exception, and the
"founder's kin" exception.

Contra: Re Payne Estate; Gilmer v. British Columbia (Attorney General) (1953), 11 W.W.R. 424 (B.C.S.C),
where a trust in favour of "needy ex-members of the Imperial Armed Forces" was held valid.

Oppenheim v. Tobacco Securities Trust Co., supra, note 20, at 306 (see quote in text accompanying note 77,
supra).

Professor Waters, supra, note 57, at 562, argues for this interpretation:

In the case of a discretionary trust or any trust which involves a selection among a class of persons, the
objects of the trusts are the persons who are eligible for selection, not those who actually receive
something. It is therefore irrelevant as to whether one person or ten thousand persons are to be selected
from the class. As for public benefit, this means that the class which is eligible for selection must form
a sufficient section of the community. It may well be. ..that there is little or no actual benefit to those
who ultimately receive nothing though they were eligible for selection. And when only one individual
or a few individuals may be selected, the actual gain or benefit to the community or to the class may in
that sense seem to be none. But the fact of eligibility is what the courts have always considered to
constitute benefit, and, if the class of eligibles is large enough, there is a public benefit.

In Scott on Trusts, supra, note 27, at 2939 and 2942, a similar argument is advanced:

Where the class of persons from whom the recipients of benefits are to be selected is sufficiently
large, the fact that the number of persons who are to receive the benefits is small does not prevent the
trust from being charitable. This is clear enough where the income of the trust fund is to be applied for
the benefit of one person or a limited number of persons for an indefinite period. In such a case the
number of persons who are to receive benefits under the trust at any one time is limited, but the total
number is unlimited. A trust is upheld as a charitable trust because it is of benefit to the community. It
is not essential, however, that every member of the community should be a beneficiary or potential
beneficiary of the trust. Even though the purposes of the trust are charitable in character, the trust is not
a valid charitable trust if the benefits are limited to too small a class of persons.

Supra, note 56, §375. See, also, Norris J.A. in dissent in Re Wedge Estate (1968), 63 W.W.R. 397 at 399, 67
D.L.R. (2d) 433 at 435 (B.C.C.A.). It was suggested that a gift on trust "to some needy displaced family of
European origin. ..who wishes to make a new start in life in Canada and engage in fanning" was not a charitable

180

A trust is not a charitable trust if the persons who are to benefit are not of a sufficiently large or
indefinite class so that the community is interested in the enforcement of the trust.

In our view, however, it does not matter which formulation is correct since both are
misguided. The size of the beneficiary class, whether possible or ultimate, is not formally
relevant.

This position is borne out by an examination of the actual decisions of the courts. There
are many cases where a charitable trust was held valid even though the possible or the

ultimate class of beneficiaries was small. An endowed professorship, for example, or a
scholarship for only one student, or an endowment for a minister's stipend or retirement
allowance, are all valid charitable trusts, even though the number of possible or ultimate
beneficiaries in each case is small. To our knowledge no case has ever been cited and no
compelling example has ever been provided which demonstrates that the size alone of the
possible or ultimate beneficiary class is formally relevant.

The root cause of the error may be, however, that the smallness in size of the
beneficiary class is often a very useftil indication of a lack of distance. The smaller the size of
the class, the more likely the donor could actually name the beneficiaries; in a situation where
the donor could name the beneficiaries there is a reasonable suspicion that the motive is
affection or duty, not altruism. Certainly it is common for altruism to be aimed at specific
individuals, for example, a trust ftind established to pay for the medical treatment of a child
with a rare disease, or a trust to help a family that has lost their home in a natural disaster. All
donors to these trusts give altruistically; these are quintessentially charitable acts, yet,
obtusely, they are excluded by this limb of the Compton/Oppenheim test. Of course, in these
examples there is no need for the law of purpose trusts so no harm is thereby caused. The real
issue is, however, that it is a mistake to elevate the size of the beneficiary class into a
formally relevant consideration, and, although it may have led to only a few errors, this
mistake has caused some confusion.

The confusion lies in the fact that courts and commentators readily assert that the
"public benefif criterion varies from category of charity to category of charity. Courts, for
example, readily maintain that the "public benefit" standard has developed "empirically", not

trust because it failed the public benefit test. In the opinion of the dissenting judge, it failed because only one
person or one family was to benefit.

The Goodman Report, supra, note 27, at 22, agreed:

Provided all requirements for charitable status are present the fact that the beneficiary class may be
small should as at present be no bar to charitable status.

Apropos of the criticisms in the text, none of the examples cited by the Restatement (Second) of Trusts, supra,
note 56, to support its rule actually illustrate the point about the size of the class.

One could argue that, in fact, the ultimate beneficiary in the first example is the university community at large.
Professor Waters suggests that the possible beneficiaries in the second example are the entire class of students
fi-om which the scholarship student is chosen. See Waters, supra, note 57, at 562 and 567.

181

logically, that it is a question of degree, and that "[m]uch must depend on the purpose of the
trusf in issue. In Gilmour v. Coats, decided a few years before Oppenheim, Lord Simonds
explained the different treatment in the application of the public benefit standard for different
types of charity

It would not, therefore, be surprising to find that, while in every category of legal charity some
element of public benefit must be present, the court had not adopted the same measure in regard
to different categories, but had accepted one standard in regard to those gifts which are alleged to
be for the advancement of education and another for those which are alleged to be for the
advancement of religion, and it may be yet another in regard to the relief of poverty.

Similarly, Lord Somervell stated in Inland Revenue Commissioners v. Baddeley:^^

There might well be a valid trust for the promotion of religion benefiting a very small class. It
would not at all follow that a recreation ground for the exclusive use of the same class would be a
valid charity, though it is clear... that a recreation ground for the public is a charitable purpose.

Commentators likewise maintain that the criterion "public benefit" fluctuates depending on
the particular head of charity under consideration. Certamly, as the law now stands, this is
true in an anomalous group of cases called the "poor relations cases", where charitable trusts
for the benefit of poor relations and, more recently, poor employees have been upheld as

valid. We examine these anomolous cases in chapter 8. Those cases to one side, we suggest

87
88
89
90

The last phrase is from Lord Cross in Dingle v. Turner, supra, note 20, at 624.

Gilmour v. Coats, supra, note 38, at 449.

[1955] A.C. 572 at 615, [1955] 1 All E.R. 525, at 549 (H.L.) (subsequent references are to [1955] A.C.).

Oosterhoff and Gillese, supra, note 28, at 810: "[T]here is a progression from a very limited requirement of public
benefit of trusts for the relief of poverty, to a greater requirement of trusts for the advancement of religion, a still
greater requirement of trusts for the advancement of education, and the most stringent requirement of trusts for
other purposes beneficial to the community." See, also, Inland Revenue Commissioners v. Baddeley, supra,
note 89, at 615, per Lord Somervell.

The cases are summarized in Re Scarisbrick; Cockshott v. Public Trustee, [1951] 1 Ch. 622, [1951] 1 All E.R. 822
(C.A.). See, also, Re Cohn, [1952] 3 D.L.R. 833 (N.S.T.D.).

See Dingle v. Turner, supra, note 20; Gibson v. South American Stores (Gath & Chaves) Ltd., [1950] 1 Ch. 177,
[1949] 2 All E.R. 985 (C.A.); Re Massey Estate, [1959] O.R. 608, 21 D.L.R. (2d) 477 (H.C.J.); Jones v. T Eaton
Co., supra, note 51. Contra: Re Cox, [1951] O.R. 205 at 224, [1951] 2 D.L.R. 326 at 337 (C.A.); afTd [1953]
1 S.C.R. 94, [1953] 1 D.L.R. 577, where Roach J. A. said: "In my opinion this Court should hold that in this
Province there is not such an exception to the general rule [regarding the nexus of common employment]."

There are other anomalies as well. Another exception found only in the English case law is the so-called
"founder's kin" rule which permits educational trusts in favour of a sufficiently large section of the community
that express favouritism within the group for the grantor's relatives. This exception was considered in a 1954
English case, Re Koettgen Westminster Bank Ltd. v. Family Welfare Association Trustees Ltd., [1954] Ch. 252,
[1954] 1 All E.R. 581, and in a 1961 Privy Council decision, Caffoor v. Commissioner of Income Tax (Colombo),
[1961] A.C. 584, [1961] 2 All E.R. 436 (P.C). In the former case the gift was "for the promotion and furtherance
of commercial education" with a preference that up to 75% of the income was to be given "to any employees of
John Batt & Co. (London) Ltd. or any members of the families of such employees". Lord Upjohn in that decision

182

that such open acknowledgement of so much variation in the criterion is recognition that the
criterion is not what it is purported to be. The error lies, in our view, in thinking of "class
size" as a formally relevant consideration in the first place.

b. "Benefir

Complicating matters further is the existence of the third sense of "public benefit" in the
common law, namely, the requirement that (in our words) the project have practical utility, or
that it actually contribute to the improvement of the world. There is only limited explicit
recognition in the case law and commentary that the practical utility of the project is a

formally relevant consideration. This reticence of the law, if we may put it that way, can be

held that the trust was valid as a charitable trust. In the latter case, there was a gift for the education of the
grantor's relatives with a gift — over to others if the relatives were unable to accept the gift. The Privy Council
held, at 604, in that case that the trust was invalid as a charitable trust because of the "absolute priority to the
benefit of the trust income... conferred on the grantor's own family". No Canadian case has upheld a gift under
which the "founder's kin" are to be preferred, and the exception in favour of such charitable trusts has been
criticized both in England and in Canada. Waters, supra, note 57, at 569 states: "Any ftirther extension of the
exception in favour of private benefit would bring the whole law of public benefit into disrepute."

See, for example. Re Pinion, supra, note 6, in which the testator left his studio, its contents and his "atrociously
bad" paintings to the National Museum. Harmon J., at 107, said:

I can conceive of no useful object to be served in foisting upon the public this mass of junk. It is
neither public utility nor educative value.

And Russell L.J., at 1 1 1, said:

For my part, I would not admit to the favoured ranks of charity bearing the banner of education a
disposition with such negligible qualifications to bear it. Where the evidence leaves me with virtual
certainty on balance of probabilities that no member of the public will ever extract one iota of
education from the disposition, I am prepared to march it in another direction, pressing into its hands a
banner lettered de minimus non curat lex.

See, also, Re Elmour, [1968] V.R. 390, where the testator's writing, which was to be published under the
purported charitable trust, was judged to be of no literary value and therefore the trust itself was held to be non-
charitable. But compare Re Shapiro (1979), 27 O.R. (2d) 517, 107 D.L.R. (3d) 133 (H.C.J.), where a trust to assist
in the publication of an unknown Canadian author was held valid.

A British Columbia case, Re Millen (1986), 30 D.L.R. (4th) 1 16, 22 E.T.R. 107 (B.C.S.C.) (subsequent references
are to 30 D.L.R. (4th)), provides a good illustration of similar difficulties. There the trust was established to fund
the "Millen Award" to be awarded annually for, at 117: "I. A lyric, beautifiil in form and in content" and "2. A
prose original, fact or fiction, which in some way portrays the beautiftil." It was held non-charitable because (1) it
was not educational, the only relevant category in the courts view (since "beauty" is too vague a term and since it
lies in the eye of the beholder), and (2) there was no public benefit because only one person would ultimately
benefit, there being no requirement or provision for the publication of the work. We would argue that the court
was, in part at least, mistaken. The advancement of aesthetic experience ought to be a valid category of charitable
purpose in and of itself And the public benefit requirement ought not to be construed to require a beneficiary class
of a certain size. Rather, the difficulties with this gift were the lack of realistic institutional provision for its
existence in perpetuity, its vagueness with respect to the selection of the recipient of the prize, and, therefore, its
lack of utility in the advancement of a laudable purpose.

For cases involving similar problems, see Re Brooks Estate (1969), 68 W.W.R. 132, 4 D.L.R. (3d) 694 (Sask.
Q.B.) (gift to "the work of the Lord" held valid), and Re Jacques Estate (1967), 65 W.W.R. 136, 63 D.L.R. (2d)
673 (B.C.S.C.) (gift "to be distributed to finance community project" held invalid). See, generally, Tudor on
Charities, supra, note 7, at 5.

183

explained by a number of factors. First and foremost, the size element of the
Compton/Oppenheim test frequently acts as a screen for this question. In the Restatement
(Second) of Trusts formulation of the size test, for example, the relevance of the size of the
ultimate beneficiary class is due to the belief that a class of sufficient size ensures that the
community has an interest in enforcing the trust. We agree that is the reason, but we do not
agree with size being used as the correct indicium. Rather, in our view, the community will
have an interest in enforcing any charitable purpose trust which contributes effectively to the
instantiation of a common good for the benefit of strangers. Second, trusts lacking practical
utility are often cured of their particular defect — frequently vagueness — under the "scheme-
making" power of the courts or, rarely, under a very broad application of the "initial
impracticability or impossibility" cy-pres doctrine. Third, for obvious reasons, courts are
reluctant to say of a benevolent person that his or her project is impractical or useless, or that
it will not work. Often the application of this requirement, therefore, is disguised in other
considerations. Fourth, if "practical utility" is thought to include only material, economic, or
social benefits, then identifying these in the case of religion is extremely problematic. Either
these benefits are considered to be non-existent with respect to religion, or they are fixed on
as relevant considerations and religion is valued only for its byproducts or accoutrements (for
example, where stained glass windows are concentrated on instead of acts or worship). Thus
these four substantial difficulties with recognizing, articulating, and applying the practical
utility aspect of the benefit to the public test have contributed significantly to the confusion in
this area.

Recognizing the formal relevance of the practical utility test does help solve one puzzle
in this area of the law. The statements made regarding the variation in strictness of the
"public benefit" test, which we previously construed as enigmatic, may now be more readily
explained. We noted in chapter 6 that the practical utility question is always context specific.
It is this fact that helps explain the appearance of variation. Where the donor's gift is for the
relief of poverty, it will almost always be the case that the gift contributes to the advancement
of one or more of the goods for the benefit of strangers, given the beneficiaries' pre-existing
state of serious deprivation. A gift that supports an accepted religion is also likely to pass the
practical utility test, since invariably the avenues for giving are limited and pre-established by
the recipient religion. In other words, projects in these two categories are simple to design
and, therefore, almost never fail the practical utility test. Projects advancing other goods are
more difficult to design, although one would expect that, given the prevalence of educational
institutions in our society, projects for the advancement of education would seldom miss the
mark either. These observations affirm, rather than deny, the existence of a single standard.
The appearance of variation is only an appearance. It is not the standard that varies; it is the
success ratio of projects in the different categories that fluctuates.

95
96

Supra, note 56.

See, further, infra, ch. 13. Application of the cy-pres doctrine where there is no impossibility or impracticability,
however, is prohibited. Thus, where the project can still be accomplished, but there are obviously better, more
practical ways to achieve the relevant charitable objective, there can be no cy-pres application.

184

(iii) Clarification

We agree with Professor Fridman's conclusions regarding the elements of the public

benefit test, which he expressed some time ago:

(a) A charitable trust is one which benefits an identifiable group of people, however small or
great in number, but with a common interest, so long as that group is not identified by some
blood relationship or family or purely contractual tie.

(b) The benefit involved may be physical or spiritual, measurable or intangible, direct or
indirect.

(c) But it must be recognizable, that is, capable of intellectual and definite recognition, and it
must be of reasonable expectation. It must not be a putative or hoped-for benefit.

We think that the correct design of the "public benefit" test on the points in issue in this area
of the law should have the features identified by Professor Fridman in the passage quoted.
That is, once it has been established that the objects are charitable, that they advance a
common or universal good, then the "pubic benefif ' test should consider obligational and
emotional distance, and the overall practical utility of the project. It should not ask about size
except insofar as size of the beneficiary class may be an indication of the lack of distance or a

factor that contributes to the project's lack of utility. Since "benefif and "public" are
equivocal, however, we suggest that courts should use these terms carefully or not at all.

Fridman, supra, note 32, at 55 1-52.

The Goodman Report, supra, note 27, at 19, made a similar but more tentative recommendation regarding the
relevance of size:

Trusts for the benefit of classes of persons with special needs have been held charitable, even though
quite a small number of persons might fall within such a class. Each case requires consideration on its
merits. For instance, there is no reason in principle why people suffering from a rare disease should not
be beneficiaries of a charitable trust established for their benefit. Likewise in the field of education, a
small group of children by reason of some special disability may require special facilities. ...Provided
the other requirements for charitable status are present we see no reason why the fact that there may be
few eligible beneficiaries (i.e. members of the public to benefit individually) should be a bar to
charitable status.

CHAPTER 8

THE LEGAL DEFINITION
OF CHARITY: SPECIFIC
PROBLEMS WITH THE
CURRENT DEFINITION AND
PROPOSALS FOR REFORM

1. INTRODUCTION

In this chapter, the Commission examines a number of particular problems with the
common-law definition of charity. From the discussion in the previous two chapters, it should
be clear that in our view courts should no longer feel unduly constrained by the list of
charitable projects in the Statute of Elizabeth, by the categories generated from that list in the
textbooks and commentaries, or by the categories established in Pemsel. Indeed, one of our
conclusions was that there is ah*eady a tendency in much of the recent case law to use the
fourth category in Pemsel as a broadly inclusive definition. All that is required for the proper
development of that approach is a better understanding of what is meant by "public benefit"
in the Pemsel test. We suggest that the definition of charity, as set out in chapter 6, offers the
way forward on this question. In the following discussion we make use of that definition to
clarify and resolve many of the problems raised. The discussion itself is organized using the
traditional rubrics of the Pemsel test, since that test is the starting point of almost all the
modem cases and academic commentary dealing with the definition of charity. As will
become apparent, the Pemsel test is deeply flawed conceptually. Consequently almost all of
the problems relating to the question of definition discussed here arise due to conceptual
difficulties posed by this test. Our effort in what follows, therefore, is to suggest lines of
development that will permit over time an improved legal understanding of the meaning of
charity.

Statute of Charitable Uses, 1601, 43 Eliz. 1, c. 4 (U.K.) (hereinafter referred to as the "Statute of Elizabeth").

Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28
(H.L.).

[185]

186

2. "RELIEF OF POVERTY"

There are two questions concerning this head of charity: What is its content, that is,
what purposes fall under this head? and, What should be done about the "poor relations"
exception to the distance requirement? The Commission looks at each question in turn.

(a) Content

Relief of poverty is one of the core purposes in the narrow conception of charity, but it
is not the only one. Aiding the emotionally, physically, mentally, and spiritually distressed
are other important goals. The common characteristic of all these functions is the provision of
help to people in circumstances of suffering and distress caused by or contributed to by, or
which may cause or contribute to, economic deprivation. In Canada, many courts have tended
to include all these purposes under PemsePs first category — relief of poverty — even though
relief of poverty is not necessarily an apt description of the intentions of most of these
projects. A few courts have regarded all these purposes, except the relief of poverty, as
coming under the fourth head — other purposes beneficial to the community — on the
understanding that the relief of poverty requires a substantial element of economic
deprivation in the proposed beneficiaries, but such economic deprivation will not necessarily
be present where the beneficiaries of the charity are distressed or disadvantaged emotionally,
physically, mentally, or spiritually. Some courts have avoided the difficulty of classifying
these purposes under the Pemsel test altogether by resorting directly to the list in the
preamble to the Statute of Elizabeth. As well as specifying the poor, the preamble mentions
aged and impotent people, and sick and maimed soldiers and mariners. The problem, then, is
how to categorize certain activities which no one doubts are charitable, but few seem to know
for certain how, or by virtue of what definitive test.

See D.W.H. Waters, Law of Trusts in Canada, 2d ed. (Toronto: Carswell, 1984) at 552 and 584, for a discussion
of the case law. Recent cases include Buenavista on the Rideau v. Ontario (Regional Assessment Commissioners)
(1996), 134 D.L.R. (4th) 278 (Ont. Gen. Div.) (house to rehabilitate addicts 'house of refiige' wndiQv Assessment
Act, R.S.O. 1990, c. A.31; Big Sisters of Kitchener-Waterloo & Area v. Waterloo Regional Assessment
Commissioner, [1996] O.J. No. 388 [QL] (Big Sisters charitable under relief of poverty); Ontario Finnish Rest
Home Association v. Regional Assessment Commissioner, [1996] O.J. No. 818 (Ont. Gen. Div.) [QL] (seniors'
facility not charitable — alleviation of economic deprivation was not controlling purpose); Marville Manor v.
Regional Assessment Commissioner, [1995] O.J. No. 4064 (Ont. Gen. Div.) [QL] (seniors' facility not charitable);
Community Connection v. Regional Assessment Commissioner, [1995] O.J. No. 3791 (Ont. Gen. Div.) [QL] (day-
care centre charitable); Family Service Association of Metropolitan Toronto v. Regional Assessment
Commissioner (1995), 23 O.R. (3d) 382 (Gen. Div.) (family service association charitable); Light-Haven Home
Inc. V. Ontario Regional Assessment Commissioner, [1995] O.J. No. 766 [QL] (home for elderly not charitable);
Teen Challenge Farm Inc. v. Regional Assessment Commissioner, [1995] O.J. No. 992 [QL] (teen home charitable
as "house of refuge" under Assessment Act, supra); Polish Canadian Centre Assn. v. Windsor, [1994] O.J. No.
1601 [QL] (provision of low-income housing not charitable); and IL. Peretz Senior Citizen Corp. v. Windsor,
[1994] O.J. No. 960 [QL] (home for aged not charitable).

Although it is important to investigate and resolve these problems, to our knowledge no court has been seriously
deceived by the confusion to the point of reaching an obviously mistaken conclusion.

187

Hospitals present a useful illustration of the difficulty. The Privy Council, in Re Resch's
Will Trusts, addressed the issue of classifying the activities of a private hospital in the
following passage:

A gift for the purposes of a hospital is prima facie a good charitable gift. This is now clearly
established both in Australia and in England, not merely because of the use of the word
'impotent' in the preamble ..., though the process of referring to the preamble is one often used
for reassurance, but because the provision of medical care for the sick is, in modern times,
accepted as a public benefit suitable to attract the privileges given to charitable institutions.

In this passage, hospitals are said to be prima facie charitable, they are put in the fourth
category, and xqcomxsq is had to the Statute of Elizabeth. Gifts for the benefit of orphans have
presented similar difficulties in classification. The relief of poverty is certainly an element in
many such gifts, but so is the advancement of education and the relief of the emotional
distress caused by the lack of a home and parents. Similarly, gifts for the support of the aged
may often have an element of poverty relief in them, but this facet is often far less
pronounced than the objective of simply providing comfort to people in their declining
years.

What is the source of the difficulty? There are, we would suggest, three contributing
factors. The first element lies in the social transformation of some of the institutions involved
in the pursuit of the charitable purposes under consideration. To continue with the example of

Re Resch's Will Trusts; he Cras v. Perpetual Trustee Co, [1969] 1 A.C. 514, [1967] 3 All E.R. 915 (P.C.)
(subsequent references are to [1969] 1 A.C). See, also, Re Ross Estate; Charlotte County Hospital v. Town of
Saint Andrews (1980), 28 N.B.R. (2d) 61 1, 7 ET.R. 79 (Q.B.) (gift to publicly flinded hospital is charitable ;7er se
and by virtue of fourth limb of Pemsel, supra, note 2).

Re Resch 's Will Trusts, supra, note 5, at 540.

See Re Forgan Estate (1961), 34 W.W.R. 495, 29 D.L.R. (2d) 585 (Alta. S.C), where the gift was for the
establishment of "a home for the care of the children of others, orphans, wards of the province". See, also, Re St.
Catherine 's House (1977), 2 A.R. 337 (CA.) ("home or hostel for Anglican girls in the Diocese of Edmonton with
particular concern for those of low earning ability who want to become teachers and clerks" held charitable on the
basis of the statute and the fourth limb of Pemsel, supra, note 2), and Re Ryan Estate; Canada Permanent Trust
Co. V. McFarlane, [1972] 4 W.W.R. 593, 27 D.L.R. (3d) 480 (B.C.C.A.) (gift to "Protestant homes or institutions
for the care and welfare of children" held charitable because it was for the relief of poverty).

See Maria F. Ganong Old Folks Home v. Minister of Municipal Affairs (N.B.) (1981), 37 N.B.R. 225, 129 D.L.R.
(3d) 655 (CA.) (no element of poverty necessary in gifts for aged), and Joseph Rowntree Memorial Trust Housing
Association Ltd. v. Attorney-General, [1983] 1 All E.R. 288, [1983] 1 Ch. 159. Gifts for the aged are accepted as
prima facie charitable, with no need to show poverty or any other need, in Australia and the United States: City of
Hawthorn v. Victorian Welfare Assoc, [1970] V.R. 205 (Aus.), Hilder v. Church of England Deaconess'
Institution (Sydney) Ltd., [1973] 1 N.S.W.L.R. 506 (Aus.); and Re Estate of Henderson, 17 Cal. (2d) 853, 1 12 P 2d
605(1941).

Other examples of valid trusts for the relief of people in distress include gifts in favour of retired soldiers (Verge v.
Somerville, [1924] A.C. 496, 131 L.T. 107 (P.C), and Whitmore v. Canadian Ugion (Regina Branch), [1940] 3
W.W.R. 359 (Sask. K.B.); disaster relief ftinds {Re North Devon & West Somerset Relief Fund Trusts; Hylton v.
Wright, [1953] W.L.R. 1260, [1953] 2 All E.R. 1032); and the relief and rehabilitation of prisoners, and unmarried
mothers {Re Andrae; Sims v. Public Trustee (1967), 61 W.W.R. 182 (Alta. S.C)).

188

hospitals, historically hospitals were established for the care of the poor, not the treatment of
the sick. Today they treat sick people, rich and poor alike. Second, the difficulty arises in part
from the concomitant evolution in the law's use of the word "charity". Historically hospitals
were "charitable" institutions in the narrow sense, because they provided relief to the poor.
Today, hospitals are "charitable" institutions in the wide sense (that is, charitable and
philanthropic), because they are established to pursue the good of health (life) for both rich
and poor people. The third cause of confusion, however, is the very formulation of the
various common-law tests applied. To illustrate this point, it is necessary to pause briefly to
develop an explanation that may, ultimately, permit a modest improvement in this area of the
law.

Two different perspectives were employed in the discussion in chapter 6 on the
definition of charity: one focused on and drew insights from the distinction between charity
and philanthropy, in the narrow sense of those terms; the other developed a real definition
from the list of common goods. Although complementary and equally helpful in
understanding the meaning of charity, these two perspectives divide up the subject-matter
"charity" in different ways and thereby generate two incommensurable systems of
classification. Using the first, we divided the subject-matter into charity, in the narrow sense,
and philanthropy. Using the second, we divided the charity according to the common
goods — life, knowledge, play, etc. There is no explicit cross-referencing between the two
systems of classification: the first does not explicitly acknowledge that the point of charity is
human flourishing; the second does not explicitly incorporate the notion that economic
deprivation in and of itself is one of the main impediments to human flourishing. The third
source of confiision in the area of case law under consideration then, is, in part, that these two
incommensurable systems of classification are incorporated, incongruently, directly into the
Pemsel list. On the one hand, the "relief of poverty" category of Pemsel names a project,
referencing the distinction between charity and philanthropy (in their narrow senses). On the
other hand, religion, education, and much of the fourth limb of Pemsel name projects
referencing, directly or indirectly, goods from the list of common goods. Besides mixing
systems of classification in this way, the Pemsel list makes two further conceptual errors: it
names projects at different levels of generality and, more importantly for present purposes,
and as already noted, it gets the content of charity, in the narrow sense, wrong — "relief of
poverty" fails to describe all the purposes concerned with people in distress and suffering.
More conceptual complexity follows when resort is had in the case law to the Statute of
Elizabeth (as in Re Resch's Will Trusts) to address this latter discrepancy. This occurs
because the items on the statute's list are not generated by either system of classification, but
consist merely in a random list of specific projects that were considered charitable at the time
of its enactment.

Education will be examined infra, this ch., sec. 4. As will be seen there, education indirectly references the goods
of knowledge, play, and practical reasonableness.

Supra, note 5.

189

The way forward is to understand that there are at least two systems of classification at
work in the Pemsel definition and to recognize that the test is modestly defective for that
reason. Our definition, which uses only the second system of classification, provides
guidance, but since it does not call for any explicit consideration of economic deprivation, it
must be carefully applied. In particular, the practical utility element of our test provides
sufficient scope to exclude projects that are intended to aid, or that in fact aid, only the rich,
since these projects are unlikely to contribute effectively or usefully to the advancement of
any of the goods. They do not contribute to human flourishing in any very effective way.

(b) The "Poor Relations" Exception to the Distance Requirement

Trusts for the relief of poverty where the persons who benefit are the donor's "poor
relations" or the donor's "poor employees" are valid trusts, even though they do not

In Scottish Burial Reform & Cremation Society v. Glasgow Corp., [1968] A.C. 138 at 154, [1967] 3 All E.R. 215
at 223 (H.L.) (subsequent references are to [1968] A.C), Lord Wilberforce noted that the test in Pemsel, supra,
note 2, "though no doubt not very satisfactory and in need of rationalisation, is tolerably clear".

We mention this problem because it appears to be the source of some anxiety in the cases and commentary.
Waters, supra, note 3, at 552-57, remarks that Canadian courts have been very liberal in their interpretation of
poverty, and have included in it gifts to aged men and women, widows, and neglected children. In this way, he
argues, the relief of poverty, category is broadened into charity in the narrow sense. From there he reasons that it
may be a short step to "well-meaning but unreasoned generosity" to the wealthy aged; once it is admitted that
serious economic deprivation is no longer a necessary element in the definition, it may seem that the gift to the
wealthy aged must be accepted. This is where the "practical utility" criterion, however, is relevant. Consider the
example of an endowment, established by a complete stranger, to fund the purchase of a library for a community
of wealthy retirees, from which the poor are excluded. Under the definition of "charity" advanced in ch. 6, supra,
this endowment should fail since it is not a practically useful way to advance the good of knowledge. The donor's
altruism is, under our test, misguided. (A second solution to this hypothetical, suggested in some cases, is to add a
requirement that a charitable act, although it may include the rich among its beneficiaries, may not exclude the
poor. See Protestant Old Ladies Home v. Provincial Treasurer (P.E.I.), [1941] 2 D.L.R. 534 (P.E.I.C.A.).) Re
Nottage; Jones v. Palmer, [1895] 2 Ch. 649, [1895-9] All E.R. Rep. 1203 (C.A.), provides anodier illustrafion of a
situation in which the type of reasoning being advanced might have been applied. Re Nottage is the leading
authority, mistaken in our view, supporting the proposition that sport is not a charitable purpose. In that case, an
endowment was established to support a yachting award. Instead of holding that sport is not a charitable purpose,
the court might have said the actual gift was not a practically useful way of advancing sport, given the very
limited number of very rich people involved in yachting and, therefore, given the very limited effect, if any, it
would have on the advancement of sport generally; there must have been many far more effective ways to
advance sport in England than that chosen by the testator.

The cases are summarized in Re Scarisbrick; Cockshott v. Public Trustee, [ 1 95 1 ] 1 Ch. 622, [ 1 95 1 ] 1 All E.R. 822
(C.A.). See, also, Re Cohn; Keshen v. Ferguson, [1952] 3 D.L.R. 833 (N.S.S.C).

See Dingle v. Turner, [1972] A.C. 601, [1972] 1 All E.R. 878 (H.L.); Gibson v. South American Stores (Gath &
Chaves) Ltd, [1950] 1 Ch. 177, [1949] 2 All E.R. 985 (C.A.); Re Massey Estate, [1959] O.R. 608, 21 D.L.R. (2d)
477 (H.C.J.); and Jones v. T Eaton Co., [1973] S.C.R. 635, 35 D.L.R. (3d) 97. The relaxafion of the distance
requirement in the case of poverty extends beyond situations involving relations and employees. See, for example,
Re Denison Estate (1974), 2 O.R. (2d) 308, 42 D.L.R. (3d) 652 (H.C.J.) (gift in favour of poor members of the
Law Society of Upper Canada). Some care should be taken in analyzing these cases since courts sometimes
assume there is a problem meeting the distance requirement because there is a relationship (family, employment,
membership in club or society) between the donor and donee. We would submit that the existence of a
relationship is merely strong evidence that distance is lacking, not conclusive proof To conclude otherwise is to

190

benefit the public. These trusts are anomalous and have been accepted as such by most
commentators and courts. Some observers have called for their abolition. In our view, for
the purposes of trust law, the abolition of these exceptions to the distance requirement is not
required. For the purposes of favourable tax treatment, however, we believe that there is
sufficient reason to act to abolish them now.

These exceptions are probably explained by looking at the purpose — relief of poverty —
at stake and the centrality of that purpose to the narrow meaning of charity.'^ The question
from the trust law perspective is whether there is sufficient reason for the state becoming
involved in the enforcement of these trusts and whether these trusts should be afforded the
other trust law advantages — perpetual existence, for example — extended to charitable
purpose trusts. Given the centrality of the relief of poverty to the meaning of charity, and
given there is involved in these types of trusts a well-identified class of people with a strong
interest in seeing that these trusts are enforced, there seems to be little reason to abolish them.
One could argue, to the contrary, that in many instances what a donor wants to achieve by

t 7

using a charitable purpose trust can be achieved nearly as well by using a valid private trust.
It could also be argued that allowing one exception to the restrictive purpose-trust rule leads
to others, perhaps to the point where all non-charitable purpose trusts should be recognized as
valid. ^ These opposing reasons are not compelling. In our view the reasons for and against
these exceptions are too evenly balanced to justify a legislative repeal, insofar as trust law is
concerned. The law of inertia should, therefore, continue to apply.

There is much less reason to favour these trusts with the tax advantages, however, since
the motive to help strangers is weak, the resulting social benefits are minimal, and the
opportunity for tax avoidance through income splitting is strong. Therefore, the Commission
recommends that the federal government enact a provision which excludes these trusts from
the currently available tax privileges.

make the same mistake made in the formulation of the "named propositus" test in Re Compton; Powell v.
Compton, [1945] 1 Ch. 123, [1945] 1 All E.R. 198 (C.A.).

16
17

See, for example, U.K. National Council of Social Services, Chanty Law and Voluntary Organisations: Report of
the Goodman Committee, (London: Bedford Square Press, 1976) (hereinafter referred to as the "Goodman
Reporf\ at \1 -22.

This is the justification offered in Re Scarisbrick, supra, note 13.

Under s. 18 of the Perpetuities Act, R.S.O. 1990, c. P.9, employee trusts of all types are relieved from the
application of perpetuities rules.

This possibility is considered further below, but in our view, such a general recognition of validity of purpose
trusts is undesirable. For a ftirther discussion, see infra, ch. 14.

191

3. RELIGION

(a) Introduction

The advancement of religion has always presented difficulties for the law of charitable
purpose trusts. We have looked at some of the reasons for this in our discussion of the real
definition of charity. Our present object is to contribute further to the clarification of the
current law by examining two problems. The first problem concerns the definition of the
good of religion. The second concerns the way in which the public benefit test — in our
language the distance requirement and the practical utility requirement — applies in the
domain of religion. We look at each in turn.

(b) Definition

As the learned authors of an Australian textbook on the law of trusts have observed, the
"modem law of trusts for the advancement of religion reflects the convulsions of its
history". As stated in chapter 7, the effect of mortmain legislation and the enthusiastic
reception of the policy underlying it by English courts in the eighteenth and nineteenth
centuries have resulted in a much more liberal policy on what counts as religion for the

purposes of the law of charity than is perhaps defensible. This liberal approach also results
from an understandable reluctance on the part of courts to question the truth or authenticity of

the beliefs of those who profess a religious conviction:

[T]he court will normally make no distinction between one Christian sect and another or even
between one religion and another, unless the religion in question is so offensive to the court that it
might be regarded as inculcating doctrines adverse to the very foundation of all religion or
subversive of all morality such as the spread of materialism.

Occasionally, courts will reach a negative result regarding a particular religious purpose by
accepting that the purpose at issue might be religious in some general sense but not in the
"technical" legal sense. However, this is rarely done as a matter of definition. Rather, the
courts have used one of two related narrow lines of reasoning to reach this result. They have
sometimes used the "public benefit" test to exclude particular practices of certain otherwise
recognized religions, and they have sometimes held that the legal meaning of religion is not

19
20
21

Supra, ch. 6.

H.A.J. Ford and W.A. Lee, Principles of the Law of Trusts, 2d ed. (Sydney: Law Book Co., 1990), at 847.

See, for example, Re Watson; Hobbs v. Smith, [1973] 1 W.L.R. 1472, [1973] 3 All E.R. 678 (where Plowman J.
upheld as valid a trust for the publication of the writings of an English builder who had belonged to a group of
three undenominational Christians); Re Doering, [1948] O.R. 923, [1949] 1 D.L.R. 267 (H.C.J.)
(Swedenborgians); and Thornton v. Howe (1862), 54 E.R. 1042, 31 Beav. 14 (followers of Joanna Southcote).

Ford and Lee, supra, note 20, at 847-48.

192

necessarily coextensive with the official actions and practices of a given (recognized)
religion.

TTius, in the prevailing approach of the law, there is some reluctance to apply a rigorous
definition of "religion". Instead, the law applies a minimalist definition, one which assumes
that some religion is better than none but expects that no religion is, or no religion should be
permitted to be, harmful to the public interest, and that not everything professed or practised
as or by a religion counts as religion in law. This is not the only possible approach, but
perhaps the law is wise to err initially on the side of over-inclusiveness. The wisdom is easy
to appreciate: there is an extraordinary risk of chauvinism m this particular decision,^^ and the

For the first technique, see, for example, Cameron v. Church of Christ Scientist (1918), 57 S.C.R. 298, 43 D.L.R.
668, where a gift in favour of Christian Science was held invalid on the basis that "private devotion or edification"
was not charitable religious activity in law because it lacked practical utility. Trusts in favour of certain religious
orders have also been held not charitable on similar grounds. See Gilmour v. Coats, [1949] A.C. 426, [1949] 1 All
E.R. 848 (H.L.) (subsequent references are to [1949] A.C). The idea of requiring that religions satisfy a stricter
public benefit test was considered and ultimately rejected by the 1989 U.K. White Paper, Charities: A Framework
for the Future (Cmnd. 694, 1989).

One prominent example of the second technique is the historical treatment of the Catholic mass in English trust
law. It still remains uncertain whether a trust for the saying of masses is charitable under English law since the
leading House of Lords decision. Bourne v. Keane, [1919] A.C. 815, [1918-19] All E.R. Rep. 167 (H.L.), held
only that outright gifts for masses are not invalid as gifts for superstitious uses. There is an early Ontario case to
like effect: Elmsley v. Madden (1871), 18 Gr. 386. Two earlier lower court decisions in England, Re Caus;
Lindboom v. Camille, [1934] 1 Ch. 162, [1935] All E.R. Rep. 818, and Re Hallisy Estate, [1932] O.R. 486, [1932]
4 D.L.R. 516 (C.A.) held in favour of the validity of trusts for masses. Recently, a third lower court decision. Re
Hetherington; Gibbs v. McDonnell, [1990] Ch. 1, [1989] 2 All E.R. 129, held that a trust for the saying of masses
in public was valid. It is unclear, however, that these decisions would be followed by higher courts. See, fiirther.
Waters, supra, note 3, at 578. There are other examples of the second technique. For example, there are cases
involving gifts to a church or a church office holder in trust for the "use of the Diocese" or for "parish work"
which have been held not charitable on the basis that not all the work of the parish or diocese was charitable. See
Re McCauley Estate (1897), 28 O.R. 610 (H.C.J.), and Farley v. Westminster Bank Ltd, [1939] A.C. 430, [1939]
3 All E.R. 491 (H.L.). More recent Canadian cases have been more generous on this score. See Re Delaney Estate;
Canada Trust Co. v. Roman Catholic Archepiscopal Corp. of Winnipeg (1957), 26 W.W.R. 69, 12 D.L.R. (2d) 23
(B.C.C.A.) (gift to the archepiscopal corporation for the benefit of a particular parish, or "otherwise", held valid as
either an outright gift to the corporation or as a valid trust), and Blais v. Touchet, [1963] S.C.R. 358, 40 D.L.R.
(2d) 961 (gift in trust "pour les oeuvres" of the bishop held valid on the basis that "oeuvres" was to be interpreted
as charitable works). See, also, Hutterian Brethren Church of Wilson v. R, [1980] C.T.C. 1,31 N.R. 326, where
the farming activities of the church brethren were held not charitable, and the income arising therefi"om, therefore,
not exempt from tax.

The approach has been described by Professor Waters, supra, note 3, at 579, as follows:

[B]y working outwards by a process of analogy from the repair of churches, the courts in Canada like
those in England have developed an approach to religious activity which in the main has
accommodated a probable response to religion of contemporary society, but, as the cases. ..show, they
have not been able to devise a set of criteria for the assessment of religion which is entirely
satisfactory.

See Cross J. in Neville Estates Ltd v. Madden, [1962] Ch. 832, [1961] 3 All E.R. 769, for a characteristic
statement.

In a religiously homogenous society, the issue will not arise, but in a diverse society, such as Ontario, the question
is ever present. The English practice, until the Toleration Act 1688, 1 Will. & Mar., c. 18 (U.K.), in the case of

193

importance of religion to individual identity makes mistaken evaluations particularly
harmful."

There is another less influential line of thinking in the case law that takes a slightly
more rigorous view of what should be considered as religion in the first place. This approach

is also supported by academic commentary, and some general definitions have been offered.

Thus, Lord Hanworth said:

The promotion of religion means the promotion of spiritual teaching in a wide sense, and the
maintenance of the doctrines on which it rests, and the observances that serve to promote and
manifest it.

Similarly, Donovan J. in United Grand Lodge of Ancient Free & Accepted Masons of

30 •

England V. Holborn Burrough Councils, said:

To advance religion means to promote it, to spread its message ever wider among mankind; to
take some positive steps to sustain and increase religious belief; and these things are done in a
variety of ways which may be comprehensively described as pastoral and missionary.

In these two definitions it is recognized that the domain of religious activity is essentially, but
by no means exclusively, spiritual, and that there is a necessity for an established doctrine and
an element of doctrinal propagation, both within and sometimes outside the membership, and
a necessity for a practice or observances. Although they make valuable contributions, these
two definitions still overlook a key element identified in the following passage from the
decision of Dillon J. in Re South Place Ethical Society; Barralet v. Attorney-General, in
which his Lordship sought to identify the distinction between religion and ethics:

Religion.. .is concerned with man's relations with God, and ethics are concerned with man's
relations with man. The two are not the same, and are not made the same by sincere inquiry into

Protestant dissenters and the mid-nineteenth century, in the case of the Jewish and Roman Catholic religions, was
outwardly biased against religions other than the Church of England. The practice in Ontario was otherwise
almost from the beginning. Thus, in England, there are very old cases where trusts in favour of the advancement
of the Jewish and the Catholic religion were held invalid, either on the basis that they contravened public policy or
on the basis that they were in favour of superstitious uses.

Note, however, that the freedom to practise religion is not at stake in the decision whether the religion is authentic
for the purposes of the law of charity. Only the availability of the purpose trust and the tax privileges are in issue.

See H. Picarda, "New Religions as Charities" (1981), 131 New L.J. 436; J.R. Brancato, "Characterization in
Religious Property Tax-Exemption: What is Religion? — A Survey and a Proposed Definition and Approach"
(1968), 44 Notre Dame Lawyer 60.

Keren Kayemeth Le Jisroel Ltd. v. Inland Revenue Commissioners, [1931] 2 K.B. 465 (C.A.), at 477; on appeal
[1932] A.C. 650, [1932] All E.R Rep. 971 (H.L.).

[1957] 1 W.L.R 1080 at 1090, [1957] 3 All E.R. 281 at 285 (Q.B.D.). See, also, Wood v. R., [1977] 6 W.W.R.
273, {sub nom. Re Russell) 1 E.T.R. 285 (T.D.).

[1980] 1 W.L.R. 1565, at 1571-72, [1980] 3 All E.R 918 at 924 (Ch. D.).

194

the questions: what is God? ... It seems to me that two of the essential attributes of religion are
faith and worship; faith in a god and worship of that god.

In this passage, the worship of God is identified as core to the meaning of religion, and the
established doctrines and observances are understood as contributing to or as facets of the
knowledge and the worship of God. Similarly, the accepted definition in American trust law
requires an element of theism: "a bond uniting man to God and a virtue whose purpose is to
render God the worship due to him as the source of all being and the principle of all

government of things".

On the basis of these elements of a definition, ethical societies, polytheistic religions
and religions involving ancestor worship, the Church of Scientology, bogus religions,^^
and cults have been, at one time or another, and for varying purposes, excluded by some
courts from being classified as religion. The decisions in question rely on some or all of the
elements identified. The approach is to appraise critically not the truth of the religious
doctrine per se, but rather whether it is essentially religious in nature and whether the
organization that proffers it is authentic. This more critical approach parallels a similar
process sometimes applied in other domains of charity such as art and education. Courts will
sometimes evaluate the validity of the artistic value of works of art donated to charity and,
also, they will assess the value of the knowledge sought to be transmitted in a purportedly

educational trust.

What is the way forward? Should courts continue to avoid the direct question, given
the danger of chauvinism and the seeming indeterminacy of authenticity as a criterion, or

34
35

See Nikulnikoffv. Archbishop of Russian Orthodox Greek Catholic Church, 255 N.Y.S. 653 (Sup. Ct. 1932), cited
in Picarda, supra, note 27, at 436.

See Bowman v. Secular Society Ltd., [1917] A.C. 406, [1916-17] All E.R. Rep. 1 (H.L.) (subsequent references are
to [1917] A.C), and Re South Place Ethical Society, supra, note 3 1 .

SeeNeo v. Neo (1875), L.R. 6 P.C. 381.

See R. V. Registrar General; Ex parte Segerdal, [1970] 2 Q.B. 697, [1970] 3 All E.R. 886 (C.A.), and Missouri
Church of Scientology v. Tax Commissioner, 560 S.W. 837 (1977), where the Church of Scientology was denied
the property tax relief available to charities on the basis, in both cases, that it was more a philosophy with religious
connotations without any element of reverence for God.

For example, see Theriault v. Silber, 391 Fed. Supp. 578 (1975), where a prisoner in a federal penitentiary claimed
to have founded a church with his fellow prisoners and complained of violations of his right to the free exercise of
religion committed by prison authorities.

See Re Pinion; Westminster Bank v. Pinion, [1965] Ch. 85 at 98, [1964] 1 All E.R. 890 (C.A.), where the gift by
the testator of the testator's art collection to be maintained by the trust in its integrity as a museum was held not to
be charitable because the collection was not of sufficient quality. See, also, Re Hummeltenburg; Beatty v. London
Spiritualistic Alliance, [1923] 1 Ch. 237, [1923] All E.R. Rep. 49.

After some obvious difficulty sorting through the problem of religion, the Goodman Report, supra, note 15,
concluded in favour of the status quo. It did not offer a definition of religion. The report merely suggested that a
court should be permitted to say that some religions that are detrimental to the community's moral welfare should
be excluded. The 1989 U.K. White Paper, supra, note 23, at 8 states, similarly, that "any religious body is entitled

195

should legal doctrine develop a more robust definition of "religion"? In our view, the courts,
in fact, have little real choice in answering this question since the indirect approach is, as
often as not, used as a covert way of applying a poorly articulated legal definition. The real
choice, therefore, is whether the doctrine on definition will be developed explicitly or
implicitly. Our preference is that the development be more explicit. The proper counterweight
to the danger of chauvinism is tolerance, but the proper response to sham is the application of
a strong definition. Although we have not offered and do not offer a definition of religion, we
suggest this outline: the worship and knowledge of God, the pastoral and missionary
propagation of an established theology, and observances or practices.

Of course, adopting a more explicit approach on the question of definition does not by
itself preclude the other arguments if and when they apply. We would submit, however, that
once a better definitional process is in place, these other arguments — that a particular
religious practice of an otherwise valid religion is not of benefit to the public or that the
practice is not religious in the technical legal sense — will in fact be applicable very rarely, if
ever. With respect to the public benefit criterion as applied to religion, we argue below that
the criterion will not usually be applicable at all once it is determined that the good pursued is
religion. With respect to the "non-religious-in-the-technical-legal-sense" argument, there are
two features of the practices and beliefs of almost all religions which will make the
application of this argument problematic in the vast majority of cases. First, many of the other
"non-religious-in-the-technical-legal-sense" activities of the charity purporting to be religious

will often, if not always, be activities that are in the pursuit of other goods. Anglican nuns
run hospitals, Protestant missionaries run schools, parishes and synagogues intentionally
foster community and friendship, and Christians and Jews established Y.M.C.A.s and
Y.M.H.A.s to foster Christian and Jewish fellowship and sportsmanship among youths. It is
critical to recognize that these activities are generally pursued by these organizations as
religious activities: the hospital is run by the nuns as nuns; the school is run by the
missionaries as missionaries, etc. The point is that there is enormous diversity in the form and
manner of the pursuit of the good of religion. Is there any sense in the law excluding some of
them solely on the basis of a poorly articulated "technical" meaning of religion? Second, the
actual practices and observances of all religions in many instances are likely to appear
irrational unless understood from the internal point of view. How does the Catholic rosary, an
Anglican sacrament, the circumcision of Jewish boys, or the Sikh kirpan appear to the
unsympathetic, irreligious outsider? Making the decision that a particular practice of an
otherwise authentic religion is not "religious-in-the-technical-legal-sense" is fraught with
enormous difficulty. We would submit that it cannot be done unless the starting point is the
internal point of view, and that once examined from the internal point of view, that should be
the end of the matter in nearly every case.

to charitable status so long as its tenets are not morally subversive and so long as its purposes are directed to the
benefit of the public". The White Paper cites with approval a statement made in the High Court of Australia that
there can be "no acceptable discrimination between institutions which take their character form religions which
the majority of the community recognizes as religious and institutions which take their character from religions
which lack that general recognition".

This is because the genuine pursuit of the other goods is generally an integral part of the doctrines, practices, and
observances of almost all religions.

196

Do these features of the good of religion pose insurmountable difficulties for the law?
We submit that the law should recognize and accept the diversity that these features of the
pursuit of the good of religion entail, and that the law must tackle the difficulties involved
head on, with a definition that exposes sham religions and sham transactions involving
religions. We suggest the following as examples of properly reasoned conclusions where the
good of religion is possibly involved:

(1) The religious identity of the Y.M.C.A. is now false, although it might still qualify
as a charitable or nonprofit organization because of its pursuit of health for the
benefit of others on a nonprofit basis.

(2) The "donation" at the gate of the Christian theme park is an entrance fee, not a
tax-deductible donation. It is an exchange transaction, not a gift, even though the
provision of a Christian context for play and fellowship is a valid religious

..40

pursuit.

(3) The income from Hutterite farming is taxable — although the farming work is
performed in ftirtherance of community or of a religious conception of the nature
of work — since none of that aspect of the matter has any bearing on the tax status
of the personal income earned.

(4) A gift in trust for "the purposes of the United Church" is a valid charitable trust,
even though the United Church spends money on activities other than worship,
since all those other activities are either in pursuit of other goods or in pursuit of
the good of religion.

(5) A gift in trust for the followers of Joanna Southcote, Jone's Peoples Temple, or
the Church of Bacchus (a restaurant) is not valid and is not entitled to any
favourable tax treatment because the recipient religion is not authentic.

In brief, in our view, the problem with the minimalist approach to the definition of
religion is that it lets in too many "religions" while it excludes too many valid activities of
authentic religions. It is preferable to face the challenge of identifying authentic religions,
then apply, as required, other elements of the definition of charity — such as whether or not
the gift benefits strangers — or other arguments, to identify sham organizations and sham

See, for example, Homa v. M.N.R., [1962] Tax A.B.C. 961, where the taxpayer's claim that a portion of the
moneys paid to a private religious school, which his children attended, was a donation was rejected.

Under s. 1 10(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), the income of a person who has taken a vow
of poverty and who donates the income to his or her order is deductible. In this case, the work and the income
earned are properly treated as essentially charitable (religious) because, in part, the entire income is given away,
and therefore is tax exempt.

Some of these examples are taken from A.H. Oosterhoff and E.E. Gillese, Text, Commentary and Cases on Trusts,
4th ed. (Toronto: Carswell, 1992), at 825.

197

transactions. Indeed, Canadian courts have already shown themselves to be somewhat more
willing to do just this than have their English counterparts.

Religion presents a problem for the public benefit test in three ways. First, charitable
trusts in favour of religion will typically single out a particular religion for benefit. This
feature may give gifts in favour of religion the appearance of being discriminatory and,
therefore, objectionable from a public policy perspective. We deal with this particular
problem below. Second, gifts in favour of religion will typically and naturally benefit the
donor's religion. This feature may make these gifts appear "private", as running afoul of the
distance requirement. Third, depending on how one values the good of religion, few or none
of the benefits of a gift for the advancement of religion will have practical utility. Thus it may
appear that a gift in favour of religion can never satisfy the practical utility element of the
public benefit test. On this third difficulty. Professor Waters has said:

This subject has proved one of the most difficult for the courts to handle in view of the fact that
unlike education, poverty relief, welfare and community endeavours, there is essentially nothing
in religion which can be proved objectively in court to promote the observable well-being of
persons or to be for the observable benefit of the public.

Our objective now is to assess the impact of the public benefit requirement on the second and
third difficulties — ^the "private" benefit or distance problem, and the practical value
problem — and to conclude each discussion with proposals for improvement.

In essence, the problem is that courts often do not know what more they are required to
decide once they have found that the gift in question advances the good of religion. The
difficulty is illustrated in the following passage:

'It is not all religious purposes that are charitable. Religious purposes are charitable only if, they
tend directly or indirectly towards the instruction or the edification of the public', or at any rate,
as was remarked in Venge v. Somerville et al, [1924] A.C. 496, at 499, 'of an appreciably
important class of the community'.

This accurate description of the law is in fact enigmatic and evasive and, thus, symptomatic
of the difficulty we now address.

44
45

Infra, this ch., sec. 5(c).

Waters, supra, note 3, at 569.

Per Plaxton J., in Re Anderson, [1943] O.W.N. 303, at 305, [1943] 4 D.L.R. 268, at 271 (H.C.J.); rev'd. [1943]
O.W.N. 698 (C.A.), quoting Chesterman v. Federal Taxation Commissioner, [1926] A.C. 128, at 131 (PC), for a
similar purpose.

198

(i) The Problem of "Private Benefit" or Lack of Distance

It may seem difficult for a gift that advances religion to comply with the distance
requirement when the usual gift in favour of religion is to the donor's own religion and, more
often than not, to the donor's own worshipping community. Does the "nexus of a faith",'^^ as
Professor Waters puts it, defeat the "benefit to the public" element of such gifts in the same
way that the nexus of common employment or family destroys the "benefit to the public"
element of gifts to advance education or gifts in the fourth category under the Pemsel test?"*^
Sometimes the question is put, mistakenly as we have argued above, as a question of size,
with different activities of the same religion being classified as charitable or not, depending
on the number of people involved.

One response to this difficulty is to locate the distance element in the fact that religions
are generally open for all to join and that they are interested in proselytizing. Thus, because
of this, any benefit from a gift to advance religion is theoretically available to a large segment
of the population, not just those who belong to the donor's community at the date of the
gift. Another response is to count heads. Neither of these suggestions, however, is adequate
in our view: the first because it is entirely artificial to suggest that the Catholic or the atheist
benefits fi"om a gift to support the United Church in the way suggested, and the second
because the number of people benefitting, as we have already argued, is irrelevant.

A better view is to analyze the gift, depending on the circumstances, as meeting the
distance requirement in one of three ways:

(1) Where the gift is used to sustain the infrastructure — social or material — of a
worshipping community, the distance requirement is met either: (a) by virtue of
the fact that other members of that community benefit and they are strangers in the
requisite sense; or, perhaps better, (b) by virtue of the fact that no one "benefits"
in any way objectionable under the distance requirement since the infrastructure is
established to support the worship of God. The gift is, therefore, from the internal
point of view, a gift "to God".

46
47
48

Waters, supra, note 3, at 581.

/Z)/^., at 581.

See Davies v. Perpetual Trustee Co., [1959] A.C. 439, [1959] 2 All E.R. 128 (P.C), where a gift to establish a
religious college in favour of the descendants of Presbyterians in New South Wales from the north of Ireland was
held invalid on account of the limited number and close nexus of the people that would benefit.

For example, see Neville Estates Ltd. v. Madden, supra, note 25, where the fact that the public were not prohibited
from joining a synagogue made a gift to it sufficiently "public". Also, see. Association of Franciscan Order of
Friars Minor v. City ofKew, [1967] V.R. 732 (Aus.) for a similar argument. This is also the meaning given to this
element in Oosterhoff and Gillese, supra, note 42, at 825.

Perhaps the suggestion is that the benefit received is in the form of a spillover by way of the more citizen-like
behaviour of the members of the recipient church which results from their religious virtue. This is to value
religion, mistakenly, exclusively for its by-product.

199

(2) Where the gift is intended to support the religious lives of others, the distance
requirement is met, in addition to the reason given in (l)(b) above, by virtue of the
fact that strangers indeed benefit.

(3) Where the gift is to the wider purposes of the religion in question, as in "to the
works of the parish" or "to the church", then the distance element is met in
addition, possibly, to the reasons given in (l)(a), (l)(b), and (2) above, by virtue
of the fact that members of the public benefit fi-om the works of the religion (for
example, hospitals, daycare, social outreach).

(ii) The Practical Utility Problem

The Statute of Elizabeth makes minor mention of religious objects. Only the repair of
churches was mentioned, and this was because at the time of its enactment the repair of
churches, like the construction and maintenance of causeways, bridges, and seabanks (which
are also mentioned in the statute), were parish responsibilities. The inclusion of this object in
the statute's list was, therefore, as much an indication of its secular value as its religious
value. As Professor Jones remarked, the preamble

did not attempt to mark out the limits of legal charity or condemn as non-charitable those uses
which were outside its letter and equity... [since the] object of that Act.. .was simply to secure the
proper application of the endowments of those charitable trusts which could alleviate poverty and
relieve the parish of the financial responsibility.

Religious purposes were still recognized as charitable, but their enforcement fell outside the
administrative apparatus for the enforcement of charitable purposes established under the
statute.

The history of religious purposes under the statute is a history of growth by analogy
from the religious projects on the statute's list. The repair of churches, the gift of memorial
windows, the maintenance of cemeteries, and the installation of church bells were all held to
be charitable as religious purposes, as were, in time, endowments to support ministers. All
of these projects have two things in common. First, all are very conventional religious gifts
having a substantial tangible quality and a substantial public good (in the economist's sense)
quality to them and, therefore, all could easily satisfy any conceivable formulation of the

51
52
53

Supra, note 1 .

See G. Jones, History of the Law of Charity 1532-1827 (London: Cambridge University Press, 1969).

Jones, ibid., at 57-58. See, also, A.W. Scott, 77?^ Law of Trusts, 3d ed. (Boston: Little, Brown & Co., 1967), Vol.
IV, at 2880-81 (hereinafter referred to as ''Scott on Trusts'"), where this is explained and Sir Francis Moore, the
draftsman of the statute, is quoted as explaining that religion was left off the list "lest the gifts intended to be
employed upon purposes grounded upon charity, might, in change of times... be confiscate into the King's
treasury".

See cases cited in Oosterhoff and Gillese, supra, note 42, at 823, and Waters, supra, note 3, at 581.

200

practical utility test. On account of these features of most gifts to advance religion, the
practical utility test seldom raises any difficulty and it is generally said that the practical
utility element of the gift is "assumed". Second, all of these projects merely contribute to
providing the material and social infrastructure that make worship possible, and therefore
they may be said to be secondary or instrumental to the more central act of worship. Yet,
interestingly, the elements of religion more central to worship — prayer and ritual, for
example — often lack the tangible qualities of these secondary elements; and unless acts of
worship are themselves considered to satisfy the practical utility test, the paradox arises that
the means but not the end is considered to have practical utility. Unfortunately, English law
has made just this mistake.

The famous case of Gilmore v. Coats is illustrative. In that case there was a gift in
favour of a Roman Catholic priory of discalced Carmelite nuns. The nuns lived their lives in
prayer and contemplation, not undertaking any works outside their walls. The technical legal
question was whether there was a sufficient element of "benefit to the public" to the gift — in
our practical utility sense — given that none of the sisters' work had any obvious tangible
effect outside their walls. It was, of course, accepted that Roman Catholicism was a religion
recognized by the English law of charity. For the court, however, this did not entail that all its
works — the work of Carmelite nuns in particular — ^were charitable, and therefore the first
argument of the appellant — ^that the court should accept the Catholic belief in the efficacy of
intercessory prayer — was rejected out of hand. Thus, the act of worship itself was held not to
satisfy the practical utility test.

The reasoning to support this position, as one might expect from such a paradoxical
conclusion, was fundamentally self-contradictory. Lord Reid reasoned as follows

The law must accept the position that it is right that different religions should each be
supported irrespective of whether or not all its beliefs are true. A religion can be regarded as
beneficial without it being necessary to assume that all its beliefs are true, and a religious service
can be regarded as beneficial to all those who attend it without it being necessary to determine the
spiritual efficacy of that service or to accept any particular belief about it. Admittedly public
benefit in the present case can only be established if the court is entitled to accept and act on the
beliefs of the Roman Catholic Church. This would, in my view, now be something new.

On the contrary, we would argue that if one accepts that the advancement of religion is
charitable per se, as Lord Reid in this passage seems to, then one does not value religion
mainly as a means to some other good or for its by-products, such as (possibly) a more civil
population. This is true even if there are good instrumental reasons to value religion, such as
the historic one that it has been a well-spring of other charitable activity such as the relief of
poverty and the advancement of education and health. The good of religion lies in the

Supra, note 23. See, also, Cocks v. Manners (1871), L.R. 12 Eq. 574, 40 L.J. Ch. 640, for a similar case with a
similar holding. In that case, a gift to a Dominican convent where the members led quiet lives of contemplation
was held invalid because of the lack of public benefit.

Gilmour v. Coats, supra, note 23, at 459.

201

worship of God, and a life of relationship and obedience to Him. Yet, in the above passage,
Lord Reid contradicts this implicitly by suggesting that an act of worship is judged beneficial
for reasons other than its being what it is: "a religious service can be regarded as beneficial to
all those who attend it without it being necessary to determine the spiritual efficacy of that
service". But, if the service is not accepted by the law as having "spiritual efficacy", that is,
as being an act of worship — and to be beneficial as such — then why and how can the law
value it? To argue by analogy, an act to relieve the suffering of the poor must have as its
effect as well as its purpose the relief of the suffering of the poor, and a court would be
mistaken not to regard both aspects of the act in determining the authenticity of the act.
Similarly, the law must ask in any case involving the good of religion whether the act or acts
in issue have as their purpose and effect the advancement of worship. Of course, the law need
not accept or even pronounce on matters of theology, and in difficult cases there is no
requirement that the law refrain from sceptical approaches to the self-interpretation of any
particular religion. The law cannot avoid, however, the question of whether the act is or is not
an act of worship, since this is one of the central questions regarding the good of religion.
Matters that are typically accepted as advancing religion — such as the repair of churches and

the support of ministers — are, to repeat, just the necessary infrastructure; and if these are
accepted as charitable, then the act of worship itself is a fortiori charitable. Moreover, to
assess whether the intercessory prayers of Carmelite nuns is an act of worship, the starting
point and ending point, in the case of an authentic religion, ought to be the self- interpretation
of the religion in question.

This interpretation of the Gilmour decision, as being internally incoherent, is reinforced
by the second and third arguments considered by the court. The second argument considered
was whether practical utility could be found in the edification of the public that would result
from the example for living as set by the nuns. Lord Reid, paradoxically, thought this was a
valid approach to the question and even accepted that there was such an effect on the public,
but he held that the benefit was too remote. The third argument was the support of the
existence of the community enabled twenty women to practise religion in a way that would
not otherwise have been possible, and that these women constituted the relevant section of the
public required by the test. Lord Reid held that this argument assumed a positive answer to
the first question, that is, the existence of the community was of benefit to the public. He
therefore concluded that the third argument was not valid.

57
58

Ibid, [emphasis added].

In Ontario, see, for example. Re Schneckenburger (1931), 40 O.W.N. 210 (S.C), and Re Boyd Estate (1924), 55
O.L.R. 627 (C.A.). See, also, cases cited in Waters, supra, note 3, at 571 .

The Republic of Ireland's Chanties Act, 1961, No. 17 (Jr.), s. 45(1), provides that:

[l]n determining whether or not a gift for the purpose of the advancement of religion is a valid
charitable gift it shall be conclusively presumed that the purpose includes and will occasion public
benefit.

Section 45(2) provides that a valid charitable gift for the advancement of religion "shall be construed in
accordance with the laws, canons, ordinances and tenets of the religion concerned".

202

The only real question in the case should have been whether the life of the nuns was a
religious life. The court's answer to this question was simply bizarre: one of the core
instances of worship considered as such by almost all extant civilizations — the life devoted to
religious piety — was pronounced by the English court not to be religious for the purposes of
the law of charity. The way forward is to ask if gifts to religion tend to advance the good of
religion in a manner in which that good can be advanced. Supporting the material or social
infrastructure is valid, but so, too, are other gifts that support the worshipping practices of an
authentic religion in ways // considers valid. The practical utility test is satisfied when the
good of religion is so advanced.

This brings us back, finally, to a point made earlier. Gifts to advance religion should
rarely if ever fail the practical utility test (or the distance requirement); because all the
available projects in religion come "pre-packaged", if one may put it that way, by the
religious organizations in question. There is very little scope, therefore, for a donor to make
any kind of error in the design of his or her gift.

4. EDUCATION

(a) Introduction

The principal good pursued for the benefit of others in the case of the advancement of
education is knowledge, but education will often include play, practical reasonableness,
fi-iendship, and aesthetic experience as well. "Education", strictly speaking, is the activity in
which these goods are sought for the benefit of others through teaching, training, and
instruction.

There are three problems in the current law concerning the meaning of the
"advancement of education". Two of these relate to the proper scope of the term "education",
and the third concerns the meaning of "knowledge". We discuss each in turn.

We do not discuss, however, the central cases of advancement of education — such as a
trust to fiand a scholarship or prize, or an endowment in favour of founding a grade school —
because in our view these projects present no special difficulty. Also, we do not examine
issues relating to the distance requirement because this requirement presents few if any
problems in this category in Canada. In the usual case of the gift to a school or a university

For recent cases discussing these issues, see Briarpatch Inc. v. R. (1996), 96 D.T.C. 6294 (Fed. C.A.) (magazine
containing articles of interest to poor not charitable), and Vancouver Society of Immigrant & Visible Minority
Women v. R. (1996), 96 DT.C. 6232, 195 N.R. 235 (Fed. C.A.) (networking and referral service for immigrant
women not charitable activity).

See, further, cases cited in Waters, supra, note 3.

The Canadian case law is clear that distance is required. See Re Doering, supra, note 21 . In England there is a line
of authority in favour of gifts for the advancement of education that partially favour the donor's relations. These
are the so-called "founder's kin" cases. That line of authority has been extended in England to include gifts where
there is a preferred class of recipients comprised of employees (and their relations) of a company. See Re

203

to fund a scholarship, the distance requirement is satisfied because the gift in question
supports the educational project of a school to which the donor has no obligational tie. Often
there is a tie of loyalty — the donor is an alumnus — but this is considered, correctly, to be too
remote a connection, given that the actual people who benefit will usually not be related to
the donor. In other cases, the requirement is satisfied because the gift supports a research
project which will increase the body of knowledge for society at large, or a certain segment
of it.

(b) The First Problem: The Narrow Scope of "Education"

The first problem arises because the activity of education does not include all the
common ways in which knowledge is sought for the benefit of others. Education is merely
the most obvious and the most common. Neither research nor self-study necessarily involve
one person teaching another, but a gift to fund research into the causes of cancer or a trust to
ftind a research fellowship ought to be valid charitable gifts and, indeed, are considered to be
SO by current law. Likewise, gifts to ftind a library, an adult reading room, or an adult
learning society are all gifts where the good of knowledge is pursued, but these gifts do not
necessarily advance education in any conventional sense of that term. These should also be,
and indeed generally are considered to be, valid charitable gifts. The difficulty in the current
law concerns the proper classification of these activities under the Pemsel test; although they
are not concerned with educating in any conventional sense, education is the only category in
the Pemsel test that deals with knowledge.

To examine this difficulty more closely, consider the case of the gift to ftind university
research into the causes of cancer. There is ample authority that such a gift is educational.
This classification is plausible since one could argue that the point of research in a university
setting is to advance the general educational mission of the university. However, this could
reasonably be objected to on the basis that it casts research activity as merely subsidiary, or at
most complementary, to teaching. Many would properly argue, we submit, that it should be
able to stand on its own.

To raise the question more directly, then, let us suppose that the endowment to fund
cancer research is established outside the university context. Our suggestion is that so long

Koettgen's; Westminster Bank Ltd. v. Family Welfare Association Trustees Ltd., [1954] Ch. 252, [1954] 1 All E.R.
581. None of these decisions has been followed in Canada. In our view that is a good thing.

65
66

See Re Hopkins' Will Trusts; Naish v. Francis Bacon Society, [1965] Ch. 669, [1964] 3 All E.R. 46. Contra, see
Re Shaw; Public Trustee v. Day, [1957] 1 W.L.R. 729, [1957] 1 All E.R. 745 (Ch.D.).

See Re Scowcroft; Ormrodv. Wilkinson, [1898] 2 Ch. 638, [1895-9] All E.R. Rep. 274; Re Hood; Public Trustee
V. Hood, [1931] 1 Ch. 240, [1930] All E.R. Rep. 215; and Re South Place Ethical Society, supra, note 31.

See Re Spencer (1928), 34 O.W.N. 29 (H.C.J.).

Waters, supra, note 3, at 563 gives the example of a donor who establishes a research fund outside a university on
condition that the research results be kept completely secret. He suggests, correctly in our view, that such a gift is
not charitable. In our view, however, its failure to attain charitable status has little to do with the fact that there is
no teaching element to the gift. Rather, the gift is not charitable because the prohibition against publication

204

as the results of the research are publicly available, the gift advances the good of knowledge
for the benefit of the cancer research community or society at large and is, therefore,
charitable. This same analysis would apply to vindicate the endowment of a research
fellowship, since implicit in the fellowship element of the endowment is the requirement of
some public sharing of the knowledge gained. Similarly, a community library and an adult
reading room are projects that pursue the good of knowledge for the benefit of groups of
people other than "students" in any less than figurative sense. There should not, in our
submission, be any requirement to tie the validity of any of these gifts to the advancement of
education. Instead, it is preferable to expand the role of the good of knowledge in the law of
charitable purposes by recognizing that knowledge is frequently sought not only for the good
of "schools" of strangers (that is, education), but for the good of society at large, or segments
of society such as the cancer research community or the neighbourhood community.

A second problem arises because the goods of play, practical reasonableness,
friendship, and aesthetic experience are not explicitly mentioned anywhere in the Pemsel test.
Consequently, in meritorious cases they have had to find a place somewhere else on the
Pemsel list or no place at all. The absence of explicit recognition of these goods has resulted
in confusion about their status in law and in distortions in the content of "education".

As far as "education" is concerned, there have been two harnis: (i) a tendency, now
largely reversed, to exclude these goods from "education" when they ought to be included;
and (ii) a tendency, still prevalent, to include them in education when they ought to be
excluded, but recognized independently.

(i) The Underinclusiveness of "Education" in Older Case Law

Many of the gifts to advance education are intended to benefit the younger generation.
Consequently, they often have as their object, in addition to the intellectual development of
students, the imparting of the skill, knowledge, and habits necessary to lead a ftilfilling life.
Thus, the development of skills of play, practical reasonableness (the virtues of prudence,
justice, courage, and temperance), friendship and sociability (courtesy, respect for others),
and aesthetic experience will be an integral and often explicit part of such gifts. Knowledge
in the narrow sense of "intellectual development", therefore, is usually not the only good at
stake in gifts in favour of education.

Two cases illustrate this point. In an Ontario case, Societa Unita v. Gravenhurst, the
issue was whether a summer camp where children were taught about their Italian heritage and
culture was entitled to tax-exempt status. In an English case. Inland Revenue Commissioners

undermines the principle that knowledge is a common good. Such an internally incoherent project — somewhat
like a project to save a life by taking it — cannot be a practically useful way of advancing the good of knowledge.

(1977), 16 O.R. (2d) 785, 79 D.L.R. (3d) 281 (H.C.J.); affd 6 M.P.L.R. 172 (Ont. Div. Ct).

205

V. McMullen, there was a gift in trust "to organise or provide... facilities which will
enable. ..pupils of schools and universities in. ..the United Kingdom to play association
football or other games or sports and thereby to assist in ensuring that due attention is given
to the physical education and development of such pupils". In Societa Unita, Lemer J. held,
correctly in our view, that the camp was charitable and therefore tax exempt because the
children would learn to be better citizens through a better understanding of their culture and
themselves. The Court of Appeal in England held that the gift in McMullen was not
charitable, but the House of Lords reversed, holding, again correctly in our view, that the gift
was charitable on the basis that education "when applied to the young" includes "instruction,
training and practice containing... spiritual, moral, mental and physical elements".^^

These two cases illustrate the difficulties that might be encountered when these legally
orphaned goods are made the subject-matter of gifts. There was a tendency in the case law
prior to McMullen to construe the knowledge component of education projects so narrowly
that knowledge of these goods was excluded. The 1981 House of Lords decision in
McMullen, however, made clear for the first time that the legal concept of education includes

much more than the fostering of intellectual development in a narrow sense. Societa Unita
perhaps goes a step further, since the organization in that case was not even a school in any
traditional sense. These developments are appropriate, and, in our view, this broadening of
the legal definition of education, so that it corresponds with its meaning in common English,
is to be encouraged.

(ii) The Overinclusiveness of "Education" in Some Case Law

Gifts advancing the goods of play, practical reasonableness, friendship, and aesthetic
experience for the benefit of others outside the context of education have met with even more
difficulty. Lacking any independent legal recognition — ^they do not appear on the Pemsel list
or the Statutes of Elizabeth list — projects advancing these goods have had to be
accommodated either by expanding "education" or not at all. Below we argue that these
projects should be accorded independent recognition. At this point, however, our concern is
with the harm their inclusion in the category "education" has caused to the legal
understanding of that term. It is clear that education as a rubric for these projects has obvious
limits and, although properly accommodating in some instances, as suggested above in (i),

68
69
70

[1981] A.C. 1, at 1 1, [1980] All E.R. 884, at 888 (HL.) (subsequent references are to [1981] A.C.).

Ibid.,2Xn.

There were earlier cases supporting this position, but the position was by no means established prior to the
decision of the House of Lords in Inland Revenue Commissioners v. McMullen, ibid. See Re Mariette; Mariette v.
Governing Body ofAlderham School, [191 5] 2 Ch. 284, [1914-1 5] All E.R. Rep. 794, for one of the earliest cases.

Infra, this ch., sees. 8, 9, and 10.

206

will be completely inappropriate for others. Two cases, Re Shapiro^^ and Re Litchfield,^^
provide examples. In Re Shapiro, there was a gift to assist the publication of unknown
authors. Montgomery J. held that the gift was valid because it was for the advancement of
education. He quoted Mr. Justice Vaisey in Re Shaw's Will Trusts; National Provincial Bank
Ltd. V. National City Bank Ltd., stating that education included "the promotion or
encouragement of these arts and graces of life which are, after all, perhaps the finest and best
part of the human character". In Re Litchfield, it was said, to a similar effect, that "the
encouragement of the humanities can be just as much a part of the advancement of education
as the advancement of scientific research". Thus, projects advancing aesthetic experience
have been accommodated within a broadening category of "education" to the detriment of the
legal understanding of both. In our submission, courts should resist the temptation to
fictionalize "education" to accommodate these other goods in cases where the donor's project
implicating them has no teaching — that is, no educational — component. Although the most
frequent errors of this type are made in respect of aesthetic experience, there is no reason to
expect that similar errors will not occur with respect to play, friendship, and practical
reasonableness, if projects advancing these goods continue to be denied independent
recognition.

(iii) Conclusion

The remedy to this conftision, then, is:

(1) explicit recognition of the inherent limits of the category of "education" and, in
particular, recognition that education, like relief of poverty, names an activity or a
project, not a good;

(2) independent recognition of the goods of play, practical reasonableness, friendship,
and aesthetic experience, and therefore independent recognition of projects
advancing these goods for the benefit of others; and

(3) recognition that education projects sometimes do implicate these goods but that, as
independent goods, they do not require implication in an educational project to
constitute valid charitable purposes.

72
73

74
75
76

(1979), 27 O.R. (2d) 517 at 519, 107 D.L.R. (3d) 133 at 136 (H.C.J.) (subsequent references are to 27 O.R.).

[1961] 2 F.L.R. 454, [1961] A.L.R. 750 at 754 (Aus.). See, also. Royal Choral Society v. Inland Revenue
Commissioners, [1943] 2 All E.R. 101, 169 L.T. 100 (C.A.).

[1952] Ch. 163 at 171-72, [1952] 1 All E.R. 49, at 55.

Re Shapiro, supra, note 72, at 519.

Supra, note 73.

207

(d) The Third Problem: The Uncertain Meaning of "Knowledge" and
"Dissemination of Knowledge"

The third problem in the case law concerns the meaning of "knowledge" and
"dissemination of knowledge", and how, in particular, these terms are to be distinguished
from propaganda, propagandizing, and political campaigning. This is a problem that involves
either issues relating to the content of the good of knowledge, or issues relating to the
practical utility of certain projects in which it is claimed that knowledge is being advanced.

(i) The Meaning of "Knowledge"

Because the common-law test is whether the purpose is to advance "education", there
has been a tendency to think that certain kinds of "lesser" knowledge should be excluded. It
has been said, for example, that education projects must have as their purpose the

"edification" of someone or the "leading out of ignorance" of someone. In our view, some
of the mistaken case law on the meaning of education can be explained as originating in this
mistaken conception of education, with its concomitant narrow definition of knowledge.

One aspect of this problem arises from the fact that there are different kinds of
knowledge: theoretical and practical; speculative and technical; scientific and moral. Another
related aspect is that knowledge can be sought for its own sake or as a means to an end, as
illustrated, for example, in the commonly acknowledged differences between a liberal arts
education and training for a trade. We suggest that these distinctions among the kinds of
knowledge that can be pursued in education projects should not play any formal role in
sorting out which education projects are charitable and which are not. All are valid and these

distmctions are irrelevant for that purpose. The relevant question should be, simply, whether
the particular project in question aims to advance knowledge, of any type, for the benefit of
others.

Another dimension of the problem concerning the meaning of "knowlege" arises from
the need to draw some distinction between knowledge and propaganda and, therefore,
between education and propagandizing. Gifts purportedly in favour of education can
sometknes be heavily affected by political motives. Where there is a political program or
agenda, or an element of propagandizing for social transformation in the gift or organization
of issue, the gift or organization concerned may be essentially political, not educational, and

• 79

is therefore not charitable. The tendency in the cases to castigate "lesser" knowledge might

See Waters, supra, note 3, at 565, for a discussion of this view.

See, for example. Seafarers Training Institute v. Township of Williamsburg (1982), 39 O.R. (2d) 370, 138 D.L.R.
(3d) 407 (Div. Ct.). Contra, see Chartered Insurance Institute v. London Corp., [1957] 1 W.L.R. 867, [1957] 2 All
E.R. 638, (D.C.).

See Re Co-operative College of Canada and Saskatchewan Human Rights Commission, [1976] 2 W.W.R. 84, 64
D.L.R. (3d) 531 (Sask. C.A.) (a college teaching cooperative principles was held not to be charitable, in part, for
the reason that teaching cooperative principles was an "economic" object and therefore akin to a political object),
and Positive Action Against Pornography v. Minister of National Revenue, [1988] 2 F.C. 340, 49 D.L.R. (4th) 74

208

better be articulated as a rejection of projects favouring the dissemination of political
propaganda. This would be, in our view, a valid reason. Our suggestion at this point is that
accepting this as a valid reason does not argue in favour of drawing distinctions among types
of knowledge.

(ii) The Practical Utility of Projects Advancing the Good of Knowledge

None of the foregoing is to argue that the law should not be diligent in applying the
practical utility test in this domain. To do this properly courts should pay attention to
distinctions among kinds of knowledge so that they can make evaluations as to the practical
utility of specific projects advancing, or purportedly advancing, the good of knowledge. For

example, to the forty-letter alphabet proposed in Re Shaw, the proper objection might have
been that the knowledge sought to be advanced and disseminated in that project was practical
knowledge, and the specific project was therefore open to the objection that once information
on the feasibility of a forty-letter alphabet was acquired, in terms of practicality it would have
been useless.

5. PUBLIC POLICY AND PUBLIC WORKS

There are a number of ways that public policy has been thought relevant to the task of
evaluating the validity of charitable projects. We examine two of these briefly before
focusing on the most important problem in this domain, charitable projects that are
discrimmatory.

(a) Whether a Charitable Purpose Can Be Contrary to Public Policy

It is clear law that a valid charitable purpose cannot be contrary to the law or public

policy. This rule is obviously correct. It can be interpreted in two distinct ways. First, it can
be interpreted as a super-added criterion addressed after the various parts of the defmition of
charity have been addressed. On this view, a project could be prima facie charitable, but
denied recognition because it violates public policy. This way of reasoning might be
facilitated by a doctrinal distinction between the legal and the common meaning of charity.
Second, it can be interpreted merely as a necessary implication of the requirement that the
purpose pursued be charitable, since if the purpose pursued is charitable, it cannot also be
against public policy. On this view, a project that violates public policy could not be even
prima facie charitable.

(Fed. C.A.) (a society founded to change social opinions about pornography was held not to be educational). For
other examples, see cases cited in Waters, supra, note 3, at 566.

Supra, note 63.

See, also, Re Hummeltenberg, supra, note 37 (a college for the training of spiritual mediums), and Re Pinion,
supra, note 37 (a museum to contain a "worthless" collection).

See Oosterhoff and Gillese, supra, note, 42, at 21 1.

209

While both understandings can be found in the case law, we prefer the second. It makes
clear the basic and reasonable assumption that the state does not choose against the good, at
least to the extent that the state does not promulgate public policy or law so that otherwise
valid charitable pursuits are in conflict with it or them.

(b) Whether All Elements of Public Policy Are Necessarily Charitable

Sometimes it is argued that if the purpose pursued is the advancement of some element
of public policy, however defined, then the purpose must also be charitable at law. On this
view, for example, an organization founded to promote compliance with the Canadian
Charter of Rights and Freedoms, or to pursue the enforcement of a particular law or of
Canadian law in general, is charitable. We suggest that this proposition is false for one of two
reasons, depending on the type of organization under consideration and the intended scope of
the proposition.

(i) The Non-charitable Status of Organizations Founded to Promote
Government Policies

First, if the dominant objective of an organization is to alter the public's awareness in a
way that could be defended plausibly as simply advocating compliance with public policy,
for example, by encouraging people to do their civic duty, to meet the obligations of
patriotism, or to observe and respect human rights, then, in our submission, the organization
is political in the broadest, but still standard, sense of that term. It is aimed ultimately at
influencing opinion on what the law or public policy should be, and is therefore not
charitable. Similarly, if the dominant objective of an organization is to pursue the
enforcement of the law, in part, through the initiation of legal challenges under the
constitution, then the organization's principal activity is pursuing the enforcement of law, not
doing charity. Every reasonable political or legal opinion in a liberal democracy will

84
85

Although this is not true of every state, one hopes and behaves as though it is true of one's own. For a similar
argument, see J. Phillips, Case Comment, ''Everywoman 's Health Centre v. Minister of National Revenue" (1992),
11 Philanthrop. (No. 1)3, at 7.

Part I of the Constitution Act, 1882, being Schedule B to the Canada Act 1982, 1982, c. 1 1 (U.K.).

Hence, we would argue that the following objective of the Women's Legal Education and Action Fund is not
charitable. The following is cited in E.B. Bromley, "Contemporary Philanthropy — Is the Legal Concept of
'Charity' Any Longer Adequate?", in D.W.M. Waters (ed.), Equity, Fiduciaries and Trusts 1993 (Scarborough:
Carswell, 1993)59, at 84:

(3) [T]he promotion of human and civil rights through the sponsoring of selective litigation, and in
particular, to secure the enforcement of the Constitution of Canada and the Canadian Charter of
Rights and Freedoms set out therein and educating the public concerning the principles reflected in
the Constitution.

The view that such activity is charitable has been criticized, rightly in our view, by Bromley, ibid., at 84-85:

[It would] enable groups who support the law as it presently stands to conduct activities to maintain
and enforce existing law within the ambit of allowable charitable activities but denies that opportunity
to groups which want to promote changes to the law....[S]uch a proposition conflicts with the concrete

210

commend itself to the public under the guise of the good or the right. What marks the view as
pohtical or legal is the desire of those who advance it to persuade fellow citizens or judges to
take a certain view on a certain issue.

These arguments apply regardless of the motivating spirit, and, therefore, apply even if
the motivating spirit is to benefit others through the removal of legal or social obstacles to the
full recognition of their human dignity. The reasons in both sorts of cases are similar:
reasonable people may disagree that the particular awareness aimed at is valid or that the
particular provision of law challenged is the cause of the particular injustice identified, or that
the particular project chosen is the proper one under the circumstances, given the basic
motivation. These are all essentially political or legal projects.

(ii) The Intersection of Public Policy and Charitable Purposes

Second, it is sometimes suggested that any project that advances public policy, as
defined broadly by the current state of the law or policy, is necessarily charitable because the
fourth category of Pemsel includes, or is completely coterminous with, the declared purposes
of government. Thus, the argument goes, if the government does something or is in favour of
doing something, then doing it must be of "public benefit" and, therefore, charitable. There
is an element of truth in this line of thinking which requires clarification, but the basic
proposition, again, is misleading. There are two aspects to the problem.

a. Charitable Status of Public Works Projects

First, governments provide funding for, among other things, public goods such as
bridges, highways, and monuments. These sorts of public works projects have also
traditionally been classified as charitable both under the Statute of Elizabeth and, to a lesser
extent, under the fourth head of the Pemsel test. These projects provide public goods in the
economist's sense of goods that are non-appropriable and as cheap to produce for many as for
one. Charitable trusts advancing projects of this kind were common in Elizabethan and
Victorian England, but are rare in modem Canadian society. One reason for this is that the
modem state, with its extensive taxation machinery, no longer looks to the generosity of

reality that an activity intended to influence the legislature or Parliament to maintain the existing law
on something as flindamental and divisive as abortion is just as political as an activity intended to
influence it to change the existing law or enact a new law.

See, also, Re Hopkinson; Lloyds Bank Ltd. v. Baker, [1949] 1 All E.R. 346, at 330, 65 T.L.R. 108 (Ch. D.), where
it was said, supporting the position taken here:

I venture to add as a corollary to that statement [of Lord Parker in Bowman v. Secular Society Ltd.,
[1917] A.C. 406 to the effect political objects are not charitable] that it would be equally true to apply
it to the advocating or promoting of the maintenance of the present law, because the court would have
no means in that case of judging whether the absence of a change in the law would or would not be for
the public benefit.

See, for a hint of this, Everywoman 's Health Centre Society (1988) v. Minister of National Revenue, [1992] 2 F.C.
52, [1991] 2 C.T.C. 320 (Fed. C.A.).

211

citizens to fund public works. But they do exist in modem times. The House of Lords held
in Incorporated Council of Law Reporting for England & Wales v. Attorney-Genera^^ that
the publication of judicial decisions in a system of precedent law was analogous to the sort of
public works under consideration and, therefore, a valid charitable purpose. So, too, gifts for
the beautification of a street or gifts to support measures taken in the interest of public safety
or to support a cemetery have been held charitable.

One might legitimately ask whether gifts to fund public works are charitable in the
sense of being gifts to advance a common good or, indeed, whether they are charitable in any
other conventional sense. We think the answer to this question is yes: these projects advance
common goods by providing the material infi-astructure that makes it possible for others to
pursue them more effectively. In this regard, interestingly, they are exactly like all other
charitable projects. Knowledge, for example, is advanced for the good of others not by
somehow giving it directly to others, but by giving someone the material means or material
encouragement to pursue it. Even the best teachers do not "put" knowledge into the heads of
their students. The distinction between public works projects and other more usual types of
charitable projects lies at the level of the directedness and directness of the charity: the public
works projects, because they are also public goods in the economist's sense, make many
pursuits of many goods possible to a multitude of people.

Recognizing that public works projects are charitable in the way just described,
however, does not support the broader claim that the fourth category of Pemsel is
coterminous with public policy, that is, that everything government does is charitable. Much
less does it prove that everything government does, because government does it, is charitable.
It merely indicates that there is considerable overlap between what constitutes a valid
charitable project and the projects and activities of government. This, then, is the element of
truth in the general proposition that the fourth category of Pemsel includes, as it is completely
coterminous with the declared purposes of government.

b. Government Purposes as a Test for Charitable Purposes

One way to raise the second aspect of the problem is to begin with the observation that
law and charity are similar in the sense that both are concerned with instantiations or
determinations of common goods; law, by the state, for the benefit of the citizenry; charity,
by individuals and associations of individuals, for the benefit oi strangers. Given this degree
of similarity, one might ask whether it would be appropriate for a court simply to look to

88
89

Interestingly, however, gifts to governments in Canada are in some cases 100% deductible or creditable. This
treatment of these gifts could be regarded as a remnant of the Elizabethan and Victorian policies of favouring
trusts to fiand public works. See E.B. Bromley, "Parallel Foundations and Crown Foundations" (1993), 11
Philanthrop. (No. 4) 37.

[1972] Ch. 73, [1971] 2 All E.R. 1029.

See Re Knowles, [1938] O.R. 369, [1938] 3 D.L.R. 178 (C.A.), and Re Cotton Trust for Rural Beautification
(1980), 118 D.L.R. (3d) 542, 9 E.T.R. 125 (P.E.I.S.C).

212

what the law or public policy is, or what the state does, to assess whether any particular
project is charitable. Thus, this is one way of putting forward the argument that charity and
public policy are coterminous: that government does it too is strong evidence or even proof
that a particular project is charitable.

We think this line of reasoning, although tempting, should be resisted and courts should
simply continue to ask of the project in issue whether it satisfies the test as we have
formulated it. The rejected view is as dangerous and misleading as it is helpful. Its appeal lies
in the fact that it seems to provide an element of certainty in the otherwise vague fourth limb
of the Pemsel test. In our view, however, this certainty is illusory: government purposes, the
nature and elements of public policy, and the point of any particlar law are not always readily
discernible, at least so as to be beyond reasonable dispute. Moreover, in this day and age,
government expenditures, even if motivated to advance a clearly identifiable common good
(as opposed to the private purposes of particular lawmakers), are not always practical and
useful ways of doing so. That is to say, government programs fail for all the same reasons as
charitable projects fail. Thus, since state action in any of its many forms cannot be applied as
readily as the proposition under consideration suggests, it should not form part of the formal
considerations in the vast majority of cases. Certainty in the fourth limb of the Pemsel test
should come from a better understanding of the definition of charity.

Charitable purpose trusts may sometimes be, or appear to be, discriminatory because
they explicitly exclude certain portions of the public, or because they explicitly favour one
segment of the public over others. To the extent that this feature of charitable gifts has
surfaced as a problem in the law, it has been dealt with in one of two ways.

If a gift benefits a small group of people identified by, for example, race, religion, or
ethnic origin, it has been held in some cases that the segment of the public so identified is too
small to satisfy the "public benefif test. Often in these cases the gifts are in favour of the
members of a particular church or of a particular religion in a particular area, and they often
involve the pursuit of goods, such as friendship and play, that have been perennially suspect
in the common law. The decisions usually focus on the question whether the gift is of public
benefit and the gifts usually fail. It is often difficult to disentangle in the reasons the
arguments based on the non-charitable nature, at law, of the good involved and the arguments
based on the size and composition of the group benefited. If, however, these elements of the
decisions are put to one side — if the good involved is held valid, as it should be in our view,
and the objection based on size is put aside as irrelevant, again, as it should be in our view —
the issue becomes whether there is any ftirther basis upon which to object to these types of
gift. This brings us to the second way this type of problem has been approached.

See Inland Revenue Commissioners v. Baddeley, [1955] A.C. 572, [1955] All E.R. 525 (H.L.) (a community
centre for Methodists in a particular area held not valid); Williams' Trustees v. Inland Revenue Commissioners,
[1947] A.C. 447, [1947] 1 All E.R. 513 (H.L.) (a social centre for Welsh people in London held not charitable);
m<\ Attorney-General V. Cahill, [1969] 1 N.S.W.L.R. 85 (Aus.) (a Catholic Boy's Club held not charitable).

213

In some jurisdictions, such as Ontario, this type of gift can also be regarded as attracting
the application of the laws and policies governing unlawful discrimination and, if the gift is in
violation of these in a way that causes substantially incontestable harm to the public, it can be
attacked as a contravention of public policy. Obviously any treatment of this kind must
carefully distinguish between legitimate and illegitimate discrimination, since the law ought
not to invalidate gifts that favour the members of a particular group if there are good reasons
supporting the manner in which the group is identified. Gifts in favour of members of a
particular religion are an obvious example of gifts that should be valid even if they are
discriminatory, but there are many others. This type of discriminatory gift is accommodated
to some extent under Canadian human rights legislation with provisions such as section 1 8 of
Ontario's Human Rights Code. Section 18 provides as follows:

91
92
93

See Re Millar, [1938] S.C.R. 1, [1938] 1 D.L.R. 65.

R.S.O. 1990,c.H.19.

Other human rights codes in Canada contain similar clauses. See, for example, the Charter of human rights and
freedoms, R.S.Q., c. C-12, s. 20, as am. by S.Q. 1982, c. 61, s. 6:

20. A distinction, exclusion or preference based on the aptitudes or qualifications required for an
employment, or justified by the charitable, philanthropic, religious, political or educational nature of a
non-profit institution or of a institution devoted exclusively to the well-being of an ethnic group, is
deemed non-discriminatory.

See, also, the Individual's Rights Protection Act, R.S.A. 1980, c. 1-2, s. 2, as am. by S.A. 1985, c. 33, s. 2 and S.A.
1990,c.23,ss.2,3:

2. — (1) No person shall publish or display before the public or cause to be published or displayed
before the public any notice, sign, symbol, emblem or other representation indicating discrimination or
an intention to discriminate against any person or class of persons for any purpose because of the race,
religious beliefs, colour, gender, physical disability, mental disability, age, ancestry or place of origin
of that person or class of persons.

(3) Subsection (1) does not apply to

(a) the display of a notice, sign, symbol, emblem or other representation displayed to
identify facilities customarily used by one gender,

(b) the display or publication by or on behalf of an organization that

(i) is composed exclusively or primarily of persons having the same political or
religious beliefs, ancestry or place of origin, and

(ii) is not operated for private profit,

of a notice, sign, symbol, emblem or other representation indicating a purpose or membership
qualification of the organization, or

(c) the display or publication of a form of application or an advertisement that may be used,
circulated or published pursuant to section 8(2),

if the notice, sign, symbol, emblem or other representation is not derogatory, offensive or otherwise
improper.

214

18. The rights under Part I to equal treatment with respect to services and facilities, with or
without accommodation, are not infringed where membership or participation in a religious,
philanthropic, educational, fraternal or social institution or organization that is primarily engaged
in serving the interests of persons identified by a prohibited ground of discrimination is restricted
to persons who are similarly identified.

This immunity under human rights legislation does not by its terms extend to determine a
gift's or organization's charitable status at law. It only provides that the groups identified may
discriminate against non-members with respect to the provision of services and facilities. It
could still be argued, therefore, that a particular gift or entity is not charitable at law because,
in discriminating on the grounds of, for instance, race with respect to its eligibility or
membership criteria, it violates public policy. How then is legitimate discrimination with
respect to eligibility or membership criteria to be distinguished from illegitimate
discrimination? A recent decision of the Ontario Court of Appeal, Canada Trust Co. v.

Ontario Human Rights Commission, has begun the task of addressing this question.

Canada Trust dealt with a charitable purpose trust that had been established under the
will of one Colonel Leonard. The purpose of the trust was to provide fellowships for students
in Canada and Great Britain. The terms of the trust, however, were discriminatory. The recital

of the trust deed Stated:

Whereas the Settlor believes that the White Race is, as a whole, best qualified by nature to be
entrusted with the development of civilization ...;

And Whereas the Settlor believes that, the progress of the World depends in the future., .on the
maintenance of the christian religion;...

Similarly, the Human Rights Act, S.B.C. 1984, c. 22, s. 19 provides:

19. — (1) Where a charitable, philanthropic, educational, fraternal, religious or social organization or
corporation that is not operated for profit has as a primary purpose the promotion of the interests and
welfare of an identifiable group or class of persons characterized by a physical or mental disability or
by a common race, religion, age, sex, marital status, political belief, colour, ancestry or place of origin,
that organization or group shall not be considered as contravening this Act because it is granting a
preference to members of the identifiable group or class of persons.

(1990), 74 O.R. (2d) 481, 69 D.L.R. (4th) 321 (C.A.), rev'g (1987), 61 O.R. (2d) 75, 42 D.L.R. (4th) 263 (H.C.J.)
(subsequent references are to 65 D.L.R. (4th)). For a comment on the trial decision, see J.C. Shepherd, "When the
Common Law Fails" (1989), 9 Est. & Tr. Q. 117. For a comment on the decision of the Court of Appeal, see J.
Phillips, Case Comment, ''Re Canada Trust Company and Ontario Human Rights Commission' (1990), 9
Philanthrop. (No. 3) 3. For a discussion of the issues generally, see S.R. Swanson, "Discriminatory Charitable
Trusts: Time for a Legislative Solution" (1986), 48 U. Pitt. L. Rev. 153; D. Luria, "Prying Loose the Dead End of
the Past: How Courts Apply Cy-pr^s to Race, Gender and Religiously Restricted Trusts" (1986), 21 U.S.F. L. Rev.
41; E. Clark, "Charitable Trusts, the Fourteenth Amendment and the Will of Stephen Girard" (1957), 66 Yale L.J.
979.

Canada Trust Co. v. Ontario Human Rights Commission, supra, note 94, at 326-27.

215

And Whereas the Settlor believes that, so far as possible the conduct of the affairs of the
British Empire should be in the guidance of christian persons of British Nationality who are not
hampered or controlled by any allegiance or pledge of obedience to any. ..power or authority,
temporal or spiritual....

In keeping with these views, the trust went on to restrict the management of the trust to non-
Catholic "Christians of the White Race" and to establish eligibility criteria requiring applicant
students to be "British subject[s] of the White Race and of the Christian Religion in its
Protestant form", and that the scholarships be awarded in such a way that female recipients
receive no more than twenty-five percent of disbursements.

The Leonard Foundation had been the subject of much criticism during its fifty-odd-
year existence prior to the mid-1980s. In 1986, the Ontario Human Rights Commission filed
a formal complaint against the Foundation. The trustee of the Foundation, Canada Trust Ltd.,
responded by making an application under section 60 of the Trustee Act. ^ The trustee asked
the court whether any provisions of the trust were "void or illegal or mcapable of being fully
administered" by reason of being contrary to the provisions of the Ontario Human Rights
Code, 1981, or any other public policy, or for uncertainty; if so, whether the trust failed in
whole or in part, also who was entitled to the trust fund and whether, in particular, the cy-pres
doctrine might be applied to the trust funds.

The principal provision of the Human Rights Code at issue in the case was section 1,
which provided that:

1. Every person has a right to equal treatment with respect to services, goods and facilities,
without discrimination because of race, ancestry, place of origin, colour, ethnical origin,
citizenship, creed, sex, age, marital status, family status or handicap.

At trial, McKeown J. held that the trust did not fall within the terms of section 1 of the
provincial Human Rights Code since it was not "a service" or "a facility" and that even if it
was, section 18 of the Code ftilly exempted the trust. With respect to whether there was any
other basis upon which to find that the trust was in violation of public policy, McKeown J.
held that, although the terms of the trust were objectionable, they did not violate any rule of
public policy, in part, because the trust did not pose any substantially incontestable harm to
the Ontario public. He also found the terms to be sufficiently certain. He therefore upheld
the trust, in toto.

^^ S.O. 1981, c. 53. See, now. Human Rights Code, R.S.O. 1990, c. T23.

^^ He cited Re Lysaght; Hill v. Royal College of Surgeons of England, [19661 Ch. 191, [1965] 2 All E.R. 888
(subsequent references are to [1966] Ch.) a case which dealt with a medical scholarship which discriminated
against Roman Catholics and Jews. In that case, Buckley L.J. said (at 206):

I accept that racial and religious discrimination is nowadays widely accepted as deplorable ..., but 1
think that it is going much too far to say that the endowment of a charity, the beneficiaries of which are
to be drawn from a particular faith or to exclude adherence to a particular faith is contrary to public
policy. The testatrix's desire to exclude persons of the Jewish faith or of the Roman Catholic faith from

216

In the Court of Appeal, Robins J.A. (Osier J. {ad hoc) concurring) held that the
provisions were contrary to the public policy of "promoting racial equality". His decision did
not touch on the issue of uncertainty. He concluded that the cy-pres doctrine applied and that
the Court should "propound a scheme that will bring the trust into accord with public policy
and permit the general charitable intent to advance education or leadership through education
to be implemented". Tamopolsky J.A. held, as well, that the trust provisions were in
violation of the public policy against discrimination on the basis of race, religion, and sex,
and that the terms of the trust were a "clear case" where there would be "substantially
incontestable harm to the public". He held, as a consequence, that the trust was "void on the

ground of public policy' , but since there was a general charitable intent to "promote
leadership through education", he held that the fund could be applied cy-pres.

As Tamopolsky J.A. noted, this was the first decision in the Commonwealth to strike
down discriminatory provisions in a charitable purpose trust expressly because they were
contrary to public policy. However, there had been precursors in related areas of the law.
In Wren, a decision of the High Court of Justice of Ontario, a discriminatory restrictive
covenant prejudiced against Jews was struck down. A later decision of the Ontario Court of

102

Appeal, Noble v. Alley, held, to the contrary, that provisions in a restrictive covenant

98
99
100

101
102

those eligible for the studentship in the present case appears to me to be unamiable, and.. .undesirable,
but it is not, I think, contrary to public policy.

Canada Trust Co. v. Ontario Human Rights Commission, supra, note 94, at 336.

Ibid., at 349-52.

Re Dominion Students ' Hall Trust; Dominion Students ' Hall v. Attorney-General, [1947] Ch. 1 83, [1947] L.J.R.
371 (subsequent references are to [1947] Ch.), struck down a discriminatory condition favouring male students of
the British Empire of European origin as being at the time impossible to comply with since it undermined the
main purpose of the trust which was to foster community of citizenship among members of the British Empire. In
that case, Evershed J. held, at 186-87, as follows:

I have... to consider the primary intention of the charity. At the time when it came into being, the
objects of promoting community of citizenship, culture and tradition among all members of the British
Commonwealth of Nations might best have been attained by confining the Hall to member of the
Empire of European origin. But times have changed, particularly as a result of the war; and it is said
that to retain the condition, so far from furthering the charity's main object, might defeat it and would
be liable to antagonize those students, both white and coloured, whose support and goodwill it is the
purpose of the charity to sustain. The case, therefore, can be said to fall within the broad description of
impossibility. ...In these circumstances, I am happy to think that I can make the order which I have been
asked to make.

Re Lysaght, supra, note 97, applied a similar line of argument to avoid a condition that was discriminatory against
Jews and Catholics. There, the named trustee refused to serve unless the discriminatory provision was removed.
Buckley J. held that the personality of the trustee, the Royal College of Physicians and Surgeons, was a necessary
part of the gift and therefore the gift failed, but could be applied cy pres by striking out the discriminatory
provisions.

[1945] O.R. 778, [1945] 4 D.L.R. 674 (H.C.J.).

[1949] O.R. 503, sub nom. Re Noble and Wolf, [1949] 4 D.L.R. 375 (C.A.); rev'd [1951] S.C.R. 64, [1951] 1
D.L.R. 321.

217

discriminating on the grounds of race were not contrary to public policy. '^^ In addition, there
had been cases where offensive provisions in charitable purpose trusts were struck down by
obvious proxy rules. For example, there is a group of cases where the higher standard
applicable to the validity of a condition subsequent was applied where there was as much or
more objection to the actual substance of the condition subsequent. '^'^ Other cases have
employed the cy-pres doctrine after declaring certain discriminatory provisions impossible or
impracticable, thus striking them out and applying the funds cy-pres}^^

With respect, we think that the Canada Trust decision of the Ontario Court of Appeal is
entirely correct and that, left to its own devices, the common law of charitable trusts in
Ontario, with this start, could develop a sufficiently subtle doctrine against certain forms of
discrimination. The difficulty will be to define the difference or point of balance between
discrimination that is prohibited on the grounds of public policy and discrimination that is
permitted because it advances a legitimate interest of a legitimate community. There are
several lines of thinking that would support such a doctrinal development. Unfortunately, the
Court of Appeal decision is not entirely helpful on this particular question. Only
Tamopolsky J.A. dealt with it to any extent. He said, merely, that not all such restrictions
violate public policy and that, for example, those that favour women, aboriginal peoples, and
the physically and mentally challenged are valid. Although helpful, this formulation does not
identify the required distinction.

One view on this question is to regard the dedication of property to a charitable
purpose, either in a trust or in a corporation, as a "public" institution and therefore as subject
to greater public regulation and public scrutiny. This characterization of charitable entities is
supported by the fact that charitable purpose trusts and charitable purpose corporations
receive numerous tax advantages, have the ability to exist in perpetuity, and have available to
them the protection of the Crown. Another, and in our view more persuasive, approach
would require courts to investigate the motives behind the discriminatory provisions, and in
cases where the discriminatory provisions are motivated predominantly by antipathy or
malevolence towards another group identified by race, religion, or sex, to strike them out or
declare the trust void. This approach is also based on the inherently "public" nature of the

103

104

105
106

This latter decision was itself repudiated by the Ontario Legislature in 1951 by The Conveyancing and Law of
Property Amendment Act, 1950, S.O. 1950, c. 11. For the law at present, see the Conveyancing and Law of
Property Act, R.S.O. 1990, c. C.34, s. 22.

See Clavering v. Ellison (1959), 7 H.L. Gas. 707, 1 1 E.R. 282 (H.L.), and Clayton v. Ramsden, [19431 A.C 320,
[1943] 1 All E.R. 16 (H.L.). This area of the law is notoriously incoherent and has been the subject of judicial and
doctrinal critique. The central legal principles distinguish between a condition precedent and a condition
subsequent, each subject to a distinct criterion of certainty. The standard of certainty applicable to a condition
precedent is low since a failure to meet this standard results in the gift being declared void. Conversely, the
standard applicable to a condition subsequent is high since a failure to meet this standard results in only the
condition subsequent itself being struck.

See cases cited supra, note 1 00.

See J. Phillips, Case Comment (1990), 9 Philanthrop. (No. 3) 3, at 25.

218

charitable purpose trust and the charitable purpose corporation, but "public" in the sense of
"common", not in the sense of governmental or "of the state". On this view, these trusts or
entities are favoured because they are involved in making common goods available
altruistically. Malevolently discriminatory provisions undermine two aspects of this formula.
The donor who attaches malevolently discriminatory provisions to his or her benefaction
implies that the good provided for is not necessarily and unconditionally good for all human
beings regardless of race, religion, or sex — it is not common. More importantly, that donor
often has as a principal motive not altruism, but racism, sexism, or bigotry. Here, then, is one
situation where the law might be wise to have recourse to motives in order to assess whether
a gift or entity is not truly charitable.

If this approach is taken, then mere chauvinism or favouritism, in our view, should not
suffice to disqualify a trust or entity. Considerably more discriminatory provisions ought to
be acceptable than what would be permitted under Tamopolsky J.A.'s rule. Some
categories — for example, race — ought to be more suspect than others. Gifts favouring a
disadvantaged race, however, will generally be valid, since these are motivated invariably by
a desire to redress a disadvantage. This may have been Tamopolsky J.'s point. All the same, a
scholarship for English Canadians to learn French, a scholarship in favour of Presbyterians at
a teachers' college, or a gift to support a Welsh community centre in London, although
discriminatory on suspect grounds, ought to be valid since there is no malevolent motive in
any of them.

6. INTERNATIONAL CHARITY

Although English case law fairly readily accepts the permissibility of charitable trusts

107

that benefit foreigners, there is some doubt in England as to whether there must also be a
local benefit and whether the general permissibility varies according to the type of charity in

107

See Re Geek; Freundv. Steward {\%9y), 69 L.T. 819 (C.A.) (a trust to help the poor in a certain German town); Re
British Red Cross Balkan Fund; British Red Cross Society v. Johnson, [1914] 2 Ch. 419, [1914-15] All E.R. Rep.
459; Re Robinson; Besant v. German Reich, [1931] 2 Ch. 122, 145 L.T. 254 (a trust in favour of disabled German
soldiers); Re Vaughan, [1905] W.N. 179 (a trust for educational objects in a foreign country); Re Long (1930), 37
O.W.N. 351 (H.C.J.) (foreign missions); Re Oldfield Estate (1949), 57 Man. R. 193, [1949] 2 D.L.R. 175 (K.B.)
(maintenance of cemetery in France); Re Burnham Estate (1958), 17 D.L.R. (2d) 298 (B.C.S.C.) (poor and sick in
Armenia Macedonia and Montenegro); and Re Masoud Estate, [1961] O.R. 583, 28 D.L.R. (2d) 646 (H.C.J.)
(school in Syria).

219

question. From two Ontario decisions on point, Lewis v. Doerle^^^ and Re Levy Estate,^^^ it
is clear that there does not have to be a local benefit. The Restatement (Second) of Trusts^ ^^
likewise states:

The mere fact that a trust is created for the benefit of members of a community outside the State
or the United States does not prevent a trust from being charitable. Thus, a trust for the benefit of
the poor of another state, or a trust to establish a hospital in a foreign country, is charitable.

But English precedents are so authoritative that they, at least, make this a debatable question
in Ontario too. On the understanding of charity advanced in this chapter and in the previous
two, there would be no basis in principle to exclude a charity that benefited foreigners
exclusively. There may well be, however, insurmountable practical obstacles to a court, the
Public Trustee, or Revenue Canada executing its supervisory functions. In addition, there
may be reasons relating to tax policy or foreign relations which would justify the imposition
of restrictions on the recognition or operation of international charities. In keeping with our
general recommendation that the legal definition of charity be as close as possible to the real
definition, the Commission recommends that any restriction on international charity,
motivated by policy considerations of this type, be adopted in a form that does not call into
question the charitable status of international charity just because it is international.

7. POLITICAL PURPOSES

The English and Canadian case law is clear that politically oriented organizations are
not charitable. A number of reasons are traditionally advanced. The most repeated claim is

108

109
110
111

112

See, for example, Camille & Henry Dreyfus Foundation Inc. v. Inland Revenue Commissioners, [1954] Ch. 672 at
684, [1954] 2 All E.R. 466 at 471 (C.A.), affd. [1956] A.C. 39, [1955] 3 All E.R. 97 (H.L.), where Lord Evershed
says:

It may be that, on very broad and general grounds, relief of poverty and distress in any part of the
world, or the advancement of the Christian religion in any part of the world, would be regarded as
being for the benefit of the community in the United Kingdom. I see, however, formidable difficulties
where the objects of the trust were, say, the setting out of soldiers or the repair of bridges or causeways
in a foreign country. To such cases the argument of public policy. ..might be the answer.

See, also, McGovern v. Attorney-General, [1982] Ch. 321, [1981] 3 All E.R. 493 (subsequent references are to
[1982] Ch.), where it was held that a trust for the abolition of torture and inhumane punishment in foreign
countries was void because the court would not have the means to assess whether any proposed change in the law
would be to the benefit of the public in the foreign country.

(1898),25O.A.R.206(C.A.).

(1989), 68 O.R. 2d 385, 58 D.L.R. (4th) 375 (C.A.).

American Law Institute, Restatement (Second) of Trusts (Washington, D.C.: 1957), §374, Comment, at 260.

The classic political purposes cases are Bowman v. Secular Society Ltd., supra, note 33; National Anti-Vivisection
Society v. Inland Revenue Commissioners, [1948] A.C. 31, [1947] 2 All. E.R. 217 (H.L.) (subsequent references
are to [1948] A.C); and McGovern v. Attorney-General, supra, note 108. In Canada, see Notre Dame de
Grace Neighbourhood Association v. Minister of National Revenue (1988), 85 N.R. 73, [1988] 2 C.T.C. 14 (Fed.
C.A.); Positive Action Against Pornography v. Minister of National Revenue, supra, note 79; Scarborough

220

that a court cannot supervise the execution of a trust for political purposes because a court
cannot determine whether a proposed change in the law is necessarily for the benefit of the
public."^ Although, in our view, this is a valid reason, it is often criticized as vacuous or

Community Legal Services v. The Queen, [1985] 2 F.C. 555, 17 D.L.R. (4th) 308 (Fed. C.A.); and
Toronto-Volograd Committee \. Minister of National Revenue, [1988] 3 F.C. 251, 83 N.R. 241 (Fed. C.A.).

For Canadian writing on the issue of political objects and the law of charity, see A.B.C. Drache, "Political
Activities: A Charitable Dilemma" (1980), 2 Philanthrop. (No. 4)21; H.G. Intven, Viewpoint: "Political Activity
and Charitable Organizations", [1982-83] Philanthrop. (Winter) 35; L.A. Sheridan, "The Charpol Family Quiz"
(1977), 2 Philanthrop. (No. 1) 14; and L.A. Sheridan, "Charitable Causes, Political Causes and Involvement"
(1980), 2 Philanthrop. (No. 4) 5.

The American writing is extensive. For a review, see L.B. Chisolm, "Politics and Charity: A Proposal for Peaceful
Co-existence" (1990), 58 Geo. Wash L. Rev. 308, and Note, "Developments in the Law: Nonprofit Corporations"
(1992), 105 Harv.L. Rev. 1578.

For English writing, see H. Cohen, "Charities — A Utilitarian Perspective" (1983), 36 Current Legal Probs. 241; R.
Nobles, "Politics, Public Benefit and Charities" (1982), 45 Mod. L. Rev. 471; R.B.M. Cotterrell, "Charity and
Politics" (1975), 38 M.L.R. 471; and S. Bright, "Charity and Trusts for the Public Benefit— Time for a Re-
think?", [1989] Conv. 28.

The political purposes doctrine has been applied in many cases: Inland Revenue Commissioners v. Temperance
Council of Christian Churches of England & Wales (1926), 136 L.T. 27, 42 T.L.R. 618 (temperance reform);
Bonar Law Memorial Trust v. Inland Revenue Commissioners (1933), 49 T.L.R. 220, 17 Tax Cas. 508 (K.B.)
(conservatism); Re Ogden; Bryden v. Sammuel, [1933] Ch. 678, [1933] All E.R. Rep. 720 (liberalism); Re Loney
Estate (1953), 9 W.W.R. (N.S.) 366 (Man. Q.B.) (socialism); Re Bushnell; Lloyd's Bank Ltd v. Murray, [1975] 1
All E.R. 721, [1975] 1 W.L.R. 1596 (Ch. D.); and Re Patriotic Acre Fund {\95\), 1 W.W.R. (N.S.) 417, [1951] 2
D.L.R. (2d) 624 (Sask. C.A.) (promotion of legislation beneficial to farmers).

There are many marginal cases where a purpose trust was held valid as charitable, even though one could
reasonably argue that its objects were political: Re Scowcraft, supra, note 64 (a trust "for the fiirtherance of
conservative principles and religious and mental improvement"); Farewell v. Farewell (1892), 22 O.R. 573
(H.C.J.) (a trust for the adoption by the Parliament of the Dominion of Canada of legislation prohibiting the sale of
intoxicating liquor as a beverage and for the promotion of temperance through the education of public opinion);
Inland Revenue Commissioners v. Falkirk Temperance Cafe Trust, [1927] S.C. 261, 1 1 Tax Cas. 353 (Scot.); Re
Hood, supra, note 64 (temperance); and Lewis v. Doerle, supra, note 109 (a trust "to promote, aid and protect
citizens of the United States of African descent in the enjoyment of their civil rights").

113

Lord Parker in Bowman v. Secular Society Ltd., supra, note 33, at 442, put the argument this way:

A trust for political objects has always been held invalid, not because it is illegal, for everyone is at
liberty to advocate or promote by any lawful means a change in the law, but because the court has no
means of judging whether a proposed change in the law will or will not be for the public benefit, and
therefore cannot say that a gift to secure the change is a charitable gift.

The gift in Bowman was to the Secular Society Ltd., whose purposes included the promotion of the repeal of
Sunday observance legislation. A different formulation of the same idea is contained in Lord Simonds' speech in
National Anti-Vivisection Society v. Inland Revenue Commissioners, supra, note 1 12, at 50:

The law could not stultify itself by holding that it was for the public benefit that the law itself should
be changed. Each court in deciding on the validity of a gift must decide on the principle that the law is
right as it stands.

And Slade J. summarized the reasons as follows in McGovern v. Attorney-General, supra, note 108, at 336-37:

From the passages from the speeches of Lord Parker, Lord Wright and Lord Simonds which I have
read I extract the principle that the court will not regard as charitable a trust of which a main object is
to procure an alteration of the law of the United Kindgom for one or both of two reasons: first, the
court will ordinarily have no sufficient means of judging as a matter of evidence whether the proposed

221

obfuscatory. It may be that the state should extend its enforcement aid or tax privileges to
politically oriented organizations, but the rationale for doing so is not that the practical
objective sought to be achieved by the group is necessarily good, since at least in a liberal
democracy, as argued in chapter 6, whether it is or is not, is open to public doubt. To this
extent, political "charities" fail because the state is unwilling to lend its imprimatur to a quest
of acknowledged debatability. This is, in essence, what we take to be the traditional argument
against political "charities". The practical consequence of this is that these groups may not
use the charitable purpose trust to organize their affairs, and they must apply directly to
government for any sort of state subsidy.

There are some cases, however, such as McGovern v. Attorney-General,^^^ where the
validity of the overtly political objective is of little or no doubt and, therefore, not really
debatable. Releasing prisoners of conscience and ceasing to torture innocent people, the two
causes at issue in McGovern, are clearly good, because imprisoning people just because of
their religious or political beliefs and torturing innocent people are two moral and political
choices that are clearly wrong. Thus, advocating and acting lawfully to aid and abet the
release of prisoners of conscience and the cessation of torture are obviously valid deter-
minations of the good, even if they involve trying to persuade others and are therefore also
political. The feature that marks off this special case is that there truly is no debate. A late
nineteenth century Ontario case, Lewis v. Doerle, is illustrative of the proper approach to a
similar situation. In that case the Ontario Court of Appeal upheld a devise of land in trust that
was to be administered "to promote, aid and protect citizens of the United States of African

117

descent, in the enjoyment of their civil rights".

change will or will not be for the public benefit. Secondly, even if the evidence suffices to enable it to
form a prima facie opinion that a change in the law is desirable, it must still decide the case on the
principle that the law is right as it stands, since to do otherwise would usurp the function of the
legislature.

See, also, Re Patriotic Acre Fund, supra, note 1 12.

Another common argument is that political propaganda and distorted information is not of public benefit. See Re
Hopkinson, supra, note 85.

Lord Parker's justification in Bowman v. Secular Society Ltd., supra, note 33, has been characterized as
"implausible" by S. Gardner, An Introduction to the Law of Trusts (Oxford: Clarendon Press, 1990) at 107, and "a
strain on credulity" by Sheridan, "Charitable Causes, Political Causes and Involvement", supra, note 1 12, at 12.

Supra, note 108.

Supra, note 109.

Ibid., at 206.

114

115
116
117

222

Trusts to promote friendship or international peace have also been held invalid on the
basis of the political purpose doctrine, as has the purpose of promoting Canadian unity. ''^
We think, however, that there is a valid distinction to be made between promoting fellowship
locally, nationally, or internationally, on the one hand, and promoting political doctrines such
as Canadian unity, however patriotic, on the other. The former should be held to be charitable
on the basis that they advance the good of friendship. We will return to this argument briefly
below. We think, however, that the latter is clearly political.

Where the political purposes or activities are ancillary or incidental to other valid
charitable purposes or activities, recent case law has affirmed, correctly, that the entities

120

involved are still charitable. The prohibition applies only when the political purposes or
activities are one of the main or dominant purposes or activities.

8. FRIENDSHIP

Friendship as a good poses several practical difficulties in the law of charity, since it is,
as a matter of practice, rare for a person to pursue this good exclusively for the benefit of
strangers. Invariably, it is the donor's affection for the recipient individual or group that
moves him or her to give. Most organizations which pursue friendship — clubs, societies, and
associations — do so solely for the mutual benefit of their members, and most gifts to such
organizations are moved by the donor's own friendship with that group or association, not by
an altruism intended to benefit strangers. Thus, the distance requirement is often not
satisfied where the good is fi^iendship.

Another complicating element, often present in gifts where the good of friendship is
implicated, is that the recipient group was formed to pursue the advancement of a common

118

119

120

121

See Anglo-Swedish Society v. Inland Revenue Commissioners (1931), 47 T.L.R. 295, 16 Tax Cas. 34 (K.B.)
(English-Swedish relations); Buxton v. Public Trustee (1962), 41 Tax Cas. 235 (Ch. D.) (international relations);
Re Wilkinson, [1941] N.Z.L.R. 1065 (League of Nations); Re Strakosch; Temperley v. Attorney-General, [1949]
Ch. 529, [1949] 2 All E.R. 6 (C.A.) (South Africa and Britain); and Toronto Volgograd Committee v. Minister of
National Revenue, supra, note 1 12 (citizen exchanges between Toronto and Volgograd). But they have also been
held valid: Re Harwood; Coleman v. Innes, [1936] Ch. 285, [1935] All E.R. Rep. 918 (gifts to Peace Society of
Belfast); Parkhurst v. Burriel, 117 N.E. 39 (Mass. Sup. Jud. Ct. 1917) (legacy to World Peace Fund); and Re
Wright [1951] 2 D.L.R. 429 (N.S.C.A.) (construction of community hall).

See Canada UNI Association v. Minister of National Revenue, [1993] C.T.C. 46, 151 N.R. 4 (Fed. C.A.), and
J. Phillips, "Crossing the Line from 'Charitable' to Political" (1995), 12 Philanthrop. (No. 4) 33.

See Re Koeppler Will Trusts; Barclay's Bank Trust Co. v. Slack, [1986] Ch. 423, [1985] 2 All E.R. 869 (C.A.).
This appears to have been the position in the United States for some time: Vanderbilt v. Commissioner of Internal
Revenue, 93 F. (2d) 360 (1937).

Social service clubs present an interesting example. Generally, they pursue friendship and sociability as well as
providing services to the community that are charitable in nature. The fact that the sociability pursued is for their
own benefit means that one of their main purposes is non-charitable, and therefore that they are not exclusively
charitable. See Watt Estate v. Minister of National Revenue (1964), 64 D.T.C. 488, 36 Tax A.B.C. 40 (Edmonton
Lions Club not exclusively charitable).

223

interest of the group, not friendship or sociability per se, although friendship may be an
important by-product of the association and perhaps even one of its main goals. Trade unions
are a good example of this phenomenon. The fact that their use of the label "brotherhood" is
expressly intended as much for its ideological value as anything else is a strong indication
that their founding purpose is not friendship per se, but the social and economic interests of
the group. Thus, we also speak of membership in the "labour movement }^^

A third problem is distinguishing between the advancement of friendship between two
or more communities, on the one hand, and politics, on the other, since the aim of projects of
the former type usually contains an element of changing people's minds. The relevant
distinction is that political activity aims to change people's minds about public policy, while
friendship projects aim to change people's minds, simply, about other people. In our view,
the trend of the law against classifying international friendship societies as charitable is
therefore quite mistaken. The source of the error is the failure of the current tests to
recognize explicitly the good of friendship. A 1980 decision of the Federal Court of Appeal,
Native Communications Society of B.C. v. Minister of National Revenue, is a good example
of a case that caused some difficulty because of the lack of explicit recognition in the
traditional sources that the good of friendship can be a valid charitable purpose. In that case,
one of the primary purposes of the organization applying for registration under the Income
Tax y4c/ as a charity was to foster a sense of community among a disparate native population
in British Columbia through the publication of a newspaper and radio and television
broadcasts. Another means was to provide training facilities and programs to natives in these
media. The Minister refused registration on the basis that this sort of activity did not fit under
education, apparently the most plausible category. However, the Federal Court of Appeal
upheld the Society's appeal, correctly in our submission, by finding room in the fourth
Pemsel category.

Despite these problems, it is clear that there is some latent legal recognition that gifts
that providing the occasion or infrastructure for friendship, such as gifts to support
community centres, social and recreational centres, parks, and the like, are charitable. This is

125

so even though there is some older English authority agamst it.

122

123

124

125

See, for example, P.E.I. Public Service Association v. City of Charlottetown (1976), 12 N. & P.E.I.R. 526
(P.E.I.S.C.) (trade union not charitable because acting in interests of members).

See cases cited supra, note 118.

[1980] 2 CT.C. 170, [1986] 3 F.C. 471 (Fed. C.A.). See E.B. Zweibel, "A Truly Canadian Definition of Charity
and a Lesson in Drafting Charitable Purposes: A Comment on Native Communications of B.C. v. M.N.R" (1987),
26ET.R.41.

See Inland Revenue Commissioners v. Baddeley, supra, note 90, which held that a trust to establish a community
centre in which "social intercourse and discreet intercourse may go hand in hand with religious observance and
instruction" was not charitable. See, also, Williams ' Trustees v. Inland Revenue Commissioners, supra, note 90 (a
social centre for Welsh people in London), and in Australia, Attorney-General v. Cahill, supra, note 90 (a Catholic
boy's club). The effect of this case law has been repealed, at least in part, by statutes in England and several
Australian jurisdictions which validate "social welfare" trusts providing for "facilities for recreation or other
leisure-time occupation". See, for example. Recreational Charities Act, 1958, 6 & 7 Eliz. 2, c. 17 (U.K.). In our

224

9. SPORTS AND RECREATION

Victorian judges believed that sport, although useful to society, could not be charitable.
Thus, traditional English case law going back to that era, and strictly followed since, has held
that trusts in favour of sporting purposes are not charitable. This type of trust has only been
allowed, as suggested above, where the sport aspects of the purposes were ancillary to some
other recognized purpose, such as education. Fortunately, these matters have been dealt with
effectively in Ontario in the Re Laidlaw Foundation decision of the Divisional Court of
Ontario. That case involved the legality of grants made by the Laidlaw Foundation to certain
amateur athletic and sports associations for the disabled. At first instance, Dymond Surr.
Ct. J. held that the recipient organizations were charitable on the basis that the promotion of
sport was for the public benefit. She relied, however, on arguments that emphasized sports'
instrumental value — its promotion of fitness, health, and character — as opposed to its
intrinsic value. Southey J.'s decision in the Divisional Court affirmed the reasoning of Her
Honour Judge Dymond and generally supported a more liberal approach to the definition of
charity. We respectfully suggest that this has been a salutary development of the law.

10. AESTHETIC EXPERIENCE

The traditional tests have some difficulty accommodating projects such as museums, art
galleries, literature prizes, arts councils, and wilderness and nature preserves. As suggested
above, the tendency has been to include them with education, but this is clearly problematic
since, in most instances, including them in that category requu^es corrupting the meaning of
both "education" and "aesthetic experience". The category should be given independent
status, as has the category of sports (play) recently in Ontario.

11. LIFE AND WORK

Projects that advance the goods of life and work for the benefit of others may play a
more prominent role in the future, given the contemporary concern with the environment and
current high levels of unemployment. Traditionally, projects advancing the good of life have

(

126

127

view, for the reason stated in the text, there is no need for such legislation in Ontario. Contra, Waters, supra,
note 3, at 599. More recent decisions have held in favour of trusts for recreational purposes. See, for example,
Brisbane City Council v. Attorney-General for Queensland, [1978] 3 W.L.R. 299, [1978] 3 All E.R. 30 (Aus.),
(park and recreational show ground), and Re Vernon Estate; Boyle v. Battye, [1948] 2 W.W.R. 46 (B.C.S.C.) (a
community hall).

Re Nottage, supra, note 12, is the classic case. More recently, see Re Patten; Westminister Bank v. Carlyon,
[1929] 2 Ch. 276, [1929] All E.R. Rep. 416. In Inland Revenue Commissioners v. McMullen, supra, note 68, Lord
Hailsham supported the traditional position in obiter. See, also, Laing v. Commissioner of Stamp Duties, [1948]
N.Z.L.R. 154.

(1984), 48 O.R. (2d) 549, 13 D.L.R. (4th) 491 (Div. Ct.). But see, also, Byron Optimist Sports Complex Inc. v.
London (City), [1993] O.J. No. 62 (C.A.) [QL] (sports complex not charitable since no economic deprivation
proved). For a comment, see D.W.M. Waters, Case Review: "In the Matter of Laidlaw Foundation and in the
Matter of the Charities Accounting Act" (1985), 5 Philanthrop. (No. 1), 46. The Goodman Report, supra, note 15,
recommended that sport be recognized as well.

225
included only such obvious things as hospitals, medical research, '^^ and the protection and

129 • •

preservation of animals. Projects advancing life may become more diverse given the
inherent complexity of life, the diversity of threats to health, life's variety of non-human
forms, and its necessary "ecological" situation in a biosphere. Courts and public
administrators should be open to these developments.

Projects advancing work for the benefit of others should also, in appropriate cases, be
entitled to recognition. Social councils, micro-development projects, and community
foundations are all involved in pursuing creative and effective ways of getting people back to
work. Their efforts should not be curtailed by an overly restrictive definition of charity, and
should be recognized as validly charitable even if they do not easily fit under the traditional
categories of relief of poverty and/or the advancement of education.

12. THE "EXCLUSIVELY CHARITABLE" CONDITION

The law requires that charitable entities, to attract that designation and the privileges
that accompany it, must be organized for purposes that are exclusively charitable and carry
on only charitable activities. Under the federal tax law, an entity can be deregistered if it
engages in non-charitable activities, and it will not be registered in the first place if any of its
purposes are non-charitable. Under the law of trusts, a purpose trust is invalid unless
(exceptions aside) all its purposes are charitable. Moreover, under the law of trusts and
corporate law, carrying on non-charitable activities in the context of a charitable entity
constitutes a breach of fiduciary duty on the part of those fiduciaries who authorize such acts.

What is the justification for this? The answer, we believe, is administrative ease.
Charitable entities must be strictly charitable because imposing this condition on them is a
cost-effective way of identifying the proper targets of state privileges intended for charity. It
is important to be clear that administrative ease is the sole reason for this criterion for two
reasons. First, there may be special instances where the condition could be modified or
eliminated, while still assuring the effectiveness of the policy targeting. Second,
understanding that the "exclusively charitable" principle is applied for the sake of
administrative convenience helps in the design of the specific rules that implement the
principle. As an example of the first point, it is obvious that there is a lot more charity in the
world than is recognized by the exclusively charitable test. For example, direct gifts to
distressed or impoverished individuals, a gift to a person whose whole life is devoted to doing
charity, and a gift by a non-member to a mutual benefit nonprofit organization that pursues a
common good but for the benefit of its membership — such as a cooperative daycare — are all
charitable acts. It is difficult to devise ways to allow for the tax deductibility or creditability

128

See Re Ross; Charlotte County Hospital v. St. Andrews (1980), 28 N.B.R. (2d) 611,7 ET.R. 79 (Q.B.).

129

See Re Wedgwood; Sweet v. Cotton, [1914] 2 Ch. 245, 11 LT. 436; Re Toronto Humane Society (1920), 18

O.W.N. 414 (H.C.J.)-

130

Compare Gull Bay Development Corp v. The Queen, [1984] C.T.C. 159, 84 D.T.C. 6040 (Fed. T.D.), and Native

Communications Society of B.C. v. Minister of National Revenue, supra, note 124.

226

of the first gift, but it is not hard to imagine ways to permit deductibility or creditability of the
second and third types of gifts. In addition, there is no reason not to designate the first gift as
a charitable entity, even if the organization does not satisfy the exclusively charitable
standard. As an illustration of the second point, the rules established to govern businesses
carried on by charities can take many forms some of which — such as the American rules —
permit charities to carry on unrelated businesses but tax the profits of the business. This type
of regulation aims more specifically at the unfair consequences of subsidizing charitable
businesses with tax subsidies by attempting to take away the subsidy.

Getting the formulation of the "exclusively charitable" principle correct is also of the

utmost importance. There are two key elements to be considered — the entity's purpose or

purposes and its activities. Both must be exclusively charitable. A purpose is charitable if it

proposes to instantiate a common or universal good. An activity is charitable if it has as its

form and actual effect the instantiation of one of the goods. There is a difficulty here,

however, which has led to some conftasion in the law and legal writing. What ought to be of

concern are the primary or principal purposes as opposed to the ancillary and incidental

purposes', with respect to activities, what we ought to be concerned about is whether they are

1 1 1
activities intended to ftirther, and which in fact ftirther, the primary or principle ends.

Making the correct assessment in the case of a particular entity is a complex factual inquiry

involving investigation into these specific elements. One cannot look in isolation, for

example, at such activities as letter writing, mass mailing, postage metering, and depositing

cheques at the bank. Clearly, none of these activities considered in isolation is charitable.

These activities must be looked at in their proper context as part of a campaign to raise funds

in support of charity. It has been argued by some that since donation fiandraising, considered

in isolation, is not a charitable activity, a hospital foundation which does only this type of

fundraising — as well as granting the ftinds raised to the hospital — does not meet the

exclusively charitable test. This, in our view, is a mistaken conclusion. The error lies in the

failure to see that the charitable nature of the fundraising activity is determined by the

purposes that inform it as well as its actual effect. The proper approach is to look at the

entity's whole project or projects, its stated purpose(s), as well as its actual effect(s). Then

one must ask whether the project(s) are practically useftil instantiation(s) of a common good

or goods for the benefit of others. All of the organization's activities must contribute

effectively, in the final analysis, to the achievement of its project(s). They all must be, at

least, ancillary — ^meaning subservient or subordinate — ^to the achievement of the project or

incidental — meaning liable to happen — to the project.

In subsequent chapters, the Commission makes further specific recommendations
concerning the formulation and application of the exclusively charitable test in the various
domains of the law of concern in this study. This test is easily the most important regulatory
principle applied to the sector, since it is the principle that conditions the eligibility of the
privileges.

131

See N.P. Gravells, "Charitable Trusts and Ancillary Purposes", [1978] Conv. 92.

227

13. CONCLUSIONS AND SUMMARY OF RECOMMENDATIONS

The Commission does not recommend any change in the basic definition of "charity".
Our position generally has been that courts should be open and not legalistic in their
interpretation and application of the common-law case law on the meaning of "charity". In
our view, notwithstanding a few — perhaps, a few too many — judicial decisions to the
contrary, there is no true divergence between the common-law definition and the real
meaning of charity, and therefore there is no case to be made for a general or basic reform.
To the extent that the case law requires reformation, it ought to occur through the methods of
reformation inherent to the common-law tradition. We hasten to emphasize that this project is
as much within the jurisdiction of public administrators as it is within that of the courts.
Indeed, if there has been any serious failing in this regard in recent years, it has been at the
level of public administration. Ontario courts have done an effective job in recent years of
sorting through the contemporary problems in this area of the law, but, in the Commission's
view, it is regrettable that the Office of the Public Trustee has seen fit to litigate, let alone
appeal, such matters as the issues which are at stake in the Laidlaw case.

For the sake of thoroughness. Appendix F provides numerous possible codified
definitions of "charity" employed or suggested in other jurisdictions. As just stated, however,
we do not recommend any of them for adoption in Ontario. In addition to the substantive
reasons summarized in the previous paragraph, it is our view — concurred by most
commentators and public studies in other jurisdictions — ^that a legislated solution to the
problems inherent in this definition is far too blunt an approach to work to effect or
encourage proper development. We also think that a legislated definition is as likely to cause
as much harm as good.

Our suggestion has been that "charity" is properly defined as follows: A truly charitable
act or project is one that has as its form, its motive, and its effect the provision of the means
of pursuing a common or universal good to another. We have analyzed that definition as
being comprised of three key elements: the charitable purpose (the good pursued), the
practical utility of the act or the project (the effect), and the destination of the benefit (others).
We set motive aside not because it is unimportant, but because it is too difficult to consider
directly. Still, it remains an important background element in the legal practice on the
definition, and it surfaces occasionally to play an important role in understanding and
applying legal rules.

The law's sole preoccupation with this definition has been and continues to be to
identify entities that satisfy the "exclusively charitable" standard, since these are the entities
entitled to state privileges. For an entity to meet this standard, it must be shown that all its
project(s) have as their primary purpose(s) and actual effect(s) the instantiation of a common
good for the benefit of others. We have identified a number of sources of confusion in some
of the writing, judicial and otherwise, both in this chapter and in the previous two chapters, in
the articulation of this standard. We reiterate the most important sources of confusion here:

228

(1) "Charity" has two widely accepted but somewhat contradictory connotations: one
narrow, that includes only acts aimed at relieving the distress or suffering of
others; one wide, that includes what we have called "philanthropy". This is seen as
a tension that requires no resolution but one that indicates a possibility for treating
the former somewhat more favourably than the latter.

(2) The policy function of "charity" has definitely affected, even distorted, its legal
meaning historically and may well continue to do so into the future. This is
unfortunate, perhaps unavoidable, but nonetheless it is to be avoided.

(3) There are three basic tests for "charity", not quite definitions, at common law. All
are related, all are slightly distinct, all are subject to many divergent
interpretations, and all are conceptually imperfect. This is unfortunate but mostly
innocuous.

(4) The phrase "benefit to the public" is used equivocally to refer to the three
elements in one definition or three actual definitions. This as a major source of
confusion, and courts should focus instead on whether the project (1) pursues a
good (2) for the benefit of strangers (3) in a practically useful way.

(5) It is unfortunate that the common-law tests do not give adequate independent
recognition to all the common goods. Nevertheless, we note that little serious
harm has been caused by this, that courts are modifying their approach, and that
the law has sufficient internal resources to continue development in the right
direction.

CHAPTER 9

POLICY PERSPECTIVES
ON THE CHARITY
SECTOR

1. INTRODUCTION

In this chapter, the Commission presents some of the explanations of charity and charity
law offered in the growing (largely American) literature on charity law.^ That literature is
both positive and normative: it seeks both to explain why the law handles certain problems in
certain ways and to recommend what the law should be. There is also a large body of
empirical literature, only some of which has attempted to test the hypotheses generated in the
theoretical work. In some instances in the discussion that follows we use American
examples, sometimes because there is no Canadian analogue, but usually because what the
theories describe is American in provenance and design.

This literature is preoccupied with three basic questions. The first question, the most
basic, asks why charity takes place at all. This question is generally put by asking why
governments or the private sector cannot do or refrain from doing what charity — the "third"
sector — does. Thus, somewhat perversely, the inquiry is commenced by defining and
describing charity in terms of what it is not. The second basic question takes up issues
relating to the privileged tax treatment of charities — the deduction or tax credit and the tax
exemptions. Here the problem is to understand why governments treat charities in these

Several collections of essays provide good points of departure: W.W. Powell (ed.), The Non-profit Sector: A
Research Handbook (New Haven, Conn.: Yale University Press, 1987); S. Rose-Ackerman (ed.). The Economics
of Nonprofit Institutions: Studies in Structure and Motives (Oxford: Oxford University Press, 1986); and
E.S. Phelps (ed.), Altruism, Morality and Economic Theory (New York: Russell Sage Foundation, 1975).

See, for example, C.T. Clotfelter and L.M. Salamon, "The Impact of the 1981 Tax Act on Individual Charitable
Giving" (1982), 35 Nat'l Tax J. 171; C.T. Clotfelter, Federal Tax Policy and Charitable Giving (Chicago:
University of Chicago Press, 1985); C.T. Clotfelter, "Tax-induced Distortions in the Voluntary Sector" (1988/89),
39 Case W. Res. L. Rev. 663; and S.E. Permut, "Consumer Perceptions of Nonprofit Enterprise: A Comment on
Hansmann (1981), 90 Yale L.J. 1623.

See, for example, A. Ben-Ner, "Nonprofit Organizations: Why Do They Exist in Market Economics?", in Rose-
Ackerman, supra, note 1, ch. 6, at 94; D. Easley and M. O'Hara, "Optimal Nonprofit Firms", in ibid., at 85;
H.B. Hansmann, "The Role of Nonprofit Enterprise" (1980), 89 Yale L.J. 835; and R. Atkinson, "Altruism in
Nonprofit Organizations" (1990), 31 B.C.L. Rev. 501.

See, for example, H. Hansmann, "The Rationale for Exempting Nonprofit Organizations from Corporate Income
Taxation (1981), 91 Yale L.J. 54; B. Weisbrod, "Toward a Theory of the Voluntary Non-profit Sector in a Three^
Sector Economy", in Phelphs, supra, note 1, at 121; Clotfelter, "Tax-induced Distortions in the Voluntary Sector",
supra, note 2; W.R. Ginsberg, "The Real Property Tax Exemption of Nonprofit Organizations: A Perspective"

[229]

230

favourable ways and what can or should be required of charities in return. The third basic
question seeks to understand the internal functioning and accountability mechanisms of
organizations where self-interest founded on an ownership stake is absent. This question
looks at both the inherent appropriateness of various forms of organization and the role of
external agencies, chiefly government, in ensuring that the objectives of the organization are
fulfilled.

A good deal of this literature asks these questions about the nonprofit sector as a whole,
not just its charitable component, so as a preliminary matter it is useful to set out possible
taxonomies of the nonprofit sector. We do this in section 2 of this chapter. Section 2
concludes with the taxonomy of the sector which, in our view, best organizes it for regulatory
purposes. Sections 3 and 4 address only the first and second questions, respectively.

2. FOUR TAXONOMIES OF THE NONPROFIT SECTOR

(a) First Taxonomy: Locus of Control and Sources of Financing

One taxonomy classifies nonprofit organizations along two axes: the locus of control of
the organization (the people who provide the financing versus others), and the sources of
revenue (donations versus commercial transactions). This classification looks as follows:

Table I
Locus of Control

Source of Financing

Direct Control by Source
Financing

Control by
Intermediary

Donative

(1) Political clubs, ciiurch

(2) CARE, Arts museums.
Salvation Army

Commercial

(3) Cooperative daycare,
Canadian Automobile
Association, Consumers
Union

(4) National Geographic

Although this taxonomy of organizations is used extensively in the literature, the most
noteworthy feature of it for the purposes of the present study is that what the law calls
"charity" is not identified as an independent classification. Charities in the "legal" sense can
be found in all four boxes, but principally in boxes (1), (2), and (3). This deficiency, if
deficiency it is, is due to the fact that the classification scheme does not refer explicitly to
either of the two characteristics of "charity" at law, namely (1) doing good (2) by others, as

(1980), 53 Temp. L.Q. 291; M.P. Gergen, "The Case for a Charitable Contributions Deduction" (1988), 74 Va. L.
Rev. 1393; B.I. Bittker and G.K. Rahdert, "The Exemption of Nonprofit Organizations from Federal Income
Taxation" (1976), 85 Yale L.J. 299; M.G. Kelman, "Personal Deduction Revisited: Why They Fit Poorly in an
'Ideal' Income Tax and Why They Fit Worse in a Far from Ideal World" (1979), 31 Stan. L. Rev. 831, and W.D.
Andrews, "Personal Deductions in an Ideal Income Tax" (1972), 86 Harv. L. Rev. 309.

See, for example, I.M. Ellman, "Another Theory of Nonprofit Corporations" (1982), 80 Mich. L. Rev. 999; H.B.
Hansmann, "Reforming Nonprofit Corporation Law" (1981), 129 U. Pa. L. Rev. 497; and A.M. Sacks, "The Role
of Philanthropy: An Institutional View", in Law and Philanthropy: A Symposium (1960), 46 Va. L. Rev. at 516.

See H.B. Hansmann, "Economic Theories of Nonprofit Organization", in Powell, supra, note 1, at 27.

231

we have put it, or public benefit, as the Pemsel test puts it. Rather, the typology focuses on
the nonprofit motive as the identifying characteristic of this segment of society, then looks at
the two important variables of control and source of financing.

(b) Second Taxonomy: The First Taxonomy Plus Destination of Benefits

A second and more complex classification of nonprofits adds a third dimension to the
classification system just described. In addition to looking at the locus of control and the
source of income, this scheme looks at the destination of the benefits. In this scheme the
beneficiaries can be the people who control the organization, the people who finance it, or
neither, that is, strangers. In turn, control can be in three places: with the intermediaries and
the financers, as before, but now also the beneficiaries. It also means that the people who
provide the financing can be the beneficiaries, controllers, and third parties, through both
donations and commercial transactions. This scheme results in ten different types of nonprofit
organizations. Although this taxonomy does not explicitly take account of the type of good or
service provided, it does take account of who the beneficiaries actually are, and it is a more
useful scheme of classification for present purposes.

Table if

Identifying Relation
and Example

Controller

(C)

Source of Financing

(SF)

Beneficiary
(B)

[1. Intermediary

(by definition, neither
the Source of
Financing nor the
Beneficiary)

2. Source of Financing

3. Beneficiary]

[1. Beneficiary

2. Controller

3. Third Party

(by definition, neither
the Controller nor the
Beneficiary)]

[1. Controller

2. Source of
Financing

3. Stranger

(by definition,
neither the Controller
nor the Source of
Financing)]

See Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28
(H.L.).

See Atkinson, supra, note 3.

For an explanation of the codes used in this table, see infra. Table 111, Key.

232

(a) DONATIVES

I. c

SF 9t B
(e.g. CARE)

1. Intermediary {i.e.
Board of Directors
of CARE)

I. Third Party, by
Donation {i.e. public
donations)

1. Stranger (/.e. famine
relief overseas)

II. C

SF = B
fe.g., Public TV in U.S.;
public library)

1. Intermediary {i.e.
Board of Directors of
Public TV)

2. Beneficiary, by
Donation

{i.e. donors to Public
TV)

3. Source of Financing
{i.e. donors to
Public TV)

III. C

2. Source of Financing

2. Beneficiary by
donation

2. Controller

SF = B

(e.g.. Parish church,
where the congregation
has control over all
operations)

3. Beneficiary

{i.e., congregation)

3. Controller

{i.e., congregation)

3. Source of Financing
{i.e., congregation)

IV. C

SF ;^ B

{e.g. Parish-based
charity not for benefit
of parishioners)

2. Source of Financing
{i.e. congregation)

3. Controller by
Donation
{i.e. congregation)

1. Stranger {i.e.

famine relief verseas)

V. C

^ =
SF ^ B
{e.g. Foreign missions:
One parish in Canada
subsidizes another
overseas which is
otherwise autonomous)

3. Beneficiary {i.e.
subsidized parish)

1. Third Party, by
Donation {i.e. donor
parish)

2. Controller (/.e.
subsidized parish)

(b) COMMERCIALS

VI. c

SF ;^ B
(e.g. Oxfam Gift Shop;
UNICEF cards)

1 . Intermediary
{i.e. Board of
Directors)

1. Third Party, by
Purchase
{i.e. customers)

1 . Stranger

{i.e. profits go to
famine relief )

VII. C

SF = B

{e.g., Nadonal
Geographic; not-for-
profit nursing home;
private school; religious
publishing house; not-
for-profit shoe store)

1. Intermediary {i.e.
Board of Directors)

2. Beneficiary, by
Purchase {i.e.
customers, patients,
students, etc.)

3. Source of Financing
{i.e., profits poured
back into business
for benefit of
purchasers through
better service/product
at lower price)

VIII. C

SF = B
(e.g.. Cooperative
day care)

2. Source of Financing

3. Beneficiary {i.e.,
parents)

2. Beneficiary

3. Controller, by
Purchase {i.e.,
parents)

2. Controller

3. Source of Financing
(/.e., parents through
best possible product

at lowest possible price)

IX. C

SF ;t B
{e.g. Church bazaar)

2. Income source
{i.e. parishioners)

3. Controller, by
Purchase {i.e.
parishioners)

I . Stranger

{i.e. famine relief)

X. C

SF ^ B
{e.g. Church bookstore)

3. Beneficiary
{i.e. parish)

I. Third Party, by
Purchase {i.e. buyers)

2. Controller
{i.e. parish)

233

These ten types of nonprofit organizations can be further ordered for explanatory
purposes. One such division, in order to isolate and assess the source of income as a possible
explanatory factor, is into donatives and commercials. This exercise has been done already in
the table presented. Another division is to group them into factor-pair relations in order to
highlight the importance of these relations in defining the identity of the nonprofit. Although
the results are somewhat complex, this exercise is useful, especially in relation to donatives.

TABLE III

Descriptive Name for Type of
Organization Identified in the Relation

Identifying
Relation

Members of Set

1. Independent/Activist (direct control by
Source of Financing)

C = SF

C = B (III) Parish Church

C ?t B (IV) Parish-based Charity

2. Intermediated

(Controllers facilitate and direct the
charity of others)

C^SF

C = B (V) Foreign Missions

C 9t B, SF = B (II) U.S. Public TV

C ^ B, SF ;^ B (I) CARE

3. Mutual Benefit (Source of Financing
help only themselves)

SF = B

SF = C (III) Parish Church
SF ;^ C (II) US Public TV

4. Purely Altruistic (Source of Financing
helps only others)

SFitB

SF = C (IV) Parish-based Charity
SF 9i C, C = B (V) Foreign Missions
SF vt C, C ?t B (I) CARE

5. Self-determining (Beneficiaries run their
own show)

B = C

C = SF (III) Parish Church
C 9t SF (V) Foreign Missions

6. Paternalistic (Beneficiaries let others
decide for them)

B;^C

C = SF (IV) Parish-based Charity
C 9t SF, SF = B (II) US Public TV
C ;t SF, SF ^B (I) CARE

Key: B = Beneficiary

C = Controller
SF = Source of Financing (Donor)

The first observation to be made is that these descriptive names identify polar opposites.
Therefore, any particular organization may be located somewhere between the two poles.
CARE, for instance, although used here as an example of a purely altruistic, paternalistic, and
intermediated nonprofit, is not completely paternalistic since it consults with its beneficiaries
as to their needs.

The second observation is that, at least with respect to the donatives, there is an element
of altruism in all the forms of association identified, including the mutual benefits (Classes II
and III). When people make a donation to public television, they do so partially out of an
intention to benefit other viewers, both those who pay and those who do not, and partially out
of a sense of obligation to pay their fair share on account of the benefits received. A
parishioner who contributes to the collection plate usually contributes to support the church
in general, so that all persons, including herself, will continue to have an opportunity to
worship.

The third observation is in respect of the commercial organizations for which this last
exercise was not done. The logic of these organizations and their purposes is more complex.
Essentially, in all of the commercials there is a consumer-purchaser, the source of financing,
who transacts with the nonprofit for largely selfish reasons: she wants the product or service
the nonprofit has to offer. It is the analogue to this person in the donatives, the donor, who
had altruistic motives. These motives will be far less preponderant in the case of purchasers
from commercials (which is not to say they are not present) than they were for donors, even

234

those donors in mutual benefits (Classes II and III). Any altruistic motive there is in the case
of the commercials will be in respect of the profit made or forgone by the organization and/or
in the higher price paid by the purchaser. The profit made or forgone could go to (l)the
purchasers in the form of a rebate or reduced price (Class VII, National Geographic, and
Class VIII, cooperative day care), (2) the controllers in the form of profit (Classes VIII,
cooperative day care, and Class X, church bookstore), or (3) some third party by virtue of a
subsequent donation of profits (Class VI, Oxfam Gift Shop and IX, church bazaar). We will
look briefly at each in turn.

(1) In the first case. Classes VII and VIII, since the profit generally goes to the
purchasers in the form of reduced prices, there is little if any altruism in the
purchasers. In the case of Class VII the altruism is in the person or institutions —
the "owners" — who or which forgo the profit. In Class VIII, altruism is, arguably,
totally absent.

(2) Where the beneficiary is the controller, and not also the income source, that is.
Class X, the presence or absence of and location of the altruism depends on
whether the purchase price exceeds the amount the purchaser would otherwise be
willing to pay, and also on the ultimate destination of the benefit. If the first
amount is greater than zero, there is altruism in the purchaser, otherwise the
purchaser is getting fair value and donating nothing. A paradigm of Class X, the
church bookstore, is also the classic example of a charity running a related
business. In this paradigm the ultimate destination of the benefit is church
operations — a charity.

(3) Where the beneficiary is a stranger. Classes VI and IX, the altruism is possibly
shared by the purchaser and the controller. However, it is usually a great deal
more predominant in the motives of the controller on account of the fact that the
whole profit is donated to the benefit of strangers. Notice that these are the classic
cases of charities running unrelated businesses .

(d) Fourth Taxonomy: The Particular Nonprofit Purpose as the Primary
Consideration

Although the taxonomies discussed to this point are useful, the Commission thinks that
they do not provide an adequate classification of the nonprofit sector. We agree that the
source of financing, locus of control, and destination of benefits are three important variables.
What is missing, however, is a sufficiently explicit recognition of the sector's own self-
understanding. An appropriate classification should take account of the purposes for which
people organize nonprofits, and these purposes should play a dominant role in any scheme of
classification. The defect with the schemes of classification just discussed is that they collapse
all purposes into one — the nonprofit purpose — then use variables of lesser importance to
generate a classification. Only in the last exercise do we see some of these purposes
beginning to emerge.

We think that the law should be based primarily on a classification scheme that
identifies at least four, perhaps five, principal nonprofit purposes: religion, charity, politics,
mutual benefit, and perhaps a catch-all "other". Notice that this classification separates

235

religion from charity in the legal sense. Charity might be broken down further into social
welfare and philanthropy, as suggested above in chapter 6.

The classification scheme should also look at the destination of benefits and the sources
of donative financing, as do the others, but not at sources of commercial financing. Although
commercial financing raises important regulatory issues, in particular, those pertaining to the
related and unrelated businesses of charities, it need not figure in a scheme of classification of
entities in the sector, since it does not identify any independent accountability issues.

Finally, the scheme should take account of the array of possible accountability
mechanisms. "Accountability mechanisms" in our proposed scheme ftinctions in a way
similar to the "locus of control" criterion used in the above schemes, but, in our view, it is
much more precise in identifying what is truly of concern to the sector, its fmancers, and the
government, namely, the apparent lack of management accountability in the sector. The
original point of focusing on the nonprofit element of nonprofit entities in the sector was to
distinguish this sector from the profit-purpose sector where the profit motive of shareholders
and other owners constitutes a very strong incentive for such owners to ensure that the
managers of their enterprises maximize their profits. By contrast, in a nonprofit organization,
there is no one with a self-interest strong enough to induce them to establish accountability
mechanisms as effective as these. This deficiency is one of the traditional justifications for
the parens patriae jurisdiction of the Crown. People who identify control as a criterion, we
believe, are really concerned about accountability mechanisms: to whom and how is
management of a nonprofit entity accountable, and how effective are the accountability
techniques in controlling for disloyalty and inefficiency.

There are two main types of accountability mechanisms. One type focuses on the
different kinds of donative financing, the other on the sort of work or service performed by
the nonprofit entity. In the first, accountability arises out of the fact that some entities rely
heavily on donors for financial support and therefore may have to behave responsibly in
order to maintain that support. In the other, some accountability arises out of the responses of
consumers, donors, and others to the quality of the service offered by the nonprofit entity.
This sort of accountability will obviously be more apparent in the case of operating entities,
than in the case of funding agencies. Hence, the relevance of a distinction between operating
charities and foundations.

Our proposed scheme, then, identifies three main sets of variables: the particular
nonprofit purpose; the destination of the benefits; and accountability mechanisms, that is, the
sources of donative financing and the type of work performed (operational or non-
operational).

Ironically, control per se emerges in our preferred classification as a variable that identifies a completely different
issue than it does under the first taxonomy. Under the first taxonomy, if the financers control the charity, there is
thought to be less of a need for trust between the donor and the donee, and therefore, as will be seen more fiilly in
the next section, a lower risk of market failure. Under our taxonomy, control, to the extent that it is considered,
identifies those organizations where the charitable-purpose form is susceptible to a higher risk of corruption to
other purposes, namely, the private foundation, where the source of financing is restricted to a small number of
people who also make the investment decisions and allocate the income from the investments.

« I— «

2 M "3

K
o
H

CQ
<

C/3

o
o

1 w 5 g

o o o J=
CLh H ^ U

u
o

O
O

o
Q

o
H

e -c

fi^ o
H

4->

C/3

-a

f )

-o

c
o

^ ^^ O

(u o o o

e OS ^

«^

<i>

<1)

(1)

/-•■•s

c«

u
of
<

w
u

U
IB

w
u
<

o ^

y >

O <L)

<n; "§

C/3

^ ^

K o

<4->

•fM

■S

/«-N

/^^

Vta^

,£3

-a

■4->

•\

• ^

•l-H

<L>

-t-i

/-N

s«/

• «\

<L)

c/T

(L>

3
O

4-»

C
0

0
00

C/3

■*->

cd
>

^-1

/""v

,^— ^

>i:

■^-^

-a

^
0

4:3

C/5

■«-»

C/3

■♦-J

-J-T

.3
0

c
2

■1— >

"5b

(73

'5b

cd
■♦-»
C

.2^

'-4— >

(/3

C/5

0
00

C/3

.S
0

OX)

•3

■<— >

Id
C
0

■§

0
1

-D

^_^

,^-^

^-^

1— H

— ' (N

237

The Commission does not propose that this scheme of classification be fully reflected in
any new law. Our intention at this juncture is merely to provide the best possible taxonomy,
one which allows for a classification of organizations in the sector that uses all the important
elements. In our view, a proper taxonomy must begin by looking at the particular nonprofit
purpose of the organization. Then it should consider the destination of benefits and modes of
accountability.

It is not the case that all entities in the sector fit neatly into any one of the classifications
identified in this scheme. Many do, but many organizations have mixed purposes. Some
established for religious worship will also have a strong social welfare orientation (the
Salvation Army, for example). Some mutual benefits might also be charitable when
considered from the point of view of a non-member benefactor (a cooperative daycare, for
example). Many organizations will have an operational as well as a funding mission, and
some will be exclusively one or the other. There will be many entities that fall on the margins
of each of the possible classification systems one could develop using these criteria.
Nonetheless the broad categories are descriptive in an enlightening way, and they can be (and
have been) used for understanding normative issues and generating policy. From these
categories one can generate quite easily the current classifications used under the Income Tax
Act^ — private foundations, public foundations, and charitable organizations — a scheme
which the Commission believes is very sound and which ought to be used in provincial law
as well.

Our study, since it is concerned with the law governing charitable organizations,
focuses on religious and charitable-type organizations. In the following tables, we therefore
provide an indication of the various types of organizations in these classes. One can readily
see that accountability, the most important issue, varies in significance according to the type
of organization under consideration.

Table V
RELIGION

TYPE

NAME

EXAMPLE

congregational religion

small Protestant temple

ecclesiastical religion

Anglican Church of Canada

shrine

St. Joseph's Oratory, Montreal

private religious foundation

a parish trust

public religious foundation

Catholic Charities of the Archdiocese of Toronto
(in part only)

public religious foundation

? perhaps 0

R.S.C 1985, c. l(5thSupp.).

238

Table VI
CHARITABLE - SOCIAL WELFARE

TYPE

NAME

EXAMPLE

private charity

the poor and distress relief activities of a
parish

public charity

the poor and distress relief activities of
diocese

pubMc charity

the poor and distress relief activities of an
organization sponsored by donations from the
general public, such as the Salvation Army

government-sponsored charity

the poor and distress relief activities of an
organization sponsored by government
grants, such as a children's aid society

traditional charitable purpose trust

a trust established to run a shelter for the poor

private charitable foundation

family establishing a trust for benefit of poor

public charitable foundation

United Way, in part

public charitable foundation

a community foundation, in part

government charitable foundation

Trillium Foundation, in part

traditional charitable purpose trust

a trust established to make grants to poor
relief organizations

Table VII
CHARITABLE- PHILANTHROPIC

TYPE

NAME

EXAMPLE

private philanthropy

alumni association of a private school

public philanthropy

a museum with a large membership

public philanthropy

public research institute

government sponsored philanthropy

a museum

traditional philanthropic purpose trust

endowment to run a private museum

private philanthropic foundation

corporate foundation that funds art galleries

public philanthropic foundation

Canadian Conference on the Arts, in part

public philanthropic foundation

a community foundation, in part

government-sponsored philanthropic
foundation

Ontario Arts Council

traditional philanthropic purpose trust

a trust to establish a university scholarship

3. THEORIES EXPLAINING THE EXISTENCE OF THE THIRD SECTOR

(a) Introduction

There are two main schools of thought as to why nonprofits exist at all. The first is
economic in orientation. It suggests that nonprofits are either a response to problems of
"market failure" or a response to the inadequacy of government solutions to the problems of
supplymg "public goods" or goods with high "positive externalities". The second approach
attempts to understand the nonprofit sector as a response to certain political problems
commonly faced by liberal-democratic polities.

239
The economic approach has been developed extensively since at least the early 1970s

when the Filer Commission commenced its massive study of the charity sector, and the
literature, as a consequence, is large and sophisticated. It is partly as a reaction to the
domination of the subject by economists that more politically oriented theories were
developed in the mid-1980s. The latter, although possibly of greater intuitive appeal, are quite
unable to match the economic theories in precision and conceptual complexity. We present
only a brief account of each, in order to draw out for our purposes what is plausible or helpful
for the purposes of this study.

(b) Economic Theories

Market failure theories are theories about why the free-play of market forces does not,
in all circumstances, result in the most efficient allocation of social resources and, therefore,
why mstitutions other than the market, like charity, might be required to achieve this goal.
The perspective is one which generally expects the market to be the best mechanism for
maximizing the collective welfare of a community, as defined by the free choices people
would like to make. There are a number of very standard instances of market failure that have
been developed since the concept of market failure was first invented in the 1940s, only three
of which are relevant for present purposes: "positive externalities" and "public goods", both
of which will be treated below in (i), and "market imperfections", which will be treated below
in (ii), (iii), and (iv).

(i) The "Public Good" Argument

A public good is a good, like national defence (the classic public good) or a public park,
that displays two features: (1) once it is provided for one person, there is no simple or cost-
effective way to exclude another from consuming it (the "non-excludability" condition); and
(2) it costs no more to produce for many persons than it does for one (the "non-rivalry"
condition). Public goods are generally not provided by a market system of production and
distribution, since the rationally self-interested person has no incentive to pay for that which,
without his paying, will either be provided to him anyway, or, if it is not provided to him, will
not be provided to anyone, and its having failed to be provided will not be the direct result of
his not paying.

"Positive externality" is a concept close in meaning to "public good". The distinction is
that a commodity that has positive externalities, in addition to showing some
non-excludability and non-rivalry conditions, will also have properties that make it
"appropriable". An example might be education: education is certainly of private benefit to
its recipient, and thus appropriable, but it is also a benefit to society at large to have educated
citizens. Like public goods, goods with high positive externalities may not be provided in
efficient quantities in a society of rational utility maximizers, since although persons want

U.S., Commission on Private Philanthropy and Public Needs, Giving in America: Toward a Stronger Voluntary
Sector (Washington: D.C.: 1975) (Chair: J.H. Filer) (hereinafter referred to as the ''Filer Commission Report'').
For a discussion of the work of the Filer Commission, see supra, ch. 2.

240

them, none has sufficient incentive to pay as much as is needed to provide the services in the
collectively desired quantity.

One way to solve the market failure problem posed by the public good and positive
externalities issues is to have government provide the relevant good and use its taxing power
to eliminate the problem of "freeriders" (the persons who will not pay their fair share).
Another might be charity. Some of the goods and services provided by charities are public
goods or goods with high positive externalities. This fact has led some economists to suggest
that the existence of charities might somehow be a solution to the freerider problems, at least
in some settings. It has been suggested, for example, that religion, public broadcasting, health
care, and the fruits of scientific and medical research are examples of public goods.
Coincidentally it is noticed that they are also provided in large quantities by charitable
organizations. No theorist, however, has attempted to show that charities are better situated
than the market to solve the freerider problem; most theorists would concede that particular
problem remains unsolved. Generally, rather, the theories go on to explain how charities are
better able than governments to provide some public goods, or, alternatively, they go on to
use the public good argument as part of a theory that explains the tax deduction or the tax
credit. We treat the latter below in section 4 of this chapter. As to the former, the leading
theory argues that charity is a response to a residual unsatisfied demand of some voters (the
donors) in society who cannot get the government to provide as much or as high a quality of
certain public goods as they would like. Charities, on this theory, supplement the
government's provision of public goods, perhaps also offering certain cost advantages over
government, such as being less bureaucratized, more flexible, or more imaginative.

There are two significant drawbacks to this particular application of the market failure
explanation. First, to the extent that it is successful, it is only partially so. Although it is true
that some charities are involved in the provision of public goods or goods with high positive
externalities, a large number, perhaps the vast majority, are involved in the provision of
purely private goods. Interestingly, the initial plausibility of these theories may arise from an
equivocation in the use of the word "public". The word "public" in the economist's meaning
and the charity lawyer's meaning has two distinct referents. In the first, it refers to the notions
of non-excludability and non-rivalry; in the second, it is usually taken to refer to the
requirement that a benefit be provided to a stranger. The second problem, perhaps related, is
that this application of the market failure theory appears to miss the point that all charity,
even philanthropy, but especially eleemosynary charity, has more to do with the
redistribution of wealth, than the allocation of resources.

Still, there is an element of truth in the explanation.

(ii) The "Contract Failure" and "Agency Cost" Arguments

Contract failure theories also aim to explain why nonprofit organizations exist. They
focus on the fact that the type of organization under consideration is prohibited by definition
from distributing any profit it might make to any person analogous to an owner. Contract
failure theories rely on a different form of market failure referred to as "market
imperfections". "Market imperfections" are real-world deviations from the ideal of the

241

perfect market. The "market ideal", in the words of the leading proponent of this type of
theory, as it relates to nonprofits, suggests that under the right conditions, "profit maximizing
firms will supply goods and services at the quantity and price that represent the maximum
social efficiency".*^ He goes on to describe three of the necessary conditions, as follows: ''^

Among the most important of these conditions is that consumers can, without undue cost or
effort, (a) make a reasonably accurate comparison of the products and prices of different firms
before any purchase is made, (b) reach a clear agreement with the chosen firm concerning the
goods or services that the firm is to provide and the price to be paid and (c) determine
subsequently whether the firm complied with the resulting agreement and obtain redress if it did
not.

The fact that these conditions do not always exist is utilized in this theory to explain why
nonprofit organizations might come into existence in a market economy and supplement the
work of for-profit enterprises. It is a "contract failure" theory, therefore, because it is the
failure of the possibility of contracting with a for-profit entity that drives the consumer to the
nonprofit.

The general argument works as follows. Certain products or services present consumers
with considerable difficulties in appraising their worth. A for-profit firm producing such a
product or service has both an incentive and an opportunity to skimp on quality or quantity. A
nonprofit firm, by contrast, is prohibited by definition fi*om reaping any gain due to this kind
of skimping, since any profit it might derive fi^om cheating is necessarily ploughed back into
the entity, and must ultimately end up in its product or service. Therefore, there generally is
no incentive to skimp in nonprofits. By the same token, however, there is also a reduced
incentive in the nonprofit to operate efficiently since there is no owner to reap the benefits of
an efficient operation. The contract failure theory suggests, as a general proposition, that
nonprofits would be favoured when benefits due to the lack of an incentive or opportunity to
skimp outweigh the costs due to the lack of incentive to operate efficiently.

This general idea, it has been suggested, has three applications. First, it is thought to
apply to the case of donative nonprofits, the best example, perhaps, being Class I, CARE.
The theory suggests that it makes sense to think of the donor to CARE as a consumer of, for
instance, famine-relief-for-strangers-overseas. A for-profit firm providing this product has a
strong incentive and perfect opportunity to skimp, since the purchaser has no way of
checking the quality or quantity of famine relief purchased. This first instance of the theory's
application is characterized by the separation of the purchaser fi*om the recipients of the
benefit.

Hansmann, supra, note 3, at 842.
"* /Z?/^., at 843.

See supra. Table II.

242

The second application arises where the product or service provided is a public good or
a good with high positive externalities, such as public television in the United States. Public
television relies on donors to support it. If it were operated by a for-profit firm, donors would
be concerned that some of their dollars go into the pockets of the owners, and not to support
additional broadcasting. With the same service offered by a nonprofit, donors would have
better assurance that each dollar contributed actually increases the quantity or quality of the
broadcasting provided. What characterizes this application is the public good quality of the
thing purchased, together with the difficulty of discerning whether the contributions of
donors actually produce an increment of equal magnitude in the product or service purchased.

A third application arises in the case of complex goods, such as the health care provided
by a hospital. This example could be Class I or Class VII, either a donor contributing to a
charity hospital or patients themselves purchasing health care at a nonprofit hospital. Other
examples are education and day-care services. What characterizes these examples is the fact
that the product or service provided is such that the donor or purchaser cannot, at a
reasonable cost, monitor its quality effectively. To take the education example, parents might
feel more comfortable sending their children to nonprofit private schools because they have
better assurance that the quality of education provided will not suffer on account of the profit
motive of the school's owners.

The contract failure theory, in all three of its applications, deals with the problems of
trusts in settings where market competition would not necessarily work well to constrain the
profit motive of the people who provide the good or service. There are a number of obvious
difficulties with this theory, however. Insofar as it applies to charity, the main problem is that
it seems to misunderstand the nature of charity. It takes the relevant identifying characteristic
of charity to be its nonprofit nature — as opposed to its altruistic nature — and seeks to
understand why some goods are better provided by nonprofit organizations. In so doing, it
appears to misunderstand all charitable giving as just another type of consumption
preference. It thus collapses altruism into self-interest. To take the example of CARE, it may
be just wrong to think of the donor to CARE as a purchaser of a commodity, since a donation
to CARE is an altruistic act. The problem with the theory lies perhaps in its initial assumption
that all non-market behaviour needs to be explained exclusively in terms of market failure. It
is just as well to ask why all market behaviour is not altruistic.

Another problem with this theory is that, even on its own terms, it does not explain very
much since, even when there is a non-distribution constraint, all the decision-makers in the
institutions and in the examples could skimp just as easily by taking higher salaries or
otherwise inflating the costs of administration. Although this point is initially acknowledged
by the theory, it is hard to see how it is overcome in any of the examples.

(iii) The "Donor Control" Argument

Donor control theories are a variation on the contract failure theory. They aim to
understand why donors might organize themselves such that they directly control the
distribution of their generosity to the beneficiaries. This sort of theory explains why the
cooperative day-care centre, for example, arises: parents who belong to a cooperative day-

243

care have better control over the quality of care provided to their children than they might
have had from a privately operated day-care. However, cooperative day-cares are commercial
enterprises (the parents pay for a service), and the question here is why control might be a
feature that is also attractive to donors. The explanations focus on a number of situations, the
only relevant ones for our purposes being the cases of contract failure, mentioned above —
separation, poor monitoring, and complex goods. This theory uses these contract failure
situations to explain why donors might want to take charge.

The theory has some plausibility, but there are often more obvious reasons why donors
would want to take charge besides the fact that they do not feel they can trust their agents. In
some cases (private foundations, for example) it is not the actual delivery or quality of the
altruistic service provided that causes donors concern; they simply want the power to choose
the specific beneficiary of their altruism. In other cases, donors take charge because they
want to give more of themselves — their time, energy, and spirit — ^than just their money.

(iv) The "Donative Financing" Argument

The last set of explanatory theories asks why we have organizations to which people
donate then* wealth. The economists have pointed to several economic phenomena plausibly
present m the act of donating. Some of the more informative examples include the following:

(1) Donations by the wealthy to the arts could be explained as a form of voluntary
price discrimination, in which the rich single themselves out to pay more for a
product, that would not be provided at all if they were not willing to pay.

(2) These donations, alternatively, might also be understood as purchases of status.

(3) Those who have done well financially in life might feel generous towards their
alma mater. They might regard their donations to it as repayment of an implicit
loan received fi^om it when they were students and paid less in tuition than their
education (as events in their lives confirm) was worth.

(4) The wealthy might contribute to the capital ftinding of a hospital, to guarantee that
there are enough hospital services available when they require them in the future.

Political theories explaining the existence of charity attempt to show why what is done
by charity is not done by government. There is some affinity between these theories and the
public good theories, since the problems are more or less the same, except that the political
theories will not have to rely exclusively on a "public goods" type of argument, since they are

See, for example, J. Douglas, Why Charity? The Case for a Third Sector (Beverley Hills, Ca.: Russell Sage
Publications, 1983).

244

not, by definition or inclination, market failure theories. Yet there is almost as much
confusion at the conceptual level in asking the "why not the government" question as there is
in asking the "why not the market" question. The reason can be succinctly stated. Charity
generally considered (not the specific benefits provided by charitable acts) is a public good
which cannot by definition be provided by government. If the freerider wanted a high level of
charity in his society, but did not want to pay for it by giving to charity, he could not be
excluded from "consuming" whatever level of charity was provided by others, and his
enjoyment of that level of charity would not affect the enjoyment of others. Yet if the
freerider were forced to contribute by government, that is, if he were taxed, his contribution
would not be charity. Nevertheless, it does make sense to ask how the provision of goods and
services by charity supplements the provision of goods and services provided by government
in a liberal democracy, since both agencies are engaged in essentially redistributive acts.

There are a number of arguments worth canvassing. These are all mainly based on the
fact that government should not and cannot be the sole agency of the maximization of social
welfare in a liberal democracy. A political system of liberal property rights guarantees, at
least, the logical possibility of property owners donating their property to charitable causes.
However, the argument goes beyond proving the logical possibility of charity in a liberal
democracy. Governments are constrained by norms of universality and equality to act
categorically. In large societies the delivery of social welfare benefits or subsidies for the arts,
education, or health care and the like, requires the bureaucratization of decision-making so
that all discretionary distributions are in compliance with these fundamental norms. These
constraints mean that governments cannot be creative, flexible, or particularistic in the
provision of social welfare. In a society with a heterogenous population with widely varying
values, the government's performance in the provision of social welfare would be decidedly
lackluster from the point of view of the vast majority of its citizens. The voluntary provision
of the goods would permit more pluralism (less dictatorship) in the determination of public
values, and the ways in which publicly valued things, like education, are provided. Moreover,
this alternative method of provision would permit more daring innovations or
experimentations than governments might be willing to engage in, since widespread
disagreement about the provision of some things may be based only on whether it is
worthwhile subsidizing it out of the consolidated revenue fund, as opposed to whether the
thing itself is of public benefit.

(d) Conclusion

Although there is an element of truth in each of the economic theories canvassed so far
about the concept of "charity" from the point of view of a realist, the perspective of all of
them is fundamentally distorted by the initial assumption that the existence of the sector has
to be explained as a case of market failure. More importantly, the relative failure of these
theories to explain the existence of the sector, considered even on their own terms, serves
only to enhance the realist's position. Be that as it may, nothing in the economic theories
discussed so far suggests a radical departure from the current regulatory objectives.

The political theories offer a better understanding of the sector. Their insight as to the
overall value of the sector in a liberal-democratic polity is instructive and valid, and, at a very

245

general level, should serve to inform the sector's public regulation. It suggests a regime of
regulation which is non-confrontational and as inobtrusive as possible.

4. THEORIES EXPLAINING TAX PRIVILEGES

(a) The Tax Exemption

Charities share the tax-exempt status with all nonprofits. Therefore most of the theories
explaining the tax-exempt status do so for nonprofits as a group. There are at least four
possible classes of income received by charities, any one of which or all of which might be
made subject to income tax. The first is gift income, the second is passive investment income,
the third is related business income, and the fourth is unrelated business income. It is the
exemption of at least the first three types of income that needs explanation. Most theorists
concede that the fourth should be taxed.

One theory of the tax exemption, based largely on the assumption that gift income is the
predominant kind of income, is either that it is inappropriate to treat this kind of income in
the same way as, for example, the sales revenue of a commercial enterprise, or that even if we
did treat it the same way, in an exclusively charitable organization that income would always
be offset by the "costs" due to expenditures on charitable work, since in an exclusively
charitable organization all the resources are devoted, in the end, to charity. A complementary
argument suggests that even if this income definition problem could be solved and a net
income identified for tax purposes, it would be difficult to establish the proper rate of
taxation, given that different charities benefit different classes of taxpayers, and many of
them benefit only the poor. If the rate is a ftanction of the benefit received from the income,
that benefit would vary greatly from charity to charity, depending on who the beneficiaries of
the charity were.

A second theory of the exemption regards it as a subsidy by the state to nonprofits. This
theory assumes, more realistically, a wider variety of income types in the nonprofits, and
suggests that the state withdraws from taxing nonprofits in order to subsidize their

capitalization. This subsidy is required because without it the most efficient institutional
answer to the contract failure problems or the public goods problem would otherwise be
underfmanced, and we would end up not having as many of them as we would like. The
reason for this, in turn, is that nonprofits, by definition, are precluded from raising their
financing m capital markets. Thus, the state, by not taxing the income of nonprofits, allows
them to pour their profits back into their enterprises, thereby financing themselves.

A third theory also regards the exemption as a subsidy, but one justifiable on the basis
of the sort of benefits provided to society by charities. On this view, the state chooses to treat
favourably — perhaps for the reasons suggested above in the section on political theories of
the nonprofits — certain kinds of enterprises by not taxing their net income. The tax savings is

Many of these theories exploit the concept of a tax expenditure first developed in S.S. Surrey, Pathways to Tax
Reform: The Concept of the Tax Expenditures (Cambridge, Mass.: Harvard University Press, 1973).

246

the subsidy. The difficulty with this theory is that it argues in favour of a similar subsidy to
the for-profit suppliers of the same public benefits, and it offers no reason why the subsidy is
tied to a percentage of net income.

A fourth and final theory is based on the premise that an income tax is designed to be a
tax on the capacity of the taxable unit to provide or consume for itself Therefore any taxable
unit which provided exclusively for the benefit of others — a charity — would be completely
tax exempt no matter what its source of income. Also, any partial provision for the benefit of
others would be deductible from income. The tax exemption and tax deduction are based on
the same rationale, on this view, and that rationale is based on a theory of what an income tax
system ought to be designed to achieve. Further, since this theory explains the tax-exempt
status of only charitable nonprofits, another theory is, or other theories are, required to
explain the tax-exempt status of non-charitable nonprofits, such as private clubs and
professional associations.

(b) The Tax Deduction or Tax Credit

There are a number of theories that attempt to explain or justify the favourable
treatment provided by the tax system to donations to charity. We briefly mention two of these
theories.

The one favoured by economists is premised on the assumption that charities provide
public goods. It regards the deduction or the tax credit as a government subsidy to the charity,

by conceiving of the tax savings to the donor as a tax expenditure of the government. To the
extent that the government forgoes revenue on account of this treatment, all taxpayers are
required to pay. Thus the argument becomes one of using the tax system to make freeriders
pay a part of the cost of providing public goods. There are several variations on this theme,
not worth pursuing in detail here.

This theory is of doubtful plausibility for two reasons. First, charities do not provide
public goods, or goods with high positive externalities, to an extent sufficient to make the
provision of this type of good a characteristic feature of charities for the purposes of the
income tax system. Second, the bias of tax expenditure theories may be false: tax expenditure
theories assume that the whole of an individual's incomQ prima facie ought to be subject to
taxation and, therefore that any exemptions or credits require independent justification. Why
should we assume that? Third, the theory is not clear on details: if the theory were true,
instead of a tax expenditure subsidy, governments would do a better job using matching
grants, since the amount of the subsidy in the form of a deduction is an arbitrary function of

In 1863 Gladstone, as Chancellor of the Exchequer, attacked all tax-exempt status of charities in a speech in
Parliament as a concealed and unregulated tax subsidy, in perpetuity, for large well -endowed charities: see
N. Brooks, Chanties: The Legal Framework (Ottawa: Secretary of State, 1983) [unpublished], citing D. Owen,
English Philanthropy 1660-1960 (Cambridge: Belknap Press, 1964), at 330-35. On tax expenditure theories
generally, see R.B. Goode, The Individual IncomeTax, rev. ed. (Washington: Brookings Institution, 1976), and
R.S. Smith, Tax Expenditures: An Examination of Tax Incentives and Tax Preferences in the Canadian Federal
Income Tax System (Toronto: Canadian Tax Foundation, 1979).

247

the taxpayer's marginal rate, and the costs of the subsidy are allocated arbitrarily, not just to
the freeriders. On account of this third reason, the proponents of this theory are generally in
favour of tax credits, since a tax credit, at least, entails that the rate of subsidy is not an
arbitrary function of a taxpayer's marginal rate; they prefer tax credits also because the rich,
who have higher marginal rates, do not "paradoxically" receive better treatment than the
poor, who have lower marginal rates.

A second theory of the tax deduction and/or credit privilege regards the income tax
system as aiming to tax only income that is disposable for personal consumption. Thus gifts
to charity are treated favourably because they result in fewer resources in the donor for
private use. On this theory, the current twenty percent of income limit in the Income Tax Act,
would not be straightforwardly justifiable. This view argues in favour of a deduction over a
credit.

The economic perspectives on the tax privileges extended to charities is only slightly
more successful than those deployed to explain its existence. They do suggest a healthy
skepticism towards the sector, since the revenue cost to government of the subsidies is
significant. To the extent that one accepts the second or third explanation in (a) above, one
major preoccupation of government ought to be to ensure that the subsidy is properly
targeted. This suggests, in turn, scope for differentiation among the various types of
nonprofits and the various types of charities, as well as an adequtely funded public
administration with an effective policing power.

The arguments for and against the deduction versus the credit are inconclusive.

On the tax credit versus tax deduction debate in Canada, see W.E. Thirsk, "Giving Credit Where Credit is Due:
the Choice Between Credits and Deductions Under the Individual Income Tax in Canada" (1980), 28 Can. Tax J.
325, and C. Juneau, "Some Major Issues Affecting Evaluation of the Charities Tax Incentives" (1990), 9
Philanthrop. (No. 4)at3.

PART III THE INCOME TAX ACT: REFORMING THE
PRIMARY REGIME OF SUPERVISION

CHAPTER 10

SUPERVISION OF CHARITIES
BY REVENUE CANADA: A
BRIEF HISTORY

1. INTRODUCTION

In Canada today the most extensive regime of supervision and regulation of charitable
organizations is at the federal level. The provisions of the Income Tax Act that deal with the
deductibility of charitable donations and the tax-exempt status of charitable organizations^
also establish a comprehensive regime of supervision and regulation. The central feature of
this regime is the requirement that all organizations clauning these tax privileges obtain a
registered status. With this status comes an annual disclosure requirement and certain
restrictions on the financial and operational aspects of the organization.

The legislation that instituted the registration requirement came into force in January
1967. At that time, there were a number of other legislative regimes governing charitable
organizations in Canada. Some of these, such as the Ontario legislation that is examined in

R.S.C. 1985, c. 1 (5th Supp.).

Ibid., s. 110.1, as am. by S.C. 1994, c. 7, Sch. II, s. 79; Sch. VIII, s. 46(1) (deduction for corporations) and s.
1 18.1, as am. by S.C. 1994, c. 7, Sch. II, s. 88; Sch. VIII, s. 53(1); 1995, c. 3, s. 34(1); c. 38, s. 3 (tax credit for
individual tax payers).

Ibid.,s. 149(1)(/).

In order to be eligible for the deduction or credit under ss. 1 10.1 and 1 18.1 of the Income Tax Act, ibid., donations
must have been made to registered charities. Under s. 149(l)(e) and (/), a charitable organization must be
registered as such in order to qualify for the exemption.

Ibid, s. 149.1(14).

Ibid,s. 149.1.

An Act to amend the Income Tax Act, S.C. 1966-67, c. 47, ss. 3 and 15, amending Income Tax Act, R.S.C. 1952, c.
148, ss. 27 and 125 respectively.

In particular, see Charities Accounting Act, R.S.O. 1990, c. CIO and Charitable Gifts Act, R.S.O. 1990, c. C.8.

[249]

250

Part IV of this report and the antecedents to the income tax provisions themselves, originated
in the early 1900s. There were also statutory models, some of which dealt with tax matters, in
existence in other jurisdictions. By Canadian standards, however, the 1967 tax reform
marked a watershed in the legal regulation of charitable organizations. It represented the first
time that a realistic effort was made to regulate the sector in a systematic and comprehensive
way. What is perhaps unusual about this achievement is that it occurred in the Income Tax
Act. Consequently the federal regime of regulation has always been, in the eyes of many,
somewhat of a disappointment.

There are several reasons for this sense of failure. In part, it is due to the regime's
preoccupation with fiscal matters and tax incentives. Given its domination of Canadian
charity law, the tax regime has raised these matters to a position of undue national
prominence. In part, the disappointment is due to false expectations: it is unrealistic to expect
a great deal from a legislative scheme whose underlying logic — to promote charity by
offering fiscal incentives (on one interpretation) — is self-contradictory. A final source of
disappointment is the antagonistic character of the principal objective of the regulatory
scheme. As will be seen shortly, the main effort of the federal government in this domain,
especially in recent years, has been to establish more effective ways to police a costly tax
expenditure. This feature of the regime runs contrary to the natural sympathies of most
people involved in the sector, including the regulators and politicians who are obliged to
administer, enforce, and publicly support it. These individuals will often remark that the
regime is too intrusive or too cumbersome for social organizations run by volunteers in their
spare time.

Whatever the shortcomings of the federal regime of regulation, a knowledge of its
workings and a familiarity with its history is of some value in the task of designing the
appropriate reform of the law of Ontario, for the following three reasons:

First, a good deal of what is in the realm of conceivable legislation and administrative
practice affecting charitable organizations has already been implemented at the federal level
or, nearly as helpftil for present purposes, abandoned by the federal authorities after extensive
consultation with the sector. This wealth of government experience is a useftil resource in
defining the appropriate law at the provincial level.

Second, as emphasized in chapter 1 of this report, any comprehensive reform of the
provincial law of charitable organizations must take account of the total regulatory burden

For example, see Charities Act, 1960, 8 & 9 Eliz. 2, c. 58 (U.K.).

There are many interpretations of the charitable donation deduction and credit. Prominent among these is that of
the tax expenditure theorists. See supra, ch. 9

Revenue Canada's very lax enforcement of the annual reporting requirement is a prime example of the ambivalent
posture of the public administration. See the criticisms set out by the Auditor General in Canada, Report of the
Auditor General of Canada to the House of Commons: Main Points, (Ottawa: Department of National Revenue,
Taxation and Finance, 1991), at 258.

251

imposed on the sector. Ideally, that burden should be minimized as much as possible, either
through inter-governmental cooperation or, where possible, through the integration of the
various regulatory regimes. To do this effectively requires an understanding of the current
federal regime.

Third, the federal regime is, in a sense, the law of charity in Canada. Perhaps this is an
exaggeration, but it is important to emphasize at the outset that the sector's experience of law
and government has been largely determined by the sector's relationships with finance and
revenue officials at the federal level. This experience, which has not been wholly positive,
constitutes the political context in which any proposed provincial reform must take place.

In sections 2 and 3 of this chapter, an examination is made of the history of the federal
legislative provisions, with special emphasis on the period after the 1967 reform. Chapter 1 1
examines the current Revenue Canada regime in some detail, as well as aspects of the income
tax treatment of charitable donations and charitable organizations in the United States of
America and the United Kingdom. Chapter 12 concludes the study of the tax regime with
suggestions for a reform of the federal tax laws that would complement our recommendations
for the reform of the law of Ontario.

The first part of this chapter examines the history of the federal tax laws prior to 1967,
under the following headings: (a) the tax treatment of charitable donations; (b) the tax
treatment of charitable organizations; (c) the restrictions placed on charitable organizations
by the federal tax regime; and (d) conclusions. The second part describes the federal
experience in this domain from the 1967 reform to the 1983 reform, in chronological order.

2. THE PRE-1967 FEDERAL TAX REGIME*^

(a) The Tax Treatment of Charitable Donations

(i) World War I

The origins of the general deduction for charitable donations go back some sixteen
years prior to its actual introduction in 1930. The very first income tax Act provided for an
exemption and deduction, without limit, for "amounts paid by the taxpayer during the year to
the Patriotic and Red Cross Funds, and other patriotic and war fiands approved by the
Minister".

13
14

A very helpful source of information on the legislative history on the federal tax measures in R. Watson, "Charity
and the Canadian Income Tax: An Erratic History" (1985), 5 Philanthrop. (No. 1)3. See, also, S. A. Martin,
Financing Humanistic Service (Toronto: McClelland & Stewart, 1975) at 39-44, 194-220.

The Income War Tax Act, 1917, 7-8 Geo 5, c. 28 (Can.).

lbid,s.3{\)(c).

252

It appears from the parliamentary debate on this measure that the government's
intention was to use the deduction as a way of diminishing the need for more direct and
substantial government support of the charitable objects identified in the legislation, while at
the same time encouraging the enlistment of volunteers for the war effort by assuring them
that their families would be looked after in their absence or in the event of their death. The
government's decision to deploy this deduction in this way thus anticipated the notions of the
tax expenditure theory by some fifty years. From that perspective, it is also interesting to
observe that, given the implementation of progressive tax rates in the 1917 legislation,'^ the
policy encouraged and rewarded rich donors more than poor donors.

The Canadian Patriotic Fund, the principal beneficiary of the deduction, had been in
existence since 1914. It was established by a special Act of incorporation. The Canadian

Patriotic Fund Act, 1914, and its members included the Governor General, the Lieutenant
Governors General, and leading government and opposition figures of the day. Its main

1 Q

source of ftinds, in the order of eighty-five percent, was public donations. Its objects were
charitable in the traditional sense, and were set out in the incorporating statute's preamble

WHEREAS it is desirable to provide a fund for the assistance, in case of need, of the wives,
children and dependent relatives of officers and men, residents of Canada, who, during the
present war, may be on active service with the naval and military forces of the British Empire
and Great Britain's allies; and whereas money is now being raised for the said purpose, and it is
desirable to provide for the administration of same.

One source reports on the success of the Fund as follows. From the date of its

incorporation in 1914 to its dissolution in 1937, over $51 million was raised. Most of this
money — over $45 million — was raised during the war years. In its busiest year, 1916, the
Fund provided relief to over 54,000 Canadian families and distributed over $900,000 a
month. The Fund was dissolved in 1937 with "regret," due "to the exhaustion of its

15
16
17
18

19
20
21

Ibid., s. 4.

Watson, supra, note 12, at 5. Watson notes that the origins of the ftind went back to the Boer War.

5 Geo. 5, c. 8 (Can.).

Watson, supra, note 12, at 5. The method chosen by the govemment to support the fund was not without its
detractors. A.K. Maclean, M.P., suggested in a speech in Parliament, that it was unwise "to rely solely upon
voluntary contributions" and that it was worthy of "serious consideration whether or not some special tax should
be imposed directly upon the people to sustain the Patriotic Fund": Can. H. qfC. Deb., August 3, 1917, at 4125-
26.

The Canadian Patriotic Fund Act, 1914, supra, note 17, preamble [emphasis added].

See Watson, supra, note 12.

See Can. H. ofC Deb., March 27, 1937.

253

resources", even though there were "still aged dependants and others in dire straights" in need
of assistance.

A number of other organizations besides the Patriotic Fund and the Red Cross were
approved by the Minister for the purposes of the war fund deduction. These included the
Manitoba Patriotic Fund, the British Red Cross, and the Y.M.C.A., as well as a number of
charities registered under complementary legislation. The War Charities Act, 191?}^

(ii) 1920

Legislation repealing the war fund deduction was enacted in 1920. The parliamentary
debate on the occasion of its repeal is enlightening, since it is the only occasion on which
Parliament debated the justifiability or advisability of a general charitable donation
deduction.

The debate on the government's motion to repeal the war charities deduction
commenced with a suggestion by Hume Blake Cronyn, M.P. for London North, that
Parliament mstead adopt a provision permitting a deduction for all donations to "charitable
funds". Cronyn 's formal proposal read as follows:

Subject to such regulations as may be made by the minister, amounts paid by the taxpayer during
the year to corporations organized and operated exclusively for hospitals, orphan asylums, and
other charitable purposes, no part of the net earnings of which enures to the benefit of any private
stockholder or individual to an amount not in excess of ten percent of the taxpayer's net
income....

Those in favour of extending the deduction cited the precedent of the existing American
legislation and argued for the need to do "something helpful" for "the charitable institutions
of this country".

Those against the proposal were more numerous and more vocal. They argued that such
a deduction would mainly benefit the rich, even though it was acknowledged in debate that
people with lower incomes gave a greater percentage of their incomes to charity. They

23
24
25
26

These were the words of W.F. Nickle, Honorary Secretary of the Fund, in Canadian Patriotic Fund. A Record of
its Activities from 1929 to 1937 and covering the period from August 1914 to March 27, 1937. Fourth and Final
Report, at 6, quoted in Watson, supra, note 12, at 6.

7-8 Geo. 5, c. 38 (Can.).

An Act to amend The Income War Tax Act, 191 7, 1920, 10-1 1 Geo 5, c. 49 (Can.), s. 5.

Can. H. ofC Deb., June 9, 1920, at 331 1.

W. S. Fielding, M.P. for Shelbume and Queens, ibid., at 33 13. The American provision provided for a deduction
of up to 15% of net income for gifts made to "corporations organized and operated exclusively for religious,
charitable, scientific, or educational purposes": Can. H. of C Deb., June 8, 1920, at 3244, and Watson, supra,
note 12, at 7.

254

contended as well that the institutions requiring such public support should be supported
directly from tax revenues and not through an indirect subsidy whose allocation would be
controlled by donors, and that the deduction would result in considerably lower tax revenues

at a time when the government was in difficult financial circumstances. It was also argued
that "[c]harity, to be worthy of commendation either in this world or in the other, ought to

hurt the person giving it". Parliament's negative reaction to the proposal was also moved by
the absence of a need to recruit volunteers for a war effort. In the end, Cronyn's motion in
favour of a general charitable deduction was defeated, and the deduction for donations to war
funds was simply repealed.

(iii) 1930

The first general deduction for charitable donations in Canada, available to corporate
and individual taxpayers alike, was enacted in 1930. The government of the day was looking
for ways to respond to the economic and social problems posed by the Depression. According
to some observers, it was inspired by the American deduction which had been in place since
1917. In the parliamentary debate on the adoption of the measure, it was suggested by the
Hon. Richard Bedford Bennett, leader of the opposition at the time, that the tax deductibility
of donations would encourage wealthy taxpayers to contribute to "useful, philanthropic and

3 1

religious purposes". In support of the government's proposal, he alluded to the tithing

27
28
29

J. W. Edwards, M.P. for Frontenac, supra, note 25, at 33 12.

M. Clark, M.P. for Red Deer, ibid.

A similar debate was taking place in the United Kingdom at the same time, as a result of the appointment in 1918
of a Royal Commission to study the income tax system. As part of that effort. Inland Revenue was asked to submit
its views on the exemptions from tax enjoyed by charitable organizations. The result was the U.K. Report of
Royal Commission on the Income Tax (Cmd. 615, 1920) (the Colwyn Commission), at 615, and U.K., Royal
Commission on the Income Tax, Memorandum by the Board of Inland Revenue on the Subject of the Exemption
from Income Tax Enjoyed by Charities in Installment of the Minute of Evidence, (London: HMSO, 1920),
Appendix 31, cited in N.Brooks, Charities: The Legal Framework (Ottawa: Secretary of State, 1983)
[unpublished], at 25. Harking back to the position it took in Commissioners for Special Purposes of the Income
Taxv. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28 (H.L.) (hereinafter referred to as ''PemseF), the Board
of Inland Revenue argued that several factors ought to be taken into account in the attempt to define charity for
the purposes of the tax exemption (Memorandum, supra, at 25, para. 12):

[E]very exemption from income tax throws an additional burden on the cost of the community; every
charitable institution or body which obtains an exemption from income tax may be represented as
receiving a concealed subsidy from the State unaccompanied by State control..., the effect of the
exemption. ..is to force the state into the portion of subsidizing charitable societies in perpetuity...

The Board concluded by recommending that the exemption should be confined "to charities concerned primarily
to benefit classes of persons with small incomes", and that, if the state wanted to subsidize other groups, it should
do so directly.

See R.M. Bird and M.W. Bucovetsky, Canadian Tax Reform and Private Philanthropy (Toronto: Canadian Tax
Foundafion, 1976) at 16, and G. McGregor, "Charitable Confribufions" (1961), 9 Can. Tax J. 448.

See Can. H. ofC. Deb., May 27, 1930, at 2645-50.

255

system of "old Mosaic law", seeking in part to justify the deduction and in part to explain the
ten percent of taxable income limit, to be imposed on the deduction's availability.^^

The real concern in the debate, however, was not with the advisability or justifiability of
the deduction, which all sides quite readily acknowledged. Rather, Members of Parliament,
including the Minister of Finance himself, the Hon. Charles Avery Dunning, were more
concerned with identifying the type of recipient organizations that should benefit from the
favourable tax treatment.

Initially, the government's Bill would have allowed the deduction only for donations
made to "any church, university, college, school or hospital in Canada". This was criticized
at length in the parliamentary debate for excluding both the federated charities, such as the
community chests which had recently been formed in several centres, and the smaller non-
institutional charities. It was also criticized for inadvertently favouring Catholic charities over
Protestant charities, since the former were invariably organized along sectarian lines and the
latter generally were not.

Although sympathetic to these concerns, the Minister of Finance at first defended the
narrowness of the measure on the basis that this was the first time for this sort of tax relief in
Canada, and, therefore, more time and administrative experience were required to adjust to
the problems it might present. Interestingly, he also expressed some reservation over the
vagueness of the term "charitable". In the end, however, those in favour of a more generous
provision prevailed. The eligibility criterion that was enacted made the deduction available
for receipted donations made to "any charitable organization". This formulation remained
unchanged in the legislation until the institution of the mandatory registration requirement in
1967.

34
35

The 10% taxable limit was retained until it was increased to 20% in the major reform of the tax laws in 1972. In
1941, the Act was changed so that the limit was calculated by reference to income, not taxable income: An Act to
amend the Income War Tax Act, S.C. 1940-41, c. 18, s. 7, re-enacting s. 5(1)(/) of the Income War Tax Act, R.S.C.
1927, c. 97. See the Income Tax Act, S.C. 1970 - 71 - 72, c. 63, s. 1 10(l)(a).

The amendment to the 1927 Income War Tax Act, supra, note 32, was introduced on May 1, 1930 by the Minister
of Finance. See 16th Pari., 4th Sess., Vol. 11, at 1677. It was debated on May 27, 1930. See supra, note 31.

Montreal and Winnipeg, to name two.

An Act to amend the Income War Tax Act, S.C. 1930, c. 24, s. 3, enacting s. 5(1)(/) of the Income War Tax Act,
supra, note 32. The relevant portion of s. 3 read as follows: "(/) Not more than ten per centum of the net taxable
income of any taxpayer which has been actually paid by way of donation within the taxation period to, and
receipted for as such by, any charitable organization in Canada operated exclusively as such and not operated for
the benefit of private gain or profit of any person, member or shareholder thereof" The government suggested this
very important modification the day following the initial debate, conceding all of the points made the previous
day against the narrowness of the first proposal: Can. H. ofC. Deb., May 28, 1930, at 2714-15.

256

(iv) World War II

The need to encourage volunteers for a war effort arose again in 1939. In a special
session of Parliament the government resurrected the Patriotic Fund and the War Charities
Act^ and introduced legislation permitting the deductibility of donations to war charities of

up to fifty percent of a taxpayer's net taxable income. This was reduced to forty percent in
1941,^^ As before, a large number of organizations, such as the I.O.D.E., the Canadian
Legion War Services Fund, and the Salvation Army War Services Fund, qualified for the
purposes of the deduction. These war-time provisions were repealed in 1948

The 1941 legislation differentiated, for the first time, between corporations and
individuals with respect to the general deduction by lowering the limit for corporations to five
percent of taxable income.

(v) 1957

The last significant pre- 1967 modifications to the charitable donations deduction came
in 1957. In that year the government introduced legislation establishing an optional $100
deduction for charitable donations and medical expenses combined. The intention appears
to have been to reduce the burden of paperwork imposed on taxpayers and on the government
by the statutory requirement that all claims for the deduction be supported by receipts. In
addition, Opposition M.P.s had complained about the unevenness of the administrative
practice in enforcing this latter requirement, since it had been reported that several taxation
centres were permitting unreceipted claims for the deduction in amounts less than $25, on the
basis of "administrative expediency".

Government studies at the time showed that over half of Canadian taxpayers claimed
$100 or less in charitable donations, medical expenses, and union dues combined. In

36
37
38

40
41
42

43
44

The Canadian Patriotic Fund Act, 1939, S.C. 1939 (2d Sess.), c. 1.

The War Chanties Act, 1939, S.C. 1939 (2d Sess.), c. 10.

An Act to amend the Income War Tax Act, S.C. 1939 (2d Sess.), c. 6, s. 1, enacting s. 5(1)(«) of the 1927 Income
War Tax Act, supra, note 32.

An Act to amend the Income War Tax Act, supra, note 32, ss. 7 and 9, repealing and re-enacting s. 5(1)(/) and
repealing s. 5(1)(«) of the 1927 Income War Tax Act, supra, note 32, respectively.

See Watson, supra, note 12, at 9.

^QQ Income Tax Act, S.C. 1947-48, c. 52.

An Act to amend the Income War Tax Act, supra, note 32, s. 9, enacting s. 5{\){jj) of the 1927 Income War Tax
Act, supra, note 32.

Income Tax Act, S.C. 1956-57, c. 29, s. 7(3), amending s. 27(1) of the 1952 Income Tax Act, supra, note 7.

See Watson, supra, note 12, at 9.

257

introducing the measure, the Minister of Finance acknowledged that, as a consequence, the
measure would likely cost the government some money in lost tax revenue.'*^

Another 1957 reform was enacted in response to pressure on the government to raise
the ten percent limit. Donors to larger institutions — mainly universities, as a number of these
were engaged in capital campaigns totalling over $300 million at this time — were finding the
ten percent limit a significant constraint. In response, the government's amending legislation,
instead of raising the lunit, made it possible to carry excess deductions forward one year.
Similar reasons motivated a legislative provision increasing the limit on corporate deductions
from five percent to ten percent of income, putting it on a par once again with the limit
applicable to individuals.

(b) The Tax Treatment of Charitable Organizations

The first income tax Act exempted the mcome of "religious, charitable, agricultural and
educational institutions". That exemption, in one form or another, has continued ever since.

To clarify the section's intention that all organizations that were charitable according to
the common-law definition be eligible for the exemption, the relevant portion of the
exempting phase was amended in 1948 to read "charitable organization". To ensure that it
was clear that charitable trusts as well as charitable corporations were included, a provision
was added in 1950 to explicitly exempt "foundations".

There was no requu-ement in the 1917 income tax legislation that charitable institutions
file an annual tax return in order to prove their eligibility for this exemption. Under The War
Charities Act, 1917, "war charities" were obliged to meet several stringent requirements,
including the requirement to file financial returns semi-annually. Legislation enacted in
1922 required tax-exempt institutions to file a return of income for each taxation year.

49
50

The measure would also cost recipient organizations. See W.D. Goodman, "The Impact of Taxation on Charitable
Giving: Some Very Personal Views" (1984), 4 Philanthrop. (No. 4) 5, and McGregor, supra, note 30, at 449. The
$100 deduction has been criticized on many occasions over the years.

The Income War Tax Act, 1917, supra, note 13, s. 5{d).

Several cases had held that "institutions" did not include "trusts". See Minister of National Revenue v. Trusts &
Guarantee Co., [1940] A.C. 138, [1939] 4 D.L.R. 417 (P.C), and Burns Executors v. Minister of National
Revenue, [1950] A.C. 213, [1950] 2 D.L.R. 529 (P.C).

Supra, note 23 . "War charities" were defined in s. 2{b) as "any ftind, institution or association, other than a church
or the Salvation Army. ..having for its object.. .the relief of suffering or distress, or the supplying of needs or
comforts to sufferers from the war, or to soldiers, returned soldiers or their families or dependents...".

Regulation to The War Charities Act, 1917, Can. Gaz., (January 12, 1918), at 2337.
An Act to amend the Income War Tax Act, 1917, 1921, 1 1-12 Geo. 5, c. 33, s. 1 (Can.).

258

Charitable corporations and charitable trusts are now exempt from the obligation to file a
return of income.^' All charities, however, must now file an annual information return.

(i) World War I

The first scheme for the regulation of charitable organizations at the federal level was

enacted in The War Charities Act, 1917. The principal objective of this legislation,
according to the Parliamentary debate that preceded its enactment, was to control fraudulent
"war-charity" appeals and to encourage the efficient operation of legitimate war charities
Reference in debate was also made to comparable legislation in the United Kingdom

The Act established a registration system for "war charities". These were defined to

include any fund or institution having for its object,

the relief of suffering or distress, or the supplying of needs or comforts to sufferers from the war,
or to soldiers, returned soldiers or their families or dependents, or any charitable purpose
connected with the present European war.

Organizations without registered status or without a ministerial or statutory exemption from
the requirement to register, were prohibited from making appeals to the public for donations
for war charity purposes. Registration was denied if the charity was "not established in good

faith for charitable purposes" or if it "will not be properly administered". Registered status
gave rise to a number of quite onerous requirements dealing with such things as books of
account, banking practices, and organizational structure. Regulations promulgated under the
Act also provided for a biannual reporting obligation to the federal government.

52
53

For corporations, see An Act to amend the Income Tax Act and related statutes, S.C. 1984, c. 45, s. 58, amending
s. 150(1) of the 1952 Income Tax Act, supra, note 7. For trusts, see Income Tax Regulations, C.R.C. 1978, c. 945,
s. 204(3)(c).

Supra, note 23.

See Can. H. ofC, Deb., February 1, 1917, at 377-78.

Namely, the War Charities Act,I9I6, 6 & 7 Geo. 5, c. 43 (U.K.), repealed by the War Charities Act, 1940, 4 & 5
Geo. 6, c. 31, s. 14(3).

The War Charities Act, 1917, supra, note 23, s. 2{b). Interestingly, the definition of "war charities" in the Act
provided that whether a charity was a war charity was to be finally determined by the Minister.The Minister was
the Secretary of State.

Churches and the Salvation Army were excluded from the Act's purview by virtue of The War Charities Act,
1917, ibid., s. lib).

The War Charities Act, 1917, ibid., s. 4(4).

259

The War Charities Act was repealed in 1927 because, as explained by a government
spokesperson in Parliament, it represented too much of a burden on the very small number of
charities remaining on the register. This statutory regime was resurrected from 1939 to
1946, however, to deal with the same sorts of problems arising during World War 11.^^

(ii) World War II to 1967

a. Administrative Practice

As of 1948, the practice of the Department of National Revenue was to maintain lists of
local charities at the district level. These lists were, in the words of the Minister in 1948,
"constantly changing". There were, he affirmed in Parliament, no master lists. This
administrative practice was modified slightly in 1948 to require charitable organizations
wanting to issue receipts to apply for recognition at the district level on a prescribed form.

The federal tax authorities issued an information bulletin in 1962 which specified the
types of organization that would be recognized for the purposes of the deduction. The
bulletin incorporated the four-part definition of "charity" established in Pemsel. Under the
fourth limb of the test, the purposes beneficial to the community had to be "analogous to the
three other purposes".

b. Legislation

The only significant legislative change during this period (1945-1967) occurred in
1950. For the purposes of the tax-exempt status of charitable organizations, a tripartite
classification of charities was enacted. Charities were divided into charitable organizations,
charitable trusts, and charitable corporations. Each of these was subjected to a distinct set of
conditions which had to be satisfied in order to qualify for the tax-exempt status.

61
62

63
64
65

An Act to repeal The War Charities Act, 1917, S. C. 1926-27, c. 39.

Watson, supra, note 12, at 6, notes that of the 846 associations that had been registered, 671 had left the register.
Of those remaining, 143 were local chapters of the Imperial Order of the Daughters of the Empire.

See An Act to amend the Income War Tax Act, supra, note 38. In 1940 the supervisory jurisdiction for this statute
was transferred to the Department of National War Services. See The Department of National War Services
Act, 1 940, ^.C. 1940, c. 22.

Can. H. ofC Deb., March 18, 1948, at 2331 (R. H. Winters, M.P. for Queens-Lunenburg).

Canada, Department of National Revenue, Form T.511, "Application for Recognition as a Charitable
Organization", as per Directive No. 141 (January 22, 1948), reported in Watson, supra, note 12, at 9.

Canada, Department of National Revenue, Information Bulletin No. 17, Can. Gaz., Part I (December 22, 1962).

Supra, note 29.

An Act to amend the Income Tax Act, S.C. 1 950, c. 40.

260

A "charitable organization" — the active or operational charity as per the intention of the
legislator — was eligible for the tax-exempt status if "all" its resources "were devoted to
charitable activities carried on by the organization itself and "no part" of its income was
available for the "personal benefit" of its members.

A much more stringent regime was made applicable to trusts and corporations. Trusts
were coextensive, in the legislator's intention if not in reality, with institutions interested
exclusively in funding the operations of the active charities. These were the "foundations" in
the American parlance of the day. Corporations were conceived by the legislator to be
hybrids of the active and the granting charities, inexplicably and, as it turned out, unworkably
identified by their corporate form of organization. The statute provided for the tax-exempt
status of these latter two types of charities if they were either,

(eb) a corporation no part of the income of which was payable to, or was otherwise available
for the personal benefit of, any proprietor, member or shareholder thereof, that has not,
since June 1, 1950, acquired control of any other corporation and that, during the period,

(i) did not carry on any business,

(ii) had no debts incurred since June 1, 1950, other than obligations arising in respect of
salaries, rents and other current operating expenses, and

(iii) expended amounts each of which is

(A) an expenditure in respect of charitable activities carried on by the corporation
itself,

(B) a gift to an organization in Canada the income of which for the period is
exempt from tax under this Part by virtue of paragraph (ea), or

(C) a gift to a corporation resident in Canada the income of which for the period is
exempt from tax under this Part by virtue of this paragraph, and

the aggregate of which is not less than 90 per cent of the corporation's income for the

period,

(ec) a trust all the property of which is held absolutely in trust exclusively for charitable
purposes, that has not, since June 1st, 1950, acquired control of any corporation and that,
during the period,

(i) did not carry on any business,

Ibid, s. 21; repealing and substituting s. 57(l)(e) and enacting s. 51{\)(ea)-{ec) of the 1947-48 Income Tax Act,
supra, note 41.

" Ibid

261

(ii) had no debts incurred since June 1st, 1950, other than obligations arising in respect
of salaries, rents and other current operating expenses, and

(iii) made gifts, the aggregate of which are not less than 90 per cent of its income for the
period, to organizations in Canada or corporations resident in Canada the incomes
of which for the period is exempt from tax under this Part by virtue of paragraph
(ea) or (eb).

In these two provisions we see the origins of some of the restrictions applicable under the
current rules to charitable organizations and charitable foundations: there were general
prohibitions against carrying on a business and against financing programs with debt, and
there was a rudimentary disbursement regime.

The inclusion of these two provisions in the income tax law of 1950 was justified by the
government in Parliament on the basis of two reasons. First, the restrictions and disbursement
requirement were needed to prevent certain abuses that had come to the attention of the
government. In his speech explaining the provisions, the Minister alluded to the fact that a
number of "foundations" had been created in Canada in recent years, and gave as an example
the Massey foundation. The abuses cited by the Minister were that some of these
foundations — not the ones mentioned — had been operatmg businesses and accumulating their
business and investment incomes with the intention of distributing the income to their
"proprietors" on dissolution. This was an obvious misuse of the tax exemption which the
mandatory restrictions and the disbursement requirement would certainly remedy. It is worth
noting that precisely the same concerns were motivating the enactment of the The Charitable

Gifts Act, 1949 in Ontario at the same time.

Section 2\{eb) and (ec) were enacted also because, under the existing legislation, it was
not clear whether granting mstitutions actually qualified for the exemption. A number of
Privy Council decisions had indicated that they did not. It was thought best to correct this
oversight by making explicit the eligibility of granting institutions for the exemption.

(d) Concluding Observations on the Pre- 1967 Federal Law

The pre- 1967 tax legislation and administrative practice were, on the whole, quite
unsophisticated.

70
71

For a detailed discussion of these provisions, see J.G. Smith, "Taxation of Charitable Organizations under the
Income Tax Act", in Report of the Proceedings of the Twenty-fifth Tax Conference (Toronto: Canadian Tax
Foundation, 1973) 160, at 165-74, and R. Appleby, "The Taxation of Charitable Institutions" (1973), 1
Philanthrop. (No. 2) 17.

See Can. H. ofC Deb., May 18, 1950, at 2617-21.

S.O. 1949, c. 10. See, further, ch. 17, infra.

See Minister of National Revenue v. Trusts & Guarantee Co., supra, note 47, and Burns Executors v. Minister of
National Revenue, supra, note 47.

262

The weight of the arguments on the merits of the general deduction for charitable
donations, as measured by the speeches in Parliament during this period, was that it was
unjustifiable. Most parliamentarians who expressed their opinion on the advisability of
adopting the deduction tended to regard it as a wasteful tax expenditure favouring mostly the
rich. The balance of opinion in Parliament turned in favour of the deduction only in response
to the massive social dislocation of the Depression and in the concurrent recognition that
government could not carry the whole burden of the social welfare measures the Depression
required.

Very little was done during this period to police the tax privileges available to charitable
organizations. When Parliament did move in the domain of charity law, it was in response to
abuse and tax fraud (perceived or real), as with the foundations in 1950, or in response to
fraudulent fundraising and perceived inefficiency in the delivery of valued social welfare
services, as with the war charities legislation.

What little legislation there was during this period had more than a tax focus, since
some of it was aimed at preserving and promoting the integrity and efficiency of the sector, or
a portion of it, for its own sake. The exclusive locus of federal legislation in 1967 and after
has been the Income Tax Act. The dominant legislative motive, naturally, has been either to
protect the public treasury against abuse and fraud, or to "subsidize" the sector through "tax
expenditures". The integrity and efficiency of the sector, although important to these
objectives, remain only instrumental goals. The repeal of the second War Charities Act in the
mid- 1940s, therefore, marked the retreat of the federal government from the regulation and
supervision of charity for its own sake.

3. THE HISTORY OF FEDERAL TAX LEGISLATION FROM 1967 TO 1983

(a) 1967

When asked in the House of Commons, in September 1964, whether he could provide a
list of the charitable organizations entitled to the exemption contained in section 62( 1 )(e) of
the 1952 Income Tax Act, the Honourable E.J. Benson, Minister of National Revenue for
Taxation Division, responded with a list (valid as of December 31, 1963) of no fewer than
1,040 charitable organizations. His list contained the names of only national charitable
organizations. The Minister was obliged to admit that the Department of National Revenue
had no idea how many charitable organizations, local as well as national, there were in
Canada claiming the section 62 (l)(e) tax exemption. This failing was probably not, however,
indicative of a serious flaw in the federal tax administration at that time. Although there was
no comprehensive list of charitable organizations with tax-exempt status, there was a

Supra, note 7.

See Can. H. ofC. Deb., September 16, 1964, at 8075, Question No. 1863, and Sessional Paper 251A, RG14, D2,
1964-65, Vol. 1003, September 1 1, 1964.

263

procedure whereby the organizations claiming that status, and claiming the right to issue
receipts for tax-deductible donations, were reviewed at the district level.

It was becoming evident by the early 1960s, however, that there was a major problem
matching the deductions claimed by taxpayers — all of which were supported by receipts as
required by the legislation — and the amount actually received by charitable organizations. In
one example of this problem, a member of Parliament pointed out in the House of Commons
that, for 1961, residents of Quebec claimed donations of $164,616 million to charitable
organizations while only $137,713 million in charitable donations were claimed by the
residents of all the rest of Canada. In 1962, $157 million in donations were reported for
Quebec compared to $85.6 million for Ontario. Although these numbers were used in the
Parliamentary debate for several purposes, many Members of Parliament alleged, at least
implicitly, that widespread cheating was particularly prevalent in Quebec and that this
cheating involved the complicity of the charitable organizations themselves through the
fraudulent issuance of receipts.

The Department's initial response to the problem in Quebec was to audit individual
parishes. However, since the records of most parishes were inadequate to establish the
amount donated by each of its donors, the Department simply pro-rated the donation income
of each parish among its donors. This meant, of course, that the donations of those who had

reported accurately were reduced proportionately along with those who had not.

A more radical solution to the general problem was announced in Parliament on

June 7, 1966, when National Revenue Minister Benson introduced in Parliament a series of
amendments to the Income Tax Act. The amendments required all organizations issuing
charitable receipts to apply for registration in a central registry and to report annually on their
finances and operations to the Department. Every receipt issued by a registered charitable
organization was to have the registration number of the charitable organization on it, and
charitable organizations would be required to keep a copy of each receipt for auditing
purposes.

The institution of a central registration system was justified by Mr. Benson as both a
response to "the abuses which have developed in the matter of exaggerated receipts" and "the
possibility that organizations which once had been given formal approval could subsequently

74
75
76
77
78
79

See Martin, supra, note 12, at 203.

See Watson, supra, note 12, at 1 1 .

See Martin, supra, note 12, at 203.

Ibid., at 203-04.

Can. H. of C. Deb., June 7, 1966, at 61 14^ (Mr. Benson).

Ibid., zxens.

264

change the nature of their activities so that they no longer qualify". The proposal had also
been encouraged by the Auditor General's Report for 1965. That report had recommended
that the government consider "setting up... adequate controls over the many charitable

organizations now recognized". To admmister the new regime, the Minister promised that
his Department would organize a new unit, a "charitable organizations section", headed by a
registrar general. The unit was to form part of the assessments branch of the taxation

division.

The purpose of the new regime — to police the deduction — was evident in its placement
in the Income Tax Act: the amendment implementing the new system was contained in that

section of the Act which dealt with the deduction. Henceforth, charitable donations were
deductible only if they were made to "registered Canadian charitable organizations", and the
term "registered Canadian charitable organization", together with the causes of revocation of
registered status, were defined in that section. Among the causes of revocation were the
failure to file an annual (confidential) information return, and the failure to comply with
sections 125 and 126, which, in turn, created the obligation to keep proper records and books
of account, "including a duplicate of each receipt".

In the first year of operation of the new central registry, a total of 34,630 applications
for registration were processed by the Department of National Revenue, of which 31,373

were approved. There were another 4,322 applications processed in 1968, 3,213 of which

were approved. The impact on charitable organizations was thus "immediate and
dramatic".

Subsequently, however, the federal charities administration failed to develop into
anything as sophisticated as the Minister had promised. Federal authorities sought to ensure
only that the charitable donation receipts submitted by taxpayers matched one of the names

on the list of registered charities. One authority, writing in 1975, claimed, on the basis of
discussions with an official from the charitable and nonprofit organizations section, "that

80
81
82
83

84
85

/^/V/., at 61 14.
Ibid.,2Xe\\A.
Ibid, at6\\5.

1966-67 Act to amend the Income Tax Act, S.C. 1966-67, c. 47, s. 3, amending 1952 Income Tax Act, supra, note

7, s. 27.

See Martin, supra, note 12, at 204.

Ibid. By the mid-1970s the overwhelming majority of charities — over 90% — were registered as "charitable
organizations". Although this type of registration precluded the possibility of making grants to other charities
(since all the resources of a charitable organization had to be devoted to charitable activities carried on by it), it
did mean that the organization was not subject to the onerous 90% disbursement rule.

/Z)/^., at 204.
76;^., at 204-05.

265

once registered, there is virtually no examination or tabulation of the annual information
return of... Registered Canadian Charitable Organizations". The same author was also very
critical of the consequent lack of statistical information from the Department of National

Revenue on the sector.

In terms of concept, if not execution, the 1967 reform was a radical departure in the
regulation of charitable organizations in Canada. Charitable organizations, henceforth, would
be subject to at least the possibility of annual public accountability through a regime of
centralized registration and confidential information returns.

(b) The Carter Commission

Simultaneous with the introduction of the 1967 changes in Parliament, the Royal
Commission on Taxation (the "Carter Commission") was in the process of completing its
report on the reform of the federal income tax laws. Although the Carter Commission made
recommendations with respect to the tax treatment of charitable organizations and charitable
donations, according to most knowledgeable commentators and, in the words of two, "the
Royal Commission's discussion ...[of the tax treatment of charitable organizations] left much
to be desu-ed and fell well below the standard of analysis set in the Report as a whole".

(i) Tax-Exempt Status

With respect to the tax-exempt treatment of charitable organizations, the Commission's
report was critical of the number of organizations that had been extended the privilege of tax-
exempt status over the years, "without the establishment of any clear principles as to why

such exemption[s] should be granted and who should receive [them]". Of those
organizations then eligible, the report identified charitable organizations as obviously the
most worthy but, in so observing, seemed to dismiss the need to discuss the issue fiirther,
since nothing more was said about it in the remainder of the report. It may be, as one
commentator has recently observed, that the eligibility of charitable organizations for the

exemption simply reflected a ftindamental and unquestioned "societal consensus" on the

91
92
93

/Z>/£/.,at204.

Ibid., at 205. See, also, E.A. Chater, "Administrative Aspects of the Taxation of Charitable Organizations under
the Income Tax Act", in 1973 Report of Proceedings of the Twenty-fifth Tax Conference, supra, note 68, 177 at
180-81, for a brief description of the federal charities administration in the early 1970s. Chater was, at that time,
the Director of the Registration Division of the Department of National Revenue.

Canada, Report of the Royal Commission on Taxation (Ottawa: Queen's Printer, 1966) (Commissioner: K. Le M.
Carter) (hereinafter referred to as ''Carter Commission Report"), vols. 3, 4.

Bird and Bucovetsky, supra, note 30, at 20.

Carter Commission Report, supra, note 90, vol. 4, at 129.

F.L. Woodman, "The Tax Treatment of Charities and Charitable Donations Since the Carter Commission: Past
Reforms and Present Problems" (1988), 26 Osgoode Hall L.J. 537 at 538.

266

benefits of encouraging the provision of public goods by non-government agencies. There is
undoubtedly an element of truth in that observation since, however weak it was, the Carter
Commission Report's discussion of this issue was the first and last time it has even been
mentioned in a public document in Canada.

(ii) Business Income

An important issue discussed in greater detail in the report was the treatment of the
business income of charitable organizations. The Commission's report observed that if the
purpose of charitable organizations was "to manage charitable endeavours, it would be
reasonable to expect that the[se] organ ization[s] would not be actively engaged
in...business[es]". A few pages later, the same point was made in a slightly different way:
"there should not be any tax concessions that give one business a competitive advantage over
another, and the present exemption of business income earned by charities could well be
regarded as such an advantage". The final recommendation of the Commission on the issue
of business income, therefore, was that the business income of charitable organizations
should be taxed at the corporate rate. The report defined business income as any "non-
portfolio investment". Notably, the ownership of real property was included in its
definition. On the basis of "administrative convenience", however, the report recommended
that "a certain minimum amount of income from occasional sales, for example bazaars and

rummage sales, and from small sales operations such as gift shops" be excluded.

(iii) The Federal Administration

The Carter Commission also made suggestions concerning the appropriate design of the
federal administrative agency responsible for controlling access to the tax privileges. The
Commission suggested that the federal government establish "an inter-departmental
supervisory body" which would be responsible for assessing the eligibility of organizations
for the privileged tax status. The Commission also suggested that, in order to retain the tax-
exempt status, charitable organizations be required to submit audited financial statements to
this body, and that this body should have the power to review periodically the eligibility of
registered organizations for the tax privileges.^^

94
95
96
97
98

Carter Commission Report, supra, note 90, vol. 4, at 129.

Ibid.,a!in\.

Ibid., at 134.

Ibid.

Ibid. It will be recalled that the legislation in place at the time prohibited trusts and corporations from operating a
business and required organizations to devote all their activities to their charitable work.

Ibid, at 135.

267

(iv) The Charitable Deduction

Finally, the Commission made recommendations with respect to the deductibility of
charitable donations. There was a modest gesture in favour of tax credits over tax deductions
on the basis of "equity", but that issue was barely pursued in the text of the report, except to
observe that the implementation of a scheme of tax credits might discourage wealthy
donors. Interestingly, the Commission recommended that the issuance of tax receipts be
controlled by the government, an idea to which we shall return in our suggestions for
reform. This recommendation was advanced by the Commission as a way to cut back on
fraudulent receipts, but such a measure has since been recommended by others as also an
effective way to obtain accurate information on the donating habits of Canadians. The
Commission suggested a liberalization in the regime governing the deductibility of donations

102

to foreign and charitable organizations. It mooted the idea of permitting the deductibility
of charitable donations only if the donations exceeded one percent of the income of the
taxpayer. Finally, the Commission recommended that the ceiling for the deductibility of
donations for individuals be increased from ten percent to fifteen percent.

The 1 972 overhaul of the Canadian income tax system affected the tax treatment of
charitable organizations in only one or two minor ways. This was largely because the 1972
reform was developed in the government's White Paper in response to the Carter
Commission Report, which, as just outlined, failed to put forward any substantial suggestions
concerning the tax treatment of the sector. One recommendation contained in the report — that

100

101
102

103

Ibid., at 222. Interestingly, in a brief to the Commission, the Canadian Welfare Council argued the merits of a
match ing-grants system over the tax deduction:

[It] would avoid use of the fiscal machinery for the direct allocation of public funds to voluntary
organizations. It would enhance public knowledge and accountability both concerning the amount of
public subsidy to voluntary organizations and concerning the programmes and financing of the
voluntary organization. It would close a significant loophole for tax avoidance and evasion. The
individual (or corporation) would give to the voluntary organizations of his choice, without
consideration of tax advantage or of the present limits — for purposes of the tax concession — on
charitable donations.

See Royal Commission on Taxation, National Hearings Briefs, vol. 10, the Canadian Welfare Council submission
(No. 237, November 6, 1963), cited in N. Brooks, Financing the Voluntary Sector: Replacing the Charitable
Deduction (Toronto: Law and Economics Workshop Series, University of Toronto, Faculty of Law, 1981)
[unpublished]. This suggestion was not pursued in the report.

See infra, ch. 11.

The amendments to the Act in 1966, supra, note 83, permitted donations to only those foreign entities to which
the govemment had donated. The Department also insisted that Canadian charities carry on their activities in
Canada. The Commission's recommendations would have relaxed both these rules. See Woodman, supra, note
93, at 544.

Supra, note 32.

268

the ceiling for the deduction be raised — was implemented. However, the new ceiling was
established at twenty percent of annual income as suggested by the White Paper, not fifteen
percent as recommended by the Carter Commission. Another suggestion contained in the
White Paper (which was otherwise silent on the issue of charity and charitable
organizations) — that national amateur athletic associations be permitted to issue donation
receipts — was also implemented.

(d) 1973: Gifts In Kind

Until the mid-1960s, the Department of National Revenue officially maintained that
gifts in kind were not eligible for the charitable donations deduction. This position was
stated explicitly by the Department in respect of inventory and used goods, and was
generally accepted as Department policy with respect to other sorts of property.

The reasons the Department took such a dim view of deductions for gifts in kind are not
hard to understand. First, gifts in kind posed difficult valuation problems. Determining the
fan- value of a gift from inventory or of a used good was often especially problematic.
Second, as a consequence, policing the valuations of gifts in kind presented major
administrative problems. Leaving the matter solely to the discretion of the taxpayer would
have allowed far too much room for self-serving appraisals. Third, there was no legislative
provision deeming the taxpayer to have received proceeds of disposition equal to the fair
value of the gift. This feature of allowing a deduction for gifts in kind seemed mildly
subversive to the spirit of the charitable donations deduction, since the custom was that
donations were made using income that was otherwise taxable. Despite these mostly practical
considerations, the Department's position, initially based on only modest support in the
jurisprudence, was eventually abandoned in the face of a strongly contradictory judicial

, . . 106

decision.

The implementation of the capital gains tax in 1972 raised the issue of gifts in kind

107

again, in a different context. Among the provisions of the Act establishing the new tax on

104

105
106

107

McGregor, supra, note 30, at 449, describes the government's practice at this time thus: "|T]he Department of
National Revenue does not, except in special cases of substantial gifts with an accurately ascertainable value,
allow gifts in kind to qualify for the charitable deduction." The Carter Commission criticized the government's
interpretation of the legislation. See Carter Commission Report, supra, note 90, vol. 3, at 225-26.

This was set out in Information Bulletin No. 17 (1962), supra, note 63.

A case decided in \955—Gaudin v. Minister of National Revenue (1955), 55 D.T.C. 385 (Tax App.
Bd.) — seemed to suggest that gifts in kind were not eligible for the deduction. The matter was clarified in favour
of the deduction of gifts in kind by a Tax Appeal Board holding in 1968: Consolidated Truck Lines Ltd. v.
Minister of National Revenue (1968), 68 D.T.C. 399.

The problem had been a continuing concern in the United States. In this regard, see H. Mansfield and R. Groves,
"Legal Aspects of Charitable Contributions of Appreciated Property", in U.S., Commission on Private
Philanthropy and Public Needs, Compendium of Commission Research, Vol VI - Taxes and Regulations,
(Washington, D. C: 1974). The context of the American discussions was the Tax Reform Act of 1969, Pub. L. No.
91-172, 83 Stat. 487.

269

capital gains was one provision deeming gifts of capital property to be gain-realizing events.
This rule had certain inadvertent consequences for some donors. For example, taxpayers
making gifts of capital property to charities might, by virtue of this rule, end up having more
(deemed) income fi-om the gift than they would be able to deduct under the twenty percent

1 0ft

limit. This feature of the new tax treatment of gifts in kind was especially disconcerting for
privately owned museums and art galleries which were forced to compete for these gifts with
their American counterparts who were not subject to a similar rule.

These problems were addressed in legislation adopted in 1973.'^^ In that year,
section 1 10(2.2) was added to the Act. This section permitted taxpayers to choose the amount
(one amount) that would be, for tax purposes, both their deemed proceeds of disposition and
the value of the gift for the purposes of the deduction. Taxpayers were given the freedom to
select any value for this amount between the adjusted cost base and the market value of the
property donated. This concessional treatment, importantly, applied only to "capital
property... that could... reasonably be regarded as being suitable for use by the donee in the
course of carrymg on its charitable... activities".

The practical effect of these provisions was that a taxpayer did not pay tax on a capital
gain in respect of a particular capital property, when the property was donated to charity. As
only a portion of a taxpayer's capital gain was taxable, for many taxpayers this provision
constituted a modest inducement to make gifts in kind since the taxable amount would always
be less than the amount permitted to be deducted.

(e) The 1 976-77 TAX REFORM

(i) Background

Over the next few years a number of events raised the public profile of the charity
sector, heightening the public's interest in the appropriateness of the tax privileges and the
adequacy of the federal regime of supervision. Articles on the sector began appearing in
Canadian law journals. The Canadian Bar Association commenced publication of its

108

109

110

111

112

See Bird and Bucovetsky, supra, note 30, for a discussion of the controversy surrounding the adoption of the
deemed disposition rule and its anticipated consequences for gifts and bequests of capital property.

The Americans adopted a rule that excepted the gift of capital property to a charity fi-om the deemed disposition
rule if the property donated was to be used by the donee. See Bird and Bucovetsky, ibid.,, at 26.

An Act to amend the statute law relating to income tax, S.C. 1973-74, c. 14, s. 35(7), enacting s. 1 10(2.2) of the
1952 Income Tax Act, supra, note 7.

The "suitable for use" condition was later repealed by S.C. 1986, c. 6, s. 55(8). In that year as well, taxpayers were
permitted the same tax concession in respect of donations of their inventory that was a work of art created by
them: S.C. 1986, c. 6, s. 55(10), enacting s. 1 10(2. 3) of the 1952 Income Tax Act, supra, note 7.

This was not the only modification. Section 1 10(2.1) was also added in that year by S.C. 1973-74, c. 14, s. 35(6).
It permitted taxpayers to deduct gifts made by will as gifts made in the year of death.This had not been possible
before and there had been a considerable effort on the part of charities to bring about this change.

270

"magazine", The Philanthropist/Le Philanthrope, a forum for the discussion of legal and
policy issues affecting the sector. Interestingly, the very weakness of the Carter Commission
discussion and the relative insignificance of the consequent reform, when contrasted with the
vigorous academic and political interest in nonprofits in the United States, seemed to shame
Canadians into taking a greater interest in the sector. One manifestation of this renewed
interest was the pace and the breadth of federal reforms over the next fifteen years: there were
three of them (1975-76, 1984, and 1988) and each was quite substantial when judged against
previous efforts.

Two themes run through the legal writing on the sector in the early 1970s. One, already
identified, was the criticism of the lack of depth of the Carter Report's treatment of the sector
and the failure of the federal government to pick up on most of what was there. Authors
lamented the lack of sophisticated writing in Canada on the justifiability of the tax exemption
and the tax deduction, and they criticized the failure of the Commission to focus on these
issues seriously. It was claimed that the tax exemption, which had remained largely unaltered
since its inception, once again escaped critical examination. Commentators were also critical
of the lack of any coherent regulation of the business activities of charities. Some of this
criticism echoed concerns expressed in the United States over the "secret" operations of the

113

large family-controlled foundations and their suspected abuses of the tax privileges. The
"tax expenditure" rhetoric of the American tax economists was deployed in Canada to explain
that these organizations, in particular, owed much more in the way of public accountability
than they were currently inclined or required to give. The anxiety caused by these apparent
deficiencies in the regulatory regime was heightened by the lack of statistical data on the
sector in Canada.

A second preoccupation of the writing was the positive law at the federal level. Articles
on the tax law of charities appeared with increasing regularity in the early 1970s. By contrast
and in comparison with the legal writing in the United Kingdom and other Commonwealth
countries, very little appeared in legal literature on the provincial law of charity. For one
thing, the corporation had replaced the trust as the preferred vehicle of charitable activity. For
another, as will be discussed below, all the interesting legislative activity was happening in
the Income Tax Act.

The upshot of both these developments was that the federal tax regime became the
battleground for those with an interest, benevolent or otherwise, in the sector. This in turn
simply re-enforced the momentum for change in the federal tax regime. From the point of
view of the provincial law of charity and, arguably, fi*om the point of view of the charitable
organizations themselves, this preoccupation with tax privileges and policing tax privileges
was probably harmftil. Nonetheless, until the renewal of interest of the Office of the Public

113

J.H. Myers, "United States Federal Tax Treatment of Charities and Contributions and Bequests To Them" in
Report of Proceedings of the Twenty-Seventh Tax Conference (Toronto: Canadian Tax Foundation, 1975) 385.

114

V. Peters and F. Zaid, "The Present and Proposed Taxation of Non-Profit Organizations" (1971), 9 Osgoode Hall
L.J. 359.

271

Trustee in its legislative mandate in the mid-1980s, the law of charity in Canada was, for all
intents and purposes, in the Income Tax Act.

(ii) The 1975 Green Paper

a. Background

Renewed interest in changing the law of charity developed at the federal level in 1973,
largely as a consequence of E.J. Benson's earlier promises to reconsider the issues in light
of the weakness of the Carter Commission Report. In that year the Department of Finance
formed a study group to reconsider the federal regime in its entirety. Interest in the
Department waxed and waned in 1974 and 1975, but the Department's efforts finally
resulted in the publication in 1975 of a Green Paper, which looked into a number of
issues concerning the tax treatment of charities.

The authors of the Green Paper were very careful to establish the Department's
jurisdictional credentials in the opening paragraphs of the Green Paper. While
acknowledging the government's appreciation for the contribution made by the sector to the
provision of public goods in Canada, the Green Paper went on to point out that there
were over 35,000 of these organizations in Canada receiving over $500 million in
donations, and that the assets of the fifteen largest charities were in excess of $700
million. These numbers, argued the paper, made it abundantly clear that the tax deduction
and the tax exemption were a major public expense. The conclusion was obvious:

Every dollar of tax relief represents a cost to the Canadian taxpayer. The government
therefore believes that it is appropriate that the rules of taxation ensure that the people of Canada
obtain maximum benefit from the charities.

115

116
117

118

119

120

Canada, Department of Finance, The Tax Treatment of Charities (Discussion Paper) (Ottawa: June 1975)
(hereinafter referred to as the "Green Paper").

See A.B.C. Drache, Viewpoint "The 1981 Budget: Failure of Process?", [1982] Philanthrop. (Summer) 43.

"Their role is to fill in gaps of service and financial support where government should not or cannot play a
significant part": Green Paper, supra, note 1 15, at 5.

It appears fi-om the way this figure is stated in the Green Paper, ibid., that the Department was including all
amounts claimed pursuant to the $100 standard deduction, as well as receipted donations.

Green Paper, ibid., at 5. This claim did not pass without dissent. D.S. Rickerd, in "The Charitable Organization's
Viewpoint" in Report of Proceedings of the Twenty-Seventh Tax Conference, 1975 (Toronto: Canadian Tax
Foundafion, 1975) at 383, commented:

One wonders whether that line of type could have been composed anywhere but in Ottawa, and it
seems hard to believe that this means anything more than 'every dollar of tax relief represents a dollar
less for the Canadian government'.

Green Paper, supra, note 1 15, at 5.

272

For the first time, federal tax policy was explicitly formulated in the rhetoric of the tax
expenditure theorists: the government's ultimate objective was to deploy the tax subsidy to
the maximum benefit of Canadians. In the logic of this view, if perhaps not entirely in the
conviction of the government, charitable dollars were considered government dollars.

Since the reform proposals contained in the Green Paper, if implemented, would have
constituted a substantial increase in the regulatory control of the federal government over
the sector, and since there was very little solid empirical information, the proposals were
expressed tentatively. They were "not the definitive position of the government", but only
the "proposed direction". The government hoped that the feedback from the sector and
from the general public would provide further support for its intention to regulate the sector
in a more aggressive fashion. This self-consciously consultative approach had been part of
the Department's strategy in many of the previous reforms and would be followed by the
Department in most subsequent reform efforts, with modest success. Like the reform
efforts before and after it, one of the purposes of this reform effort was to remedy certain
perceived abuses, and as before and after, there was only anecdotal evidence, mostly

123

American, to support the claims of abuse. The consultative approach helped diffuse
possible negative reactions of the sector. Many observers, though appreciative of the effort
put into the Green Paper, nonetheless were sceptical of its motives, critical of its design.

121

These deficiencies did not escape criticism. Thus, Rickerd, supra, note 1 19, at 382, commented:

While the Green Paper purports to seek public consultation, it is a curious document in that:

1. It does not reveal clear evidence of any prior preliminary consultation with those professionally
involved in the field.

2. It does not give any factual backing for its frequent references to abuses, improper expenditures,
costs to the Canadian taxpayer, etc.

3. It gives very little feeling of any deep understanding of the complexities involved in the
charitable field in Canada.

4. I am particularly surprised that it does not make any reference to the very carefully compiled two-
volume Proposals for a New Not-for-Profit Corporations Law for Canada, prepared and
published last year by Professor Peter Cumming of the Osgoode Hall Law School for the
Department of Consumer and Corporate Affairs.

122

123

Generally the reaction to this procedure was favourable, although a common complaint was that the time-frame
was too short. In the words of Rickerd, ibid., at 382:

[The circulation of the Green Paper] represents an attempt to continue the participatory nature of some
earlier Canadian tax changes, and is welcomed as an opportunity to contribute thoughts that may be of
assistance in the drafting of final material... [But] as no warning of the. ..issuance of the Green Paper
was given, and as it proved difficult to get copies of the Paper, once issued, the time framework [23
June 1975 to 30 September 1975] has proven to be a very difficult one, especially as most charities
operate with unpaid Boards and often with unpaid staffs.

The American Congress had recently completed investigations and passed new tax provisions in the Tax Reform
Act of 1969, supra, note 107. Many of the measures in this statute were aimed at the abuses, perceived and real,
of large family foundations.

273

and very quick and acute in their reactions against the proposals. Others felt that it was
"one of the classic examples of a major tax reform... which was well thought out, well
handled and well received [,]... a model of consultation between government and

,. 124

taxpayers .

b. Private Foundations

There were several preoccupations of the Green Paper. Foremost by far were the
perceived abuses of the family foundations. Indeed, nearly all the specific recommendations
for reform were, at least in part, motivated by a fear that wealthy families were
manipulating the charity tax laws for their private advantage. On this issue, the Green
Paper's arguments were a reflection of nearly identical arguments expressed much more

125

vigorously by American writers and politicians in the late 1960s. The American effort
had led to the enactment of the Tax Reform Act of 1969, which severely curtailed the
activities of "private foundations" in the United States. Those reforms served as a model for
the 1975-76 reforms in Canada.

One abuse of family foundations was the various types of non-arm's length
transactions between family foundations and their principals or their family relations. These
transactions included over-compensation of the family members who acted as officers of the
foundation or of the business corporation; non-arm's length loans at concessional rates by
the foundation to its principals or to a business corporation owned by its principals; the
extensive private use of the foundation's property; and sales of property to the foundation,
and purchases from it, at non-market values.

Another abuse was the use of family foundations to retain control of the family
business while avoiding the tax consequences of intergenerational wealth transfers. The
provisions of the Income Tax Act prohibited charitable trusts and corporations from
"acquiring control of any corporation" or from "carrying on a business". However, these
provisions had been defmed or interpreted so as not to prohibit the ownership of a

124

125

126

127

128

Drache, supra, note 1 16, at 44.

Green Paper, supra, note 1 15, at 9, set out the argument as follows:

It has become evident in recent years that a few taxpayers have been abusing the opportunity to
establish private charities. The most common abuse has been in arranging investments and expenses to
ensure that the charity has little income and pays out a relatively small sum annually in comparison to
its capital. This may be done by having the charity invest in low-yield debt or equity of the donor's
business, by renting premises from the donor at high rent, by paying family members high salaries for
relatively little work or by lending money to family members at low rates of interest.

There was as well, it will be recalled, the precedent of the enactment of the first disbursement regime in Canada in
1950.

In many situations these transactions would have been contrary to the law of trusts or the law of corporations,
usually because they often involved breaches of fiduciary duties by the relevant trustees or directors.

1952 Income Tax Act, supra, note 7, s. 149(7)(a), rep. by S.C. 1976-77, c. 4, s. 59(6).

274

controlling interest in a corporation acquired by gift. A trust could be established, with the
family members as trustees, and the controlling interest in the business corporation gifted to
the trust over time. Dividends could be declared on the non- voting preferred shares owned
only by family members and very little or no income would accrue to the charitable trust.
As a result, very little would have to be spent on charitable activities to comply with the
ninety percent disbursement rule. Control of the family business corporation would,
however, remain in the members of the family through their position as trustees of the
foundation. Also, there would be no capital gains taxes on the equity interest owned by the
charitable trust.

The Green Paper contained a number of proposals to remedy these perceived abuses.
The most significant was a proposal for a new classification of charitable organizations. Most
observers readily admitted the 1950 classification was incoherent. Charitable organizations
were identified by virtue of their active capacity, regardless of their legal form, whereas
charitable trusts were defined by virtue of both their legal form and their passive or grant-
making functions, and charitable corporations, paradoxically, were defined solely in terms of
their legal form. The latter two categories were subjected to a stricter regime of regulation,
with the consequence that most charities that could, attempted to qualify as "charitable
organizations". These divisions made little sense. The Green Paper proposed instead that
charities be classified according to their active ("organizations") and passive ( "foundations")
functions. The former would be permitted to distribute up to only fifty percent of their

129

"income" to other registered charities (and certain other qualified donees). If they exceeded
that limit they would be classified as "foundations" and subjected to a stricter regulatory
regime.

Although this classification made obvious sense from a regulatory point of view, the
further division of foundations into private and public suggested by the Green Paper was
slightly more contentious. Its rationale, of course, lay in the desire to remedy the above-
mentioned abuses. Its method was first to segregate the offenders into a separate category,
then to subject them to an even stricter regulatory regime. "Private foundations" were to be
identified by either one of two features: where their directors or trustees did not deal with
each other at arm's length, or where seventy-five percent or more of their capital came
from one source. Private foundations, so defined, would be required to disburse the greater
of ninety percent of their income and five percent of their capital (defined to exclude capital
used in the operations of the foundation). Private foundations would also be prohibited from
carrying on a business of any sort, related or unrelated. But, importantly, the ownership of
equity in a corporation would not count as carrying on a business.

c. Business Income

Another preoccupation of the Green Paper was the extent to which charitable
organizations should be permitted to carry on businesses, since it was obvious that many

129

This was new. Previously, all the resources of a charitable organization had to be devoted to its own activities.

275

did, and that many had to in order to survive or to fulfil their particular charitable purposes.
The Green Paper proposed to legitimize most of the business activities of most charities by
permitting charitable organizations and public foundations to carry on "related" businesses,

130

but not otherwise. This proposal was more in the nature of a housekeeping measure than
anything else, since the absolute prohibition contained in the then-existing legislation had
long been recognized as imrealistic, and was therefore not enforced.

d. Accumulation

Similarly, the Green Paper recognized the unfairness of the severe restrictions that the
disbursement quotas imposed on the capacity of charitable organizations to accumulate
wealth. It was proposed that the Department's administrative practice of turning a blind eye
to warranted transgressions of these rules be regularized by creating a statutory discretion in
the Minister to permit warranted accumulations.

e. Public Accountability

Another concern expressed in the Green Paper was the lack of public accountability of
registered charities. The annual information returns and the annual tax returns of registered
charities, if indeed filed, were confidential. The Green Paper argued that the "tax
concessions granted to registered charities are so large they entitle the public to know with
some precision about the activities of the charity". The Green Paper recommended that
every registered charity file a public information return annually containing information on
income, donations received, gifts made, costs of fundraising, overhead expenses, and

1 . 133

salaries.

/ Fundraising

The Green Paper also made suggestions concerning the establishment in the Act of a
power in the Minister to deregister a charity with excessive (defined as fifty percent of the
funds donated) fundraising costs.

130

131
132
133

Interestingly, in light of the Alberta Institute on Mental Retardation v. Canada, [1987] 3 F.C. 286, 87 D.T.C. 5306
(Fed. C.A.) (hereinafter referred to as "'Alberta Institute"), the Green Paper, supra, note 115, at 8 stated that the test
for "related" "would not be the fact that the income earned by the business is used for charitable purposes, but
rather that the business is a usual and necessary concomitant of the charitable activity". The Alberta Institute
decision is discussed ftirther, infra, ch. 11.

See D. Macdonald, Budget Speech, Can. H. ofC. Deb., May 25, 1976, at 13831-32.

Green Paper, supra, note 115.

Ibid

276

(Hi) The 1976-77 Legislation

134

The legislation enacted in 1976 followed the Green Paper's recommendations very
closely. It also added a few new provisions. This legislation represented a major innovation
in the federal regulatory regime and established the basic framework on which the present
law is based.

The basic division in the Act between operating charities— "charitable
organizations"— and granting charities— "foundations" — ^was established and foundations
were further divided into public and private. The new disbursement quota for private
foundations was slightly less onerous than the one suggested in the Green Paper, but it
nonetheless made use of the technique of a percentage calculation of capital assets. Private
foundations were required to disburse the greater of five percent of the value of their non-
arm's length investments and ninety percent of the actual income therefrom, as well as, as
before, ninety percent of the income from their other investments. The practical effect
was to encourage the trustees of private foundations to make sure that the non-arm's length
investments earned at least enough to meet the five percent disbursement requirement.

136

For the first time, a disbursement quota was also established for charitable
organizations, and a new disbursement quota was defmed for public foundations. In part,
these two quotas were the Department's solution to the problem of high fundraising costs.
In the case of organizations, the quota was calculated as a percentage of the previous year's
receipted dontations. In the case of public foundations, the quota was calculated as a
function of a percentage of the previous year's receipted donations. After an initial four-
year phase-in period, this percentage amount was set at eighty percent. Thus, the costs of
fundraising and administration could not take up more than twenty percent of receipted
donations.

Failure to comply with the new quotas was penalized with deregistration and
conditional forfeiture of assets. The disbursement quota regime was made difficult to escape
since no organization deemed by the Minister to be a charity, and not registered as such,
could claim the tax-exempt status available to all non-charitable nonprofits without
registration.

134
135
136

137

S.C. 1976-77, c. 4.

Defined to exclude capital gains.

At least one foundation was persuaded to give up its registered status as consequence of the adoption of these
rules. According to L.M. McQuaig, in Behind Closed Doors (Markham, Ont.: Penguin Books, 1987), at 53, "[f|or
Toronto's Weston family, which controlled the W. Garfield Weston Charitable Foundation, the new rules were
excessive. The Westons... decided to give up their foundation's charitable status in December 1976 — just before
the new rules were to come into effect...".

In the case of public foundations, this was defined to exclude endowments (10-year gifts).

277

The "related business" and "business" problems were resolved in the ways
recommended in the Green Paper: public foundations and charitable organizations were
permitted to operate related businesses and were prohibited from operating unrelated
businesses; private foundations were not permitted to run a business of any kind. The
Minister was given a power to permit all charities to accumulate wealth. As well, the new
public information disclosure regime was established.

These changes were written into the Act in accordance with the worst traditions of
draughtsmanship that Canadians have come to expect from the Income Tax Act, with the
consequence that the translation industry moved quickly to interpret the changes for the
charity community. Our analysis of the provisions at this stage will remain cursory,
however, since we provide a more detailed analysis of the current law in the next chapter
and the differences, although important, are too subtle for present purposes.

(0 The 1984 Reform

(i) The MacEachen Budget, 1981

The period between 1976 to 1981 was relatively quiescent on the legislative front.
Most legislative changes were of a minor technical nature.

In terms of the administration of the law, however, there were a number of indications
that the government's attitude towards the sector was becoming somewhat less benign,
perhaps betraying a deepening of the tax expenditure bias first articulated in the 1975 Green

138

Paper and reproduced m several government documents published since that date. For
example, there was an ill-fated information circular on political activity which the
Department of National Revenue felt obliged to withdraw in the face of very severe

139

criticism from the sector. There was also an attempt at the administrative level to modify
the treatment of religious schools, which met with vociferous opposition.

The next significant federal initiative to reform the law came, entirely unexpectedly,
in the form of two budget resolutions in the 1981 budget speech. These were Resolutions
138 and 139. Each of these resolutions contained a number of provisions, the primary
objective of which was to tighten up the disbursement regime.

138

139

140

See Drache, supra, note 116, at 44.

See Revenue Canada Information Circular 78-3 (February 27, 1978), where political activity was defined as any
activity aimed at influencing government policy. Although the circular was withdrawn, the Department tightened
up on political activity of charities by sending letters threatening revocation of registered status to a number of
organizations it felt were engaging in political activity, including Oxfam Canada. See, also. Renaissance
Internationale v. Minister of National Revenue, [1983] 1 F.C. 860, 142 D.L.R. (3d) 539 (Fed. C.A.).

See W. Goodman, "Implications for Religious Institutions", in Report of Proceedings of the Thirty-fifth Tax
Conference, 1983 (Toronto: Canadian Tax Foundation, 1984) 409, at 414.

278

Resolution 138(a) and (b) and Resolution 139(c) sought to close what were, from the
government's perspective, significant loopholes in the then-existing disbursement rules.
These loopholes exploited three features of the disbursement rules: the fact that charitable
organizations and public foundations were required to disburse only a percentage of
receipted gifts; the fact that one charity could make a grant from its income to another
charity in the form an endowment (a "ten-year gift"), turning income in the hands of the
first charity into non-disbursable capital in the hands of the second; and, the fact that
related charities with different year ends could make grants back and forth forever without
ever having to expend a cent on charitable works. The following is an example of how these
three features of the disbursement quota regime could work to the disadvantage of the
government: a foundation could make a grant from its income to endow a charitable
organization, but not take a receipt— in the hands of the recipient organization, this money
would be completely and forever exempt from the disbursement rules. Resolutions 138(a)
and 139(c) sought to foreclose artificial transactions of this type whose principal purpose
was to circumvent the disbursement rules. Resolution 138(a) proposed that gifts from one
charity to another unrelated charity, whether receipted or not, be included in the recipient
charity's income for the purpose of calculating its disbursement quota. Resolution 138(b)
proposed that gifts of income between related charities be subject to a one hundred percent
disbursement quota. And Resolution 139(c) proposed that only the net of disbursements over
receipts from related charities would count towards satisfying the disbursement requirement
of a charity.

Resolution 138(c) proposed creating a new penalty for failing to meet the disbursement
quota obligation, in addition to the penalty of deregistration and conditional forfeiture of
assets, which was thought to be too severe for inadvertent errors. Under the penalty
proposed in Resolution 138(c), a charity would lose only its disbursement shortfall, not its
registered status and its assets, in the event of an inadvertent breach of the disbursement
rules.

Resolution 138(d) suggested raising the quota for private foundations from five percent
to ten percent, and would have applied this increased percentage against the greater of the
cost amount and the fair market value of the private foundation's non-arm's length
investments. Paragraph (e) proposed that the definition of such investments be broadened.

Resolution 139(a) dealt with the minor problem of abuses of or deviations from the
Minister's permission to accumulate wealth, for which no provision had been made in the
1976 legislation.

Finally, Resolution 139(b) proposed that, for the purposes of the quota calculation, the
income of foimdations be calculated to include the capital gains and capital losses realized
on dispositions of their capital property (defined to exclude capital property used in their

141

Thus, money that was counted as having been actually disbursed on charity could end up collecting interest in a
bank.

279

operations or their administration). This was by far the most significant provision from the
point of view of Canadian foundations, since it would mean considerably less protection for
their capital base against inflation.

The reaction of the sector to the budget speech was surprise and dismay. The
Association of Canadian Foundations and the Canadian Centre for Philanthropy responded
quickly to the proposals with detailed criticisms. The most objectionable proposals, in
their view, were those that sought to diminish the capability of both private and public
foundations to protect their capital base against inflation: these included Resolutions 138(d),
138(e), and 139(b). The Association's response pointed to statistics setting out the historic
rate of return of investments to show that the long-run implication of these proposals was
the gradual weakening and eventual disappearance of foundations. The foundations also
questioned the advisability of the proposals in Resolution 138(a) and (b). Although
conceding that the avoidance of the disbursement regime should not readily be condoned,
they pointed out that one perhaps inadvertent implication of these paragraphs was that an
operating charity, such as a hospital or a university, would have great difficulty endowing a
related foundation.

(ii) The April 1982 Press Release

The government retreated in the face of general hostility from the sector, and in April
1982 made new suggestions for reform. These were developed after extensive and "very
worthwhile" consultations with the foundations. The most significant change dealt with the
formulation of the disbursement rule for foimdations. The government recommended that
the ninety percent of income regime be replaced with a rule requiring both public and
private foundations to disburse 4.5 percent of their asset value. Under this formula, there
would be no need for foundations to calculate their income, something that had proven quite
difficult for many of them, and therefore there would be no need for capital gains to be
disbursed, something which would have caused the foundations considerable concern. The
new 4.5 percent figure and the retreat on the capital gains issue represented a major policy
reversal for the government, since under the newly proposed rule there was a fair chance
that most foundations, through prudent investment, would be able to maintain their capital
base.

A second change dealt with the problem of non-arm's length investments. Under the
proposals contained in the April 1982 press release, these would be subject to both the
regular 4.5 percent disbursement rule and to a prescribed rate of return. The latter would be

142

See "Submissions of the Association of Canadian Foundations to the Minister of Finance on the Budget Proposals
of November 12, 1981", [1982] Philanthrop. (Summer) 25.

143

Woodman, supra, note 93, at 552: "The provisions would have effectively limited the 'lifetimes' of many private
foundations with non-arm's-length investments to about forty years."

144

C.A. Bond, "Implications for Charitable Foundations", in Report of Proceedings of the Thirty-fifth Tax
Conference, 1983 (Toronto: Canadian Tax Foundation, 1984) 386.

280

sanctioned by a penalty tax, equal to the benefit received, payable by the offending non-
arm's length party.

These new proposals were not, however, implemented. The government decided to
delay the reform in October 1982 until the Department and the new Minister of Finance,
Marc Lalonde, had had an opportunity to review the issues.

(iii) The May 1983 Discussion Paper

In May 1983 the government published its second major discussion paper dealing with
all aspects of the tax treatment of charities. The style and approach of the discussion
paper were very much like its 1975 predecessor. The Department commenced with praise
for the contribution of the sector to Canadian society:

148

The proposals which follow seek to promote the long-standing public policy of providing a
tax environment in which charities can thrive and make their valued and essential contribution to
the health and well-being of our Canadian society.

The paper went on to establish its jurisdictional credentials with considerable force and
impressive statistics. It pointed out that the tax-exempt status of charitable foundations had
allowed them to amass "well over $10 billion in property" and that the $2 billion in
estimated donations every year was costing the federal and provincial treasuries "some $600
million" .

The discussion paper outlined the problems that required fixing, from both the pomt of
view of charities and the point of view of government. From the point of view of the
charities, there were two problems: the inability of charitable organizations to establish
endowments under the disbursement rules which required that they disburse eighty percent
of receipted donations, without exception; and the erosion caused even by the ninety
percent-of-income rule to the capital base of many foundations. From the government's
point of view, there was only one problem: the disbursement regime was too easy to
subvert. In particular, the paper expressed concern that the disbursement regime could be
avoided by the transfer of funds back and forth among (related) charities, by charities

145

See October 27, 1982 "Statement on Economic Outlook and the Financial Position of the Government of
Canada".

146

Canada, Department of Finance, Chanties and the Canadian Tax System — A Discussion Paper (Ottawa: May
1983) (hereinafter referred to as the "May 1983 Discussion Paper").

147 ^

ureen Paper, supra, note 115.

148

May 1983 Discussion Paper, supra, note 146, at iii.

149

Ibid, QUI.

''' Ibid

281

changing their tax status from organization to foundation and back again, on a regular basis,
depending on which disbursement regime minimized their payout requirement, and
by foundations keeping their investments in high-growth, low -yield assets, since the
disbursement rules were mainly a function of income.

The discussion paper contained six specific proposals to address these concerns:

(1) That the legislative distinction between charitable foundations, both public and private,
and charitable organizations be eliminated.

The purpose of this recommendation was to allow the government to impose a uniform
disbursement regime on all charities so that there would be no incentive for charities to
switch from one status to another to minimize their disbursement quota. The government
also supported this proposal on the basis that it would "allow charities the flexibility to
change their methods of operation to suit changing circumstances". This proposal
represented a major reversal in policy, given the statements in the 1975 Green Paper that
"charities in Canada are essentially of two kinds— active charities which provide services
and carry out charitable activities; and foundations which distribute funds to be employed by

152

Others for charitable purposes". As such, it came as a complete surprise to the sector.

(2) That the concept of "related charities " be introduced.

This proposal was based on the desire of the government to foreclose the possibility of
charities meeting the disbursement requirement by simply making gifts to other "related"
charities. The proposed legislation would have imposed an additional disbursement
requirement on charities in receipt of donations from related charities. All such receipts
would have to be disbursed in the year in which they were received (as in Resolution
138(b)). Further, to address the possibility of back-and-forth gifting between related
charities with different year ends, it was proposed that only the net amount of gifts to, over
gifts from, related charities would be eligible as disbursements (as in Resolution 139(c)).

The objective of these requirements was laudable. Under the then-existing rules, if one
charity made a $100 grant to another charity, the whole amount of the grant could be
counted towards the former charity's disbursement requirement. However, but the recipient
would not be obliged to spend any of the funds granted until the subsequent year, and in the
subsequent year it would be required to spend only $80. Moreover, the second charity in
turn could meet its disbursement requirement by granting to another related charity only
$64. The possibility of related charities diluting and postponing the disbursement
requirement in this way seemed to the government to be obviously contrary to the spirit of
the Act. The proposed modifications required, however, that the government define "related
charities". The definition proposed in the discussion paper was very broad and quite

'" Ibid.

Supra, note 1 1 5, at 4.

282

complex. Charities would be "related" where "they have major donors in common who
together have contributed ten percent or more of the gifts received by each of the charities;
where they do not deal with each other at arm's length; where one charity was created to
further the purposes of the other; or where one is a major donor of the other". In addition
to this, the Minister was authorized to designate charities as "related charities" in certain
broadly defined circumstances.

(3) That calculation of disbursement quotas for charities be significantly altered.

The goverimient proposed that the ninety percent-of-income rule for foundations be
repealed, thereby accommodating some of the concerns of many Canadian foundations
regarding the difficulty of applying the ninety percent-of-income test, since it was hard for
charities to calculate their income. The proposed rule would have required charities to
disburse eighty percent of all gifts received, receipted and unreceipted (with exceptions for
endowments and gifts out of the capital of a donor charity), and 4.5 percent of the value of
their assets. The discussion paper supported this new rule on the basis that it would permit
foundations to protect their capital base against inflation and make it easier for them to
calculate their disbursement requirement. It was suggested that charities with investment
assets worth less than $250,000, which did not disburse more than twenty-five percent of
their outlays to other charities, should be exempted from this requirement. The government
thought that this exemption would exclude most "charitable organizations" from the
purview of the new disbursement rule. For the purposes of this disbursement rule, the arm's
length investments of a charity would be valued at the greater of their fair market value and
their cost to the charity. There would also be a new regime for loans: money borrowed by a
charity would be included in the amount, eighty percent of which had to be spent to meet
the disbursement quota; conversely, amounts spent to repay the loan would count towards
meeting the disbursement quota. Loans by charities would count toward the disbursement
requirement, and repayments on such loans would be included in the amount that had to be
dispersed.

(4) That charities which fail to meet their disbursement obligations be subjected to a tax
on the shortfall.

The discussion paper proposed that deficiencies in the disbursement quota should be
sanctioned by a two-part tax: an initial tax equal to fifteen percent of the shortfall, followed
by a final tax equal to one hundred percent of the shortfall, if the charity still failed to make
up the shortfall.

153

May 1983 Discussion Paper, supra, note 146.

283

(5) That the concept of non-qualified investments be introduced and applied to all
charities.

The government's discussion paper proposed a new set of restrictions on non- arm's
length investments that would apply to all charities. This proposal was motivated by the fact
that not only private foundations could engage in non-arm's length transactions to the
detriment of a charity. The discussion paper cited one example in which employees of a
closely held corporation made donations to a public foundation, which in turn invested the
donations in loans to the corporation at non-market rates of return.

(6) That the person who derives a benefit ft'om a non-qualified investment of a charity be
required to include twice the amount of the benefit in his income subject to tax.

The new rule for non-arm's length investments would be that they would have to meet
a specified rate of return. Failure in this regard, according to this proposal, would result in
a tax payable by the individual benefited equal to the value of the benefit.

As can readily be seen, the major preoccupations of the Department of Finance
remained the possible abuses of the disbursement regime. A number of very substantial
changes, such as the collapsing of the distinction between organizations and foundations,
were to be implemented to accommodate this concern. The resulting draft legislation
implementing these proposals was substantially more complex than the previous regime.

It is no exaggeration to say that the sector was outraged by these proposals. The
reaction of charitable organizations was particularly negative, since they were the major
losers under these rules and they had had no warning in the years leading up to the
discussion paper that the regime applicable to them would change in such a substantial way.
The outcry against the collapsing of the distinction between foundations and organizations
was unanimous. The foundations accepted the idea of a disbursement regime based on a
percentage of asset value, but strained at the 4.5 percent figure. Both foundations and
organizations objected to the eighty percent of all gifts disbursement rule on the basis of
fairness: since the only cost in tax dollars to the government was with respect to receipted
donations, they argued, only receipted donations should be counted for the eighty percent
disbursement rule.

Many private foundations objected to the rules establishing a prescribed rate of return
for non-arm's length investments. The new rules were designed to prevent abuses, but there
were many private foundations established with family assets, such as the shares of a closely
held corporation, which were not established to take advantage of the tax regime applicable
to charities and which would not be able to meet the prescribed rates of return.

^^^ See Antoine Guertin Ltee v. The Queen, [1981] C.T.C. 351, 81 D.T.C. 5268 (Fed. TD.); rev'd in part [1988]
F.C. 67, 88 D.T.C. 6126 (Fed. C.A.).

284

All charities objected strenuously to the complexity of the new regime.

(iv) The Economic Statement of November 8, 1984

The strongly negative reaction from all quarters of the charity sector caused the
government to retreat, in November 1984, to its April 1982 position. The long process of
consultation on the appropriate reform, which had commenced in late 1981, finally resulted
in legislation in 1984. Since the 1984 legislation established what is for the most part
today's regime, we will deal with it only briefly here.

The most important effect of the 1984 legislation was the establishment of a
disbursement regime for public foundations that included a percentage of their investments.
The relevant percentage for both public and private foimdations was set at 4.5 percent.

The problem of inter-charity transfers was dealt with by a rule obliging public
foundations to disburse eighty percent of the previous years receipts from any registered
charity, and requiring private foundations to disburse one hundred percent of the preceding
years receipts from any registered charity. This new regime would allow for exemptions for
gifts that were endowments. The ninety percent-of-income rule was dropped.

New sections 188 and 189 established penalty taxes for charities whose registration
is revoked, and for taxpayers who benefit from the non-arm's length investments of a
private foimdation. Section 188(3) imposed a penalty tax on certain transactions that were
aimed to minimize the disbursement obligations of foundations.

Finally, the stams of all charities was fixed by legislation. The Minister was given a
power to designate the registration status of a charity as a public foundation, a private
foundation, or a charitable organization, in order to limit the opportunity for charities to
escape an adverse disbursement regime by changing their registered status.

(g) The 1988 Reform

The last significant reform in the 1980s occurred in 1988.' In 1985, legislation had
been passed which legitimated to a certain extent the political activities of charitable

158

organizations and charitable foundations. However, the extent of political activity
permitted by these new sections was probably already permitted under the income tax
regime, by virtue of that regime's acceptance of the common-law definition of charity.

An Act to amend the Income Tax Act and related statutes, S.C. 1984, c. 45.
1952 Income Tax Act, supra, note 7, ss. 188 and 189, enacted by S.C. 1984, c. 45.
'" S.C. 1988, c. 55.

158

See An Act to amend the Income Tax Act [and other legislation], S.C. 1986, c. 6, s. 85(2), enacting s. 149.1(6.1)
and (6.3) of the 1952 Income Tax Act, supra, note 7, applicable to 1985 and subsequent taxation years (s. 85(3)).

285

There had also been, in deference to representations made by charitable organizations
themselves, a repeal of the $100 standard deduction.

Michael Wilson's major tax reform initiative in 1988 involved one major and very
significant change for charitable organizations. The legislation enacted pursuant to the
Jime 18, 1987 White Paper on tax reform provided that the deduction for charitable
donations be changed into a tax credit. That change established the current arrangement
whereby gifts of $250 and less are entitled to a seventeen percent federal tax credit, and
gifts of more than $250 are entitled to a twenty-nine percent federal tax credit. This change
was just as much a part of the philosophy of the 1988 tax reform as it was a result of
representations made by the sector. Many in the sector had advocated such a change on the
basis that rich and poor donors— that is, high and low taxbracket taxpayers— should be
subsidized to the same extent. To limit the negative "incentive effect" consequences on
wealthy donors, however, the 1988 reform increased the subsidy for donations above $250.

(h) The 1990 Reform Effort

The federal government commenced another study to reform the federal tax system
applicable to charities in 1990. A discussion paper was issued by Revenue Canada, Taxation
in November 1990, and a draft circular and draft reporting form in 1992. The proposals
contained in these documents are aimed principally at clarifying the administrative practice
of Revenue Canada and of making charities more publicly accountable. We will look at
some of these proposed changes, briefly, in the next chapter.

In 1991 national arts councils were explicitly recognized as being entitled, upon
registration, to the same treatment as charitable organizations.

(i) Conclusion

The principal motivation of the federal government through this entire period (1967 to
1990) was to protect the two tax privileges from abuse. This required the establishment of a
system for policing the deduction by making sure that it is available only for donations to
legitimate organizations. The registration system and the disbursement regime were the two
principal techniques used by the federal government to achieve this goal. The disbursement
regime, though complex, is aimed to ensure that recipients of charitable donations devote
donated resources almost exclusively to charity.

This motivation also led to a certain level of policing of the tax-exempt status through
measures aimed chiefly at private foundations. The main devices used here were the
disbursement quota and, more recently, the penalty tax on taxpayers who benefit from non-
arm's length transactions with charities.

All of these measures have resulted in the imposition of substantial discipline on the
sector. Generally, the sector's reaction has been to balk at the aggressiveness of some of the
federal government's proposals on the basis that they were either too complex for the vast
majority of charities or that they were far too onerous to correct minor, infrequent, and
often only perceived, abuses.

286

The whole process since the institution of the registration regime in 1967 has shaped
the sector's perspective on the role of government in the charity sector profoundly. Still, a
decade after the 1981 to 1984 reform process, there is a great deal of scepticism and even
fear about the motives of government regulation. For the most part, the presence of
government is felt as antagonistic, counterproductive, and unduly burdensome. To some
extent, this negative perspective had been reinforced recently by the actions of the Office of
the Public Trustee. As a consequence, very few of the submissions to the Commission on
the reform of the law of Ontario expressed any interest in a more positive and more
enlightened role for government along the lines of the Charities Commission in the United
Kingdom; for the most part, this conception of the role of government is simply beyond the
ken of most actors in the sector because it is unrelated to their recent experience.

CHAPTER 11

SUPERVISION OF CHARITIES
BY REVENUE CANADA:
CURRENT LAW

1. INTRODUCTION

The objective of this chapter is to provide a succinct statement of the current income tax
regime in Canada and a short description of the comparable regimes in the United States and
the United Kingdom. The discussion on Canada in section 2 is divided into six parts:
(a) Definitions of Basic Terms; (b) The Registration Requirement; (c) The Regulation of the
Activities of Registered Charities; (d) Disbursement Quotas; (e) Donations; and
(f) Compliance. In sections 3 and 4, the Commission examines the tax treatment of charities
in the United States and in the United Kingdom, respectively. In chapter 12 we make
suggestions for the reform of the Canadian tax regime, focusing on the regulation of the
activities of charities and not on the privileges extended to them, since the main purpose in
studying the federal tax regime is to ensure that Ontario charities, in the end result, face an
integrated and coherent federal-provincial regulatory regime.

2. THE CURRENT FEDERAL REGIME

(a) Definition of Basic Terms

To be entitled to the privileges offered to charity under the Income Tax Act, a
charitable entity must have the status of "registered charity". However, the Income Tax Act
does not define "charity". Revenue Canada previously set out a version of the Pemsel test in
its information circular dealing with the registration of charities, but it no longer does.
Currently, a version of the Pemsel test is set out in Form T4063, "Registering a Charity for
Income Tax Purposes". In deciding whether an organization is entitled to registered status,
Revenue Canada relies on a reasonably traditional interpretation of the common-law tests, as
well as the Act's particular rules on such things as political activities and unrelated and

R.S.C. 1985, c. l(5thSupp.).

Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531, [1891-4] All E.R. Rep. 28
(H.L.) (hereinafter referred to as ''PemseF').

Information Circular 77-14, replaced by Information Circular 80-1 OR.

[287]

288

related business activities. Some commentators note that Revenue Canada has taken a
"hard-Hne" of late, taking decisions often questionable in law. Others note an opposite trend
in the decided cases. Whatever may be the truth on this matter, it is noteworthy that there is
in Canada, as there is in the United Kingdom and the United States, a body of case law, albeit
small, that takes up the issue of the definition of charity for tax purposes.

"Registered charity" is defined as "a charitable organization, private foundation or
public foundation" (or "a branch, section, congregation, parish, or other division" of any of
these), that is resident in Canada, that was established or created in Canada, and that is
registered with the Minister of National Revenue. Each of the three subdivisions of
"registered charity" — "charitable organization", "private foundation", and "public
foundation" — are in turn separately defined and separately regulated under the Act.
Organizations are distinguished from foundations by theu" service orientation: they are not
permitted to make grants totaling more than fifty percent of their income in any one year.^

Foundations must be organized as trusts or corporations, not as unincorporated
associations. Organizations may be organized in any of the three available ways.

Both public and private foundations must be "constituted and operated exclusively for
charitable purposes", and no part of the income of a foundation may be available for the

personal benefit of any of its members. A charitable organization must devote all its
resources to charitable activities carried on by it, and must not distribute any part of its
income to its members. Thus, both foundations and organizations must be in purpose and in
fact "exclusively charitable". This "exclusively charitable" requirement is the main regulatory
standard under the Act. Permissible and impermissible activities under the Act are defined in
terms of this standard. Thus, there are provisions permitting activities either as an exception
to this standard, or as deemed compliances with this standard; likewise, most prohibited
activities are activities defined to be breaches of this standard.

In addition to these rules, which define the three categories in terms of the dedication of
assets and their form of organization, there are provisions that define them in terms of the
makeup of their executive (officers, directors, and trustees, etc.) and their sources of capital.
More than fifty percent of a charitable organization's or public foundation's executive must

There are several recent Federal Court of Appeal decisions of note, all supporting Revenue Canada's initial
negative view of an applicant's or registrant's charitable status. See Briarpatch Inc. v. The Queen (1996), 96
D.T.C. 6294 (Fed. C.A.) (magazine for poor not charitable); Vancouver Society of Immigrant & Visible Minority
Women v. Minister of National Revenue (1996), 195 N.R. 235, 96 D.T.C. 6232 (Fed. C.A.) (networking and job
referral services not charitable); and Fondation Pro-Quebec Inc. v. The Queen, [1994] C.T.C. 154, 94 D.T.C. 6068
(Fed. C.A.).

Income Tax Act, supra, note 1, s. 248(1).

Ibid.,s. 149.1(6)(6).

Ibid., s. 149.1(1) "charitable foundation".

289

deal with each other, and with each of the other members of the executive, at arm's length,^
and not more than fifty percent of the capital of a charitable organization or public foundation
can have been contributed by one person or by one group of persons who do not deal with
each other at arm's length. Governments, charitable organizations, public foundations, and
clubs, societies, and associations (as described in s. 149(1 )(/)), however, may establish public
foundations or charitable organizations by contributing fifty percent or more of the capital. '°
Otherwise, if any of the conditions are not met, the foundation is, by definition, a private
foundation.

The Income Tax Act obliges all registered charities to meet certain disbursement
requu^ements. These disbursement requirements, in the intention of the Act, ensure that the
resources of registered charities are in fact devoted to charity, and, therefore, that registered
charities deserve their tax-exempt status and right to issue tax receipts. It should be
emphasized that there are other ways to accomplish this objective, such as placing restrictions
on investments, direct supervision, and the enforcement of more general standards. ^^ There
must be an indication that the tripartite division of registered charities is used in the Act
principally to identify three different kinds of charitable entities, which, because they raise
slightly different regulatory concerns, are subject to three different disbursement regimes.

One other general term defined in the Act should be introduced at this stage. The class
of entities favoured with the right to issue donation receipts is slightly larger than "registered
charities". The full list of favoured entities is referred to in the Act as "qualified donees".

Ibid., s. 149.1(1) "charitable organization" and "public foundation". "Arm's length" is defined in s. 251 of the Act,
as follows:

251. — (1) For the purposes of this Act

(a) related persons shall be deemed not to deal with each other at arm's length; and

(b) it is a question of fact whether persons not related to each other were at a particular time
dealing with each other at arm's length.

For individuals, any person connected by blood relationship, marriage, or adoption is a related person
(s. 251(2)).

Ibid., s. 149.1(1) "charitable organization" and "public foundation". For public foundations created before 1984 or
designated by the Minister under ss. 149.1(6.3) or 1 10(8.1) or (8.2) of R.S.C. 1952, c. 148, the percentage figure is

75%.

Ibid., s. 149.1(1) "charitable organization" and "public foundation".

As in the United Kingdom. See infra, this ch., sec. 4.

We, in fact, recommend infra, in ch. 12 that less reliance be placed on the disbursement regime as a method of
ensuring that all charities are in fact devoted to charity.

290

They are as follows:

(1) registered charities;

(2) registered Canadian amateur athletic associations;

(3) housing corporations resident in Canada and exempt from tax under Part I by
section 149(l)(i);

(4) Canadian municipalities;

(5) the United Nations or agencies thereof;

(6) prescribed universities outside Canada;

(7) a charitable organization outside Canada to which Her Majesty in right of Canada
has made a gift in the previous twelve months;

(8) Her Majesty in right of Canada or any province; and

(9) National Arts Service Organizations.

(b) The Registration Requirement

Most of what Revenue Canada does in respect of charities is organized by the logic of a
registration system. Registered status entails tax-exempt status, the right to issue donation
receipts, and the status of qualified donee. Admission to the status is controlled by an
administrative process in which Revenue Canada administrative staff make a determination
whether the applicant is a charity pursuant to the definitional criteria just discussed. Appeals

Income Tax Act, supra, note 1, s. 149.1(1) "qualified donee" and (6.4) as en. by S.C. 1994, c. 7, Sch. II, s. 123(4),
s. 110.1(l)(a) and {b), as re-en. by S.C. 1994, c. 7, Sch. II, c. 79(1), and s. 118.1(1) "total charitable gifts" and
"total Crown gifts", as re-en. by S.C. 1996, c. 21, s. 23(1), (2).

The Canadian Taxpayer (September 11, 1990), at 138 states that there are between 5,000 and 7,000
applications per year. In 1989-90, there were 4,680, of which 141 were refiised and 3,965 accepted. According
to The Canadian Taxpayer, the average response time on an initial application is twenty-two weeks. Final
determinations can take much longer.

Revenue Canada provided the ft)liowing more current inft)rmation:

Year

Applications Received

Applications Denied

1992

3,932

282/39*

1993

4,425

369/44

1994

3,915

539/83

1995

3,995

618/86

291

from negative decisions are infrequent since the only appeal from a reftisal of the Minister to
register is to the Federal Court of Appeal, a costly and lengthy process. Registered status may
be lost for a number of reasons, some of which are discussed in more detail below. It is useful
to list these reasons here since loss of registered status is almost the only sanction for non-
compliance by a charity with the regulatory regime established under the Act. A charity may
be deregistered for failing to continue to meet any of the requirements for initial registration;
carrying on any business, if it is a private foundation, or an unrelated business, if it is not;
failing to comply with the annual information return requirement; issuing a false donation
receipt; failing to keep proper records and books of account; if it is a foundation, acquiring
control of any corporation or incurring certain types of debts; attempting to unduly delay its
expenditure on charitable activities by making its transfers to another charity; and, most
importantly, failing to meet its disbursement quota.

The tax-exempt status of charities is shared by a number of other types of nonprofit
entities, including one referred to in the Act as "non-profit organizations". The definition of
"non-profit organizations" expressly excludes "a club, society or association that, in the
opinion of the Minister" is a charity. This provision, therefore, establishes the scope of
application of the registration system since it requires any entity that is a charity in the
Minister's view to register as such in order to be eligible for tax-exempt status, as well as the
right to issue donation receipts.

Application for registration is completed by filing Form T2050 together with the
following documents:

( 1 ) a certified copy of all constating documents;

(2) a statement containing full details of the activities of the applicant;

(3) financial statements for the last completed financial year or, if not available, a
budget for the first year of operation;

(4) names and addresses of all executives; and

(5) a statement as to whether the applicant intends to purchase real estate and, if so,
the name of the registered owner.

The application for registration process is set out in more detail in Form T4063.

15
16

* The first number refers to the initial letter sent by the Division to the applicant organizations indicating that
it is not likely to qualify for registration. The second number refers to the final turn-down, which is sent if the
organization responds to the initial letter, but fails to satisfy the requirements for registration: Revenue
Canada, comment letter to the Chair of the Ontario Law Reform Commission (September 26, 1996).

Income Tax Act, supra, note 1, ss. 168(1) and 149.1(2) [as am. by S.C. 1994, c. 21, s. 74(4)], (3) and (4).

Ibid.,^. 149(1 )(/).

292

The decision of the Minister to register an applicant is generally considered to be purely
administrative in nature. The Minister is not, therefore, obliged to hear or receive submissions
from the applicant. The applicant's only recourse on a negative decision is to appeal to the
Federal Court of Appeal, pursuant to section 172(3)(a) and (aA). The appeal procedure has
been criticized by several commentators for being superficial in method and scope, as it is
based solely on a thin record comprised of the application of the applicant and the Minister's
refusal letter.

The decision to revoke a registration is made by the Minister pursuant to section 168(1),
which lists the grounds of revocation set out above and provides simply that the Minister
may, by registered mail, give notice of his intention to revoke. Revocation is effected thirty
days later by publication of the Minister's decision to revoke in the Canada Gazette. An
appeal lies, as with appeals from refusals to register, to the Federal Court of Appeal under
section 172(3). There is no explicit provision in the Act affording the registrant a right to be
heard prior to the appeal. The Federal Court of Appeal has held, however, that the revocation
of a registration does give rise to a right to be heard prior to publication of the notice of
revocation in the Canada Gazette. In Renaissance International v. Minister of National
Revenue, the Federal Court of Appeal held that, as the registrant's rights were "seriously
and adversely affected" by the Minister's decision to revoke, the rules of natural justice
obliged the Minister to provide the registrant with an opportunity to be heard. Further, the
Court held that, since the appeal process was not a trial de novo, the Act itself impliedly
obliged the Minister to put in place a process that was capable of generating a record so that a
proper appeal could be conducted. This last observation is important since it applies with
equal force to the registration process. We return to these questions below in chapter 12.

17
18

As re-en. by S.C. 1994, c. 7, Sch. II, s. 141.

We think these criticisms have some merit. We return to them infra in ch. 12. See D.W. Smith, "Tax Appeal
Procedure for Charities Needs Improving" (1985), 12 Nat. (No. 4) at 21. See, also, for other explicit and implicit
criticisms., the dissent of Heald J. in Scarborough Community Legal Services v. The Queen [1985] 2 F.C. 555, 17
D.L.R. (4th) 308 (C.A.); and see Polish Canadian Television Production Society v. R. (1987), 87 D.T.C. 5216
(Fed. C.A.), and Renaissance International v. Minister of National Revenue, [1983] 1 F.C. 860, 142 D.L.R. (3d)
539 (Fed. C.A.).

In its comments on a draft version of this chapter. Revenue Canada responded:

Despite the decision in Scarborough Community Legal Services v. Her Majesty the Queen (1985), 17 D.L.R.
(4th) 308, the Division always provides applicant organizations with an opportunity to respond through an
'administrative fairness letter', which sets out in detail the reasons why the organization will probably not
qualify for registration, and invites a reply by the organization within 60 days. If the organization responds
and the Division official is still not satisfied, there may be a request for additional information... [M]ost
charities' files contain a great deal of information by the time they reach the appeal stage.

Ibid

293

(i) Business Activities

The Act recognizes a distinction between the "related" and "unrelated" business
activities of charities. The distinction, as we shall see, is poorly defined at the margins, but
the core idea is clear: a business is related if it directly advances the goals of the charity. The
sales outlets of Goodwill Industries are a good example. An unrelated business, conversely, is
one that does not directly advance the charitable purpose.

There is no provision in the Income Tax Act prohibiting a public foundation from
carrying on a related business. Therefore, this activity is permitted. Charitable organizations
that carry on related businesses are deemed by the Act to be, with respect to those activities,
devoting their resources to their charitable activities. Therefore those activities are permitted.
Private foundations, however, are explicitly prohibited from carrying on any business at all.^^

Although "related business" is not defined in the Act, the Act does say that it includes a
business unrelated to the objects of the charity if "substantially all" the employees in the
business are unpaid. This provision thus permits public foundations and charitable
organizations to operate gift shops, run bingos, sell Christmas cards, or carry on any other
such enterprises provided the staff are mostly volunteers. Otherwise, public foundations and
charitable organizations may not carry on unrelated businesses.

The case law indicates that the courts have had some difficulty dealing with the
business activities of charities and other nonprofit organizations. Like charities, nonprofit
organizations are required under the Act to be "organized and operated exclusively" for their
nonprofit purpose. Charities, of course, are also subject to the more explicit provisions just
outlined. Otherwise, the issue of permissible and impermissible business activities is the same
in the case law. There are several decisions of interest, two involving nonprofit organizations
and one involving a charity.

In Gull Bay Development Corp. v. The Queen, the taxpayer corporation earned income
from a logging operation conducted by paid employees. The income in turn was applied to

22
23
24
25

See, generally, E.B. Bromley, "Political, Foreign and Business Activities: Problems in the Law of Charities", in
Report of Proceedings of the Forty-First Tea Conference, 1989 (Toronto: Canadian Tax Foundation, 1990) and
E.B. Bromley, "A Response to 'A Better Tax Administration in Support of Charities'" (1991), 10 Philanthrop.

(No. 3) 3.

Income Tax Act, supra, note 1, s. 149.1(4)(a).

Ibid., s. 149.1(1) "related business".

Ibid., s. 149.1(3)(a) and 149.1(2)(a), respectively.

Ibid.,s. 149(1)(/).

[1984] C.T.C. 159, 84 D.T.C. 6040 (Fed. T.D.).

294

the purposes of the corporation, which were to advance the economic and social welfare of
natives on the Gull Bay Indian Reserve. Walsh J. held that the business activity of the
corporation did not jeopardize its exclusively nonprofit nature and, therefore, that the income
was exempt from tax. He applied a "preponderant purpose" test and concluded that, despite
the business activities, the preponderant purpose, and therefore exclusive purpose, of the
corporation remained its tax-exempt social and welfare activities. In Minister of National
Revenue v. Begin^^ profits from the sale of beer in a Quebec community were likewise held
exempt from tax because they were used exclusively for purposes of social welfare, charity,
education, and civic improvement.

The issue becomes more difficult when charities are involved because of the additional
explicit prohibitions concerning unrelated and related businesses. Had the Court in these two
cases been required to ask, in addition, whether the nonprofit companies were carrying on
unrelated businesses, one might have expected considerably greater difficulty and perhaps a
different result. This question did arise, for the first time, in Alberta Institute on Mental
Retardation v. Canada,^^ a case involving certain commercial activities of a charity. In that
case the charity, the Alberta Institute on Mental Retardation, collected and sold used
household goods to a retailer, pursuant to a contract which provided for monthly advances of
$2,000 and a fifty percent share of profits from retail sales. The Alberta Institute, in turn,
remitted all its profits to its associated charity, the Alberta Association for the Mentally
Handicapped.

Construably, this was business activity, although it may have been more accurate to
regard this activity as simply converting donations-in-kind into money. Nonetheless, the
Court characterized the issue as one raising the question whether such business activity was
related or unrelated.^^ The majority (Heald and Mahoney J. J.) set out a list of four criteria to

27
28

The "preponderant purpose" test has also been applied in two property tax cases — Ontario Regional Assessment
Commissioner v. Caisse Populaire de Hearst Ltee, [1983] 1 S.C.R. 57, at 64; 143 D.L.R. (3d) 590, at 596, per
Mclntyre J., and in The King v. Assessors of Sunny Brae, [1952] 2 S.C.R. 76 in the dissenting judgments of
Cartwright J., Rinfret C.J., and Kerwin J. In the former case the activities in question were those of a nonprofit
credit union. In Sunny Brae, a laundry business was operated by a religious society and the profits from the
business were devoted to the education of orphans. The majority in Sunny Brae held that the use of the premises
was not charitable, and that the organization itself was not exclusively charitable since it was carrying on a
business, even though all the profits were used to support charitable activity only.

[1962] Ex. C.R. 159, 62 D.T.C. 1099.

[1987] 3 F.C. 286, 87 D.T.C. 5306 (Fed. C.A.) (subsequent references are to 87 D.T.C). For a comment, see V.
Krishna, (1987/89) 2 Can. Current Tax J. 36. For a similar English case, see Oxfam v. Birmingham City District
Council, [1976] A.C. 126, [1975] 2 All E.R. 289 (H.L.), where a gift shop operated by Oxfam was denied a rating
exemption, even though all the profits from the shop went to support Oxfam's charitable purposes. Thus the
House of Lords declined to apply a destination-of-profits test in assessing whether the gift shop was using the
premises for charitable purposes.

It was also argued in Alberta Institute on Mental Retardation v. Canada, supra, note 28, that the activities
constituted a breach of the "exclusively charitable" requirement. The Court held that the business activity of the^
Alberta Institute was "merely a means to the ftilfillment" of its charitable purposes, which were exclusively
charitable.

295

be used in assessing the nature of the business activity of charities:^^

1 . The degree of relationship of the activity to the charity;

2. Profit motive;

3. The extent to which the business operation competes with other businessmen; and

4. The length of time the operation has been carried on by the charity.

The majority held, purportedly applying these criteria, that a business such as the business at
issue in Alberta Institute is a related business because all the profits from that business are
used to advance the charitable purpose.

With respect, the Commission does not think that this reasoning is correct,^' nor do we
think that the four criteria established by the majority are particularly helpful or accurate in
terms of the issue at hand. We leave the development of our criticisms to chapter 12. It is
sufficient to note here that, in our view, a business is unrelated unless the business directly
advances the charitable purposes of the charity or is ancillary or incidental to the
advancement of those purposes. We therefore respectfully concur with the following
reasoning of Pratte J., in dissent, in Alberta Institute:

The mere fact that the whole of the income derived from a business operated by a charity is used
for the charitable purpose of the charity is not sufficient to make that business a related business.
And this is so because the necessary relationship must exist between the charitable objects and
the commercial activity or business itself If it were sufficient, in order to create the necessary
relationship, that the income of the business be entirely used for charitable purposes,
paragraph 149.1(3)(a) Iwhich permits revocation of registered status for carrying on an unrelated
business] would be devoid of effect. Indeed, according to that interpretation, the Minister could
only cancel a registration on the ground that the charity operates a business 'that is not related' if
the income derived from that business was not used for charitable purposes; in such a case,
however, there would be no need for the Minister to invoke paragraph 149. l(3)(a) since he

//)/V/.,at5311.

As well, the majority of cases are or appear to be against it. See The King and the Assessors of Sunny Brae, supra,
note 26; Oxfam v. Birmingham City District Council, supra, note 28; Church of Christ Development Co. v.
Minister of National Revenue, [1982] C.T.C. 2467, 82 D.T.C. 1461 (Tax Rev. Bd.) (subsequent references are to
82 DT.C); and Hutterian Brethren Church of Wilson v. R., [1980] C.T.C. 1,31 N.T. 326 (Fed. CA.) (subsequent
references are to [1980] C.T.C). Compare, also, Comptoir de Roberval Inc. v. Minister of National Revenue
(1955), 56 DT.C. 5, 14 Tax A. B.C. 193. In Comptoir de Roberval all the profits of one corporation, earned
through the sale of beer and groceries, were donated to a second exclusively charitable corporation. The Court
held, unequivocally, that the income of the first corporation was subject to tax.

Alberta Institute on Mental Retardation v. Canada, supra, note 28, at 5312. In an earlier decision, Pratte J. had
said, similarly: "a commercial activity like farming for a profit does not become a charitable activity within the
meaning of section 149 for the sole reason that it is carried on by a charitable person with the intention of using
the income derived from that business for charitable purposes." See Hutterian Brethren Church of Wilson v. R.,
supra, note 31, at 7.

296

could revoke the registration on the ground that the foundation is not operated for exclusively
charitable purposes.

For now it may be said that the majority decision in Alberta Institute is probably the law
on this issue.

(ii) Investment Activities

fl. Control of Corporations

Foundations which "acquire control" of a corporation may have their registration
revoked. "Control" is defined as fifty percent or more of the issued share capital of the
corporation, held by the foundation alone, or in concert with non-arm's length persons. The
prohibition does not apply if the corporation has not purchased for consideration more than
five percent of the share capital of the corporation. Therefore, small holdings held in concert
with non-arm's length persons are permitted. "Control" is permitted when it arises by gift,
since "acquire" does not include receiving by gift. Since very large corporations could thus
be controlled by foundations, it is unclear what the restriction on the control of corporations
is intended to accomplish. Moreover, there is nothing in the Act to prevent a charity fi-om
carrying on a business under a trust, and receiving business profits, tax free, as income
distributed to it as a beneficiary. Thus, if the purpose of the restriction is to prevent
foundations from owning a substantial stake in busmess enterprises and/or to preclude such
businesses from escaping income taxes on their profits, as seems likely, it is seriously
inadequate.

b. Investment "Businesses"

The question has arisen whether charitable organizations are in conformity with their
obligation to devote all their resources to their charitable activities if they are investing a
substantial portion or all of their capital to earn income, which in turn is devoted to their
charitable activities. Two cases illustrate the problem.

In The Pas Lumber Co. v. Minister of National Revenue, the taxpayer made a donation
of $20,000 to an organization established by it to assist needy persons in the area where it
conducted its business. The donation generated a small amount of income which, in turn, was
granted to a few needy residents. The taxpayer was denied a deduction for the donation on
the basis that the organization failed the "all the resources" test; the capital, the court
reasoned, was devoted to earning income, not to doing charity.

Income Tax Act, supra, note 1, s. 149.1(12).
(1958), 59 D.TC. 95, 21 Tax A.B.C. 233.

297

In another case, Church of Christ Development Co. v. Minister of National Revenue^^
the appellant charity was actively investing in real estate and in the stock market. The Tax
Appeal Board held:

[T]he investment by the organization of these moneys [donations and bequests] /or the precise
purpose of causing investment income thereon for the organization would not disqualify that
organization from a 'non-taxable status'... [The] conclusion that a charitable organization must
be passive,... rather than active, in its efforts to improve financial resources, is not
warranted.... [However], the activity of the appellant in buying and selling stocks and bonds and
in buying, subdividing, servicing and selling land, was conducting a business.... l\\?ti the profit
so earned may eventually find its way into charitable purposes while laudable, is not a
redeeming feature — it will be only the net profit after the impact of income taxes that will be so
available.

The decision m The Pas is incorrect, in our view, and it appears that Revenue Canada
has admitted as much: it currently treats the "all the resources" test as merely the direct
complement of the rule prohibiting the payment of income to owners or members. A better
understanding of the problem, in our submission, is that there is nothing in the "all the
resources" test or, to use our phrase, the "exclusively charitable" test, that obliges a charity to
pursue its charitable purpose in a particular way. Investing donations to generate income for
future charitable expenditure is just as valid a way of pursuing charity as spending the
donations upon receipt.

The Church of Christ decision, on the other hand, is probably correct. As m The Pas,
the purpose of the investment activity in Church of Christ was undoubtedly to raise money
for the relevant charitable purpose. The distinction between the two cases lies, however, at
the level of the form of the activity, not its ultimate purpose. As the Board in Church of
Christ pomted out, the investment activity there was so extensive, it had become a business in
itself, not a mere means or way of doing charity.

c. The Non-arm 's Length Investments of Private Foundations

The Act regulates the non-arm's length investments oi onXy private foundations. These
investments are regulated, not prohibited. The Act requu-es that the non-arm's length
mvestment itself be valued at the greater of its cost amount and its fair market value, and that
this deemed value be the value used in the calculation of one component of the disbursement

-5*7

quota of the private foundations. The effect of this rule is to ensure that the foundation and
the non-arm's length investee cannot manipulate the valuation of the investment to reduce the
private foundation's disbursement quota. Further, to help ensure that the private foundation is
actually earning a fair rate of return on the investment, the Act imposes a tax on the non-

35 ^

Supra, note 3 1 .

Ibid., at 1471-72 (emphasis in original).

^^ Income Tax Regulations, C.R.C. 1978, c. 945, s. 3702(1 )(a), as en. by SOR 187-632.

298

arm's length investee equal to the difference between a deemed rate of return and the actual

return.

"Non-qualified investment" is the specific term used to identify the offending
investments, and it is defined in very specific and broadly inclusive terms as follows:

(a) a debt (other than a pledge or undertaking to make a gift) owing to the foundation by
(i) a person (other than an excluded corporation)

(A) who is a member, shareholder, trustee, settlor, officer, official or director of
the foundation,

(B) who has, or is a member of a group of persons who do not deal with each
other at arm's length who have, contributed more than 50% of the capital
of the foundation, or

(ii) a corporation (other than an excluded corporation) controlled by the foundation,
by any person or group of persons referred to in subparagraph (i), by the
foundation and any other private foundation with which it does not deal at arm's
length or by any combination thereof;

(b) a share of a class of the capital stock of a corporation (other than an excluded
corporation) referred to in paragraph (a) held by the foundation (other than a share listed on a
prescribed stock exchange or a share that would be a qualifying share within the meaning
assigned by subsection 1 92(6) if that subsection were read without reference to the expression
"issued after May 22, 1985 and before 1987"), and

"Excluded corporation" is defined to include a corporation whose property is used
exclusively by the charity for its charitable purposes and, importantly, a corporation all the
shares of which are held by the foundation."*^

The Act imposes no penalty on the private foundation itself where the investment does
not achieve the specified rate of return. Nor, in the case where shares of a corporation are

39
40

Income Tax Act, supra, note 1, s. 189, as am. by S.C. 1994, c. 21, s. 85(1), (2). Paradoxically, the basis of
calculation of the penalty tax is different from the basis of calculation of the quota, so that the two amounts will
often differ. For the quota, the shares are valued at the greater of their fair market value and their cost amount. For
the tax, the shares are always valued at their cost amount to the charity.

Income Tax Act, ibid, s. 149.1(1) "non-qualified investment" as am. by S.C. 1994, c. 7, Sch. II, s. 123(2).

Ibid., s. 149.1(1) "non-qualified investment" (e), if), as re-en. by S.C. 1994, c. 7, Sch. II, s. 123(3).

299

owned by the foundation, does the Act regulate in any way the affairs of the underlying
business. This is in marked contrast to the American rules, as we shall see."" It would be
possible under these provisions for a private foundation to own all the shares of a (formerly)
family business with the members of the family working for and contracting with the
business, earning substantial incomes in the process. The only constraint on this type of
arrangement is the disbursement quota. However, since the quota is calculated as a function
of asset value — that is, the value of the shares — and since the value of the shares is
determined according to the greater of their cost amount and their fair market value, the
excessive salaries, to the extent that they depress earnings, may also result in a lower fair
market value.

(iii) Political Activities

Charitable foundations and organizations are permitted to engage in political activities
under the Income Tax Act, but only to a very limited extent. Their right to do so is
circumscribed by two sets of rules, one involving a matter of definition, the other relating to
compliance with the general expenditure limits established under the disbursement quota.

a, "Ancillary and Incidental"

It will be recalled that "charitable foundation" is defined such that any entity claiming
that status must be constituted and operated exclusively for charitable purposes. This means,
among other things, that none of a foundation's principal objects or activities can be political.
The Act provides, however, that if the foundation devotes "substantially all" its resources to
charitable purposes, and only a part of its resources are devoted to non-partisan political
activities of an "ancillary and incidental" nature, then the latter expenditures will be
considered to be charitable for the purpose of the definition of "charitable foundation".
Similarly, although charitable organizations are defined as organizations that devote ''all their
resources" to charitable activity, if substantially all the resources are so devoted and only a
part are devoted to non-partisan political activities of an "ancillary and incidental" nature, the
latter expenditures are considered to be expenditures on charitable activities for the purpose
of the definition of "charitable organization".

One important element of this rule is the condition which requires that substantially all
the resources of the charity be devoted to strictly charitable activities or purposes. In
contradistinction to some aspects of the disbursement rule to be discussed shortly,
"resources" here refers to all the resources — financial, physical, and human — owned by or

Infra, this ch., sec. 3.

The legislative provision permitting "ancillary and incidental" political activities was added after the Federal
Court of Appeal, in Scarborough Community Legal Services v. The Queen, supra, note 18, upheld Revenue
Canada's decision not to register an organization because it had picketed the Ontario Legislature, and expressed
its intention to do so again.

300

available to the charity, not just those resulting from receipted donations. Revenue Canada
defines "substantially all" as equal to ninety percent or more of the resources."*^

The arbitrary ninety percent limit aside, this rule is neither novel nor objectionable. In
our view, it is an accurate articulation of the common-law rule on the permissible political
activity of charities.'*'* It is also perfectly in accord with the conclusions reached in chapter 6
in the discussion on the real definition of charity. It simply recognizes, at the level of general
principal, the applicability of a means/end distinction in the domain of the political
involvements of charities: only political activities that are ancillary and incidental are
permissible because only those activities are a means of doing charity.

A modest improvement of the formulation of this rule would distinguish between
ancillary political activities and incidental political activities, not in order to treat them
differently, but merely to recognize a distinction, however slight. We would suggest that the
rule is better phrased if it permits political activity that is ancillary or mcidental. Political
activity is "ancillary" to the charitable project when it is supportive of it or advances it in an
indirect way. An example might be a workshop run by social welfare charities at which
government policy is unanimously criticized and to which the media are invited. Political
activity is "incidental" to the charitable project when it is a mere byproduct of it. The same
social welfare charities might organize a fundraising march. The spectacle of the march
would certainly have political ramifications.

The application of this rule can be quite difficult, especially in marginal cases. Many
charities find the rule to be too vague to be of much help and many of them feel that Revenue
Canada's application of it in recent years has been somewhat heavy handed. In part to
respond to the call for clearer guidelines. Revenue Canada issued Information Circular 87-1
in 1987. Information Circular 87-1 sets out in more detail Revenue Canada's views on the
permissible political activities of a charity. Interestingly, Information Circular 87-1 avoids
defining political activity explicitly, perhaps because of Revenue Canada's reticence on this
issue given the very negative reaction to its first attempt at a circular in 1978. Nonetheless,

See Interpretation Bulletin IT-486 (April 26, 1982), para. 7.

See Re Ontario Public Trustee and Toronto Humane Society (1987), 60 O.R. (2d) 236, 40 D.L.R. (4th) 111
(H.C.J), and McGoxern v. Attorney-General, [1982] Ch. 321, [1981] 3 All E.R. 493.

See Information Circular 87-1 for a different view. The circular states:

The words 'ancillary and incidental' must not be read separately. At common law the phrase 'ancillary
and incidental' has been determined by the courts to mean something that is subordinate, additional or
relative to something else. In the context of charity law, an 'ancillary and incidental' activity is one that
is naturally connected with and subservient to a charitable purpose or charitable activity, or something
that exists only in conjunction with a charitable purpose or activity. An activity which is given such
prominence by a charity that it is no longer subservient or incidental to a charitable purpose, or an
activity that exists in and of itself (ie, independently) is not 'ancillary and incidental' but has itself
become a purpose.

SeeN. Brooks, Charities: The Legal Framework, (Ottawa: Secretary of State, 1983) [unpublished], at 127 et seq.
for a detailed account of the history of the first circular. Information Circular 78-3. Information Circular 78-3

301

it is clear through the examples in the circular that Revenue Canada defines as political any
act intended to influence government policy directly or indirectly (by affecting public
opinion). We think this is correct and that Revenue Canada should not be reticent in setting
this out.

The circular develops, nearly correctly in our view, a threefold classification of
political, or apparently political, activities. First, there are partisan activities. These could
never be purely instrumental to effecting a charitable goal and therefore are expressly
excluded from the permissible political activities of charities. The only substantive change
we would make to Revenue Canada's scheme would be to include in this category other types
of political activity — such as interest group politics — which are also not merely ancillary or
incidental to charitable goals. Second, there are activities that involve conversing with
government on matters of direct or indirect concern to the charity. These are not political
activities, properly understood, although they have some of the same trappings as political
activity, such as the fact that the government is on the receiving end of some communication
of relevance to the formulation of public policy. In this type of activity, the purpose of the
communication is to permit a "full and reasoned" discussion of an issue, rather than to
"influence public opinion" or change public policy. These activities are not restricted in any
way. Third is the intermediate class of activities that are "ancillary and incidental" to the
activities or purposes of the charity. Considered in isolation, these activities are political in
form and content, but considered in then- whole context, they are merely a means of carrying
on charitable activity or a merely a byproduct of charitable activity. Examples, with which
we fully concur, are set out in the circular as follows:

(a) publications, conferences, workshops and other forms of communication which are
produced, published, presented or distributed by a charity primarily in order to sway public
opinion on political issues and matters of public policy;

(b) advertisements in newspapers, magazines or on television or radio to the extent that they
are designed to attract interest in, or gain support for, a charity's position on political issues
and matters of public policy;

(c) public meetings or lawful demonstrations that are organized to publicize and gain
support for a charity's point of view on matters of public policy and political issues;
and

defined political activities as activities "designed to embarrass or otherwise induce a government to take a stand,
change a policy, or enact legislation for a purpose particular to the organization carrying on the activity".

Information Circular 87-1 states: "A charity may not oppose or endorse a named candidate, party, or politician.
The charity's resources may not be devoted directly to such activities, or devoted indirectly through provision of
resources to a third party engaged in partisan political activities."

The words of Information Circular 87-1 are to like effect: "[Activities] that cannot themselves be considered
charitable activities but are subordinate to bona fide charitable purposes".

302

(d) mail campaign — a request by a charity to its members or the public to forward
letters or other written communications to the media and government expressing
support for the charity's views on political issues and matters of public policy.

The circular requires a charity to keep a record of its permissible political activities and
of its expenditures thereon. Where an allocation between charitable and permissible political
activity must be made, the circular requires that the allocation be "reasonable". The T3010
annual disclosure form, however, requires very little disclosure on political activities; it asks
for only the total amount spent on political activities. We understand that Revenue Canada is
currently redesigning the T3010 form to require more information on political activities.

b. The Disbursement Quota

The disbursement regimes imposed on charities under the Income Tax Act also result in
significant restrictions on the political activities of charities. The Act expressly provides that
an amount spent on any political activities may not count as an expenditure on charitable
activities or as a gift to a qualified donee for the purposes of satisfying the quotas. Because
the relevant quotas are quite high, there is not much room in the budgets of most charities for
permissible political expenses. However, since, in the case of organizations, the quota is
calculated as a percentage of only receipted donations, the expenditure of income from other
sources on political activity is not restricted by this rule.

(iv) Borrowing Activities

Foundations are severely restricted in the types of debt obligations they are permitted to
incur. Debts other than debts for current operating expenses, debts incurred in connection
with the purchase and sale of investments, and debts incurred in the course of administering
charitable activities, are prohibited. There is no such restriction on organizations. The object
of this rule is to limit the permissible risks undertaken by foundations.

Charitable gift annuities are a common fiindraising device used by many well-
established charitable organizations, mostly religious in purpose. Annuities are debt
obligations. In a gift annuity there is also a significant upfront gift element in the initial
purchase price. Hence, their attraction for charities. Only charitable organizations may enter
into these obligations. Foundations are prohibited from doing so by the rule restricting
permissible debt obligations.^^

49
50
51

Comment letter, supra, note 14.

Income Tax Act, supra, note 1, s. 149.1(1.1).

Ibid., s. 149.1(3)(60 and (4)(^.

See, further. Interpretation Bulletin IT-1 11R3.

303

(v) Granting Activities

The assumption of the regime is that foundations are mainly funding agencies and
organizations are mainly operating agencies. To ensure that making grants to appropriate
recipients does not run afoul of the "exclusively charitable" rule, several deeming provisions
are used.

For foundations, "charitable purposes" is defined to include the disbursement of funds

to qualified donees. This definition thus makes clear that funding the charitable work of
other specified entities is itself a charitable act.

For organizations, there are three relevant deeming rules:

(1) Reorganizations: Section 149.1(10) deems gifts of capital by a charitable
organization to a qualified donee to be a devotion of the organization's resources
to charitable activity. This provision, thus, permits a charitable organization to
reorganize itself or cease operations altogether by transferring its capital
endowment to a "qualified donee". Without this deeming provision, it might be
argued that such a reorganization is contrary to the "exclusively charitable"
provision.

(2) Limited granting: Section \49A(6)(b) deems gifts of up to fifty percent of an
organization's "income" to qualified donees to be a devotion of the
organization's resources to charitable activities. Such gifts are therefore permitted.
This provision thus permits organizations to engage in some grant making.

(3) Coordination of activities of associated charities: Section 149.1(6)(c) deems gifts
by an organization of up to one hundred percent of its income to an "associated
charity" to be a devotion of its resources to its charitable activities. Such gifts are

53
54

Income Tax Act, supra, note 1, s. 149.1(1) "charitable purposes".

See Inland Revenue Commissioners v. Helen Slater Charitable Trust Ltd, [1982] Ch 49, [1981] 3 All E.R. 98
(C.A.).

"Income" is no longer relevant in most contexts under s. 149.1 of the Income Tax Act, supra, note 1. It remains so
here, however. The general definition of income under the Act applies. In addition, s. 149.1(12) defines "income"
to include all gifts received by the charity save gifts of four kinds. (1) "Specified gifts" are not included in income.
The term "specified gifts" is used in the Act to designate gifts fi-om one charity to another, where the gift is
specified by the donating charity not to count towards satisfying its disbursement quota. The designation is thus
used to facilitate gifts of capital from one charity to another by treating them favourably under the disbursement
quota rules. Here, under rules goveming restrictions on grants, the object is to exclude them from the ftinds that
can be granted (again) to another charity. (2) Receipted gifts of capital from donors are also excluded, from
income, for the same reason. (3) Unreceipted gifts from non-charities are excluded, and (4) gifts of capital from
another charity are excluded.

The Minister may designate one charity to be associated with another where he is satisfied that the aim or activity
of each is substantially the same; Income Tax Act, ibid., s. 149.1(7).

304

therefore permitted. This provision thus permits cooperation among charities
belonging to an associated group of charities.

Grants failing to comply with any of these restrictions would give rise to a right in the
Minister to revoke the organization's registration. In all likelihood, however, the Minister
would simply reclassify the charity as a foundation, in which case a stricter disbursement rule
would apply.

(vi) International Charity

It will be recalled that, by definition, a registered charity must be resident in Canada.
This provision restricts significantly the capacity of Canadians and Canadian charities to do
charity abroad. There are, in fact, three ways under the Act for a registered charity to do
charitable work abroad.

First, a registered charity may itself carry on its own charitable activities abroad.
Practically speaking, this option is open to only a few large and well-established charities,
such as relief organizations, which have the financial and administrative wherewithal to send
their people abroad.

Second, under sections 110.1(l)(af) and 118.1(1), deductions and credits are allowed

for gifts to the United Nations or any of its agencies, to prescribed foreign universities, and
to charitable organizations outside Canada to which the Canadian government has made a
recent gift. These provisions thus also permit a limited amount of international charitable
activity, but the list of eligible donees is very restricted.

Third, a Canadian charity can enter an agency relationship with an entity, usually a
foreign charity, which will do the actual charitable work abroad. Information Circular 80-1 OR
establishes a list of conditions that must be satisfied to ensure a valid agency relationship.
Essentially, these conditions require that the Canadian charity maintain control over the
expenditure of the charity's ftinds and remain in a position to account for the expenditures
fiilly. Internationally oriented Canadian charities, therefore, are obliged to be creative in the
structuring of their international endeavours so that they are able to control and account for
the charitable work done as their own, on the one hand, while coping with local restrictions
and remaining sensitive to local sensibilities, on the other.

(d) Disbursement Quotas

The disbursement quota was first introduced into the Act in the major reform of 1977.
The chief ftmction of the quota is to force charities to do charitable work, or lose their status

57
58
59

Ibid., as re-en. by S.C. 1994, c. 7, Sch. II, ss. 79(1) and 88(1) respectively.
See Income Tax Regulations, supra, note 37, s. 3503, Sch. VIII.
See Information Circular 84-3 R4 for a list of such foreign gifts.

305

and its associated privileges. The quota regimes are different for each of the three categories
of charity. They are arbitrary in the sense that it is difficult to justify the particular lines
drawn, and they do not differentiate among types of charities beyond the three main types
established in the Act. They are considered by most commentators, however, to be reasonable
in their requirements, and they do provide an easily administered quantitative measure of
whether an organization is exclusively charitable. It is best, then, to understand them as
convenient, but partial surrogates for elements of the "exclusively charitable" standard.

The quota is satisfied by a charity if it disburses the required amount on its charitable
activities or on to qualified donees. Some defmition of charitable activities is therefore
required. The Act does not provide a detailed definition of this term, but as we have seen,
certain provisions of the Act do attempt to clarify the status, in this regard, of such things as
political activities and grant-makmg activities of organizations. Generally speaking, it is
accepted that the direct administrative costs of functioning as a charity clearly qualify, but
fundraising costs and legal and accounting costs clearly do not.

(i) The Quota for Charitable Organizations

The quota for charitable organizations is the least onerous of the three. A charitable
organization must spend at least eighty percent of the previous year's receipted donations on
its charitable activities or on gifts to "qualified donees". Eighty percent of receipted
donations, a somewhat arbitrary figure, represents the government's view as to how much of
a charitable organization's revenue should be taken up by non-charitable expenses, such as
the cost of administration and the cost of fundraising and political activities. The fact that
only receipted gifts are included means that gifts from tax-exempt organizations
(governments and nonprofits) and non-residents and unreceipted gifts do not form part of the
pool of gifts required to be disbursed. A gift from a donor who did not require a tax receipt
would therefore be excluded. This might happen where the donor had already reached the
deduction Iknit. Certain receipted gifts are also expressly excepted from the total against
which the 80% is calculated in order to permit capital endowments to be formed. These
exceptions are gifts by way of bequest or inheritance and gifts subject to a trust to be held for
at least ten years. Gifts from another registered charity are also excepted for the same
reason. The point of these exceptions is to permit charitable organizations to build up
capital endowments with gifts intended for that purpose.

60
61
62
63

See Information Circular 80-1 OR.

Income Tax Act, supra, note 1, s. 149.1 {2){b), as re-en. by S.C. 1994, c. 21, s. 74 (4).

These are included back into the quota regime in the year in which they are actually expended.

The Income Tax Act, supra, note 1, s. 149.1(4.1) prohibits this exception from being used to delay unduly the
expenditure of amounts on charitable activities of a charity. Where that is the purpose of the payment, the Minister
may deregister the charities. Thus one charity cannot grant to another, counting the grant towards the satisfaction
of its quota, then the recipient charity, in the second year, grant back to the donor, counting the grant towards the
satisfaction of its quota, and so on.

306

This disbursement quota regime is quite liberal since all revenue received by an
organization other than receipted gifts (investments, related businesses, fundraising events,
and non-receipted gifts) is exempt and thereft)re available ft)r other activities, such as
ftindraising and, to the limited extent defined above, political activities. Notwithstanding the
relative leniency of these rules, there may be occasions where the quota is not achievable. In
these situations, the charitable organization may apply to the Minister to obtain a
discretionary exemption ftDr the shortfall. Likewise the Minister has a discretion to exempt
charitable organizations from their full disbursement quota if the shortfall is to be
accumulated for a specified capital purpose approved by the Minister. There is also
provision in the Act for carrying forward for five years and back for one any disbursement

quota excess.

(ii) The Quota for Public Foundations

The quota calculation for a public foundation is considerably more complex. Like the
quota for a charitable organization, one of its objectives is to ensure that money donated by
the public to charity is actually employed, within a short space of time, in charitable work.
Another objective of the quota rules applicable to public foundations is to control against the
undue accumulation of wealth by charitable entities.

The quota is an aggregate of a number of distinct elements. The first element is exactly
the same as the quota for charitable organizations, that is, eighty percent of the receipted
donations of the preceding year, save those received as capital gifts or fi-om other charities.
The second element is eighty percent of all gifts from registered charities in the preceding
year, save those received as "specified gifts". This provision means that the only gifts
received fi*om registered charities to be treated by the Act as gifts of capital are those
specified by the donor charity as such. If the donating charity has invoked the specified gift
designation, it may not count the gift as an expenditure contributing to the satisfaction of its
own disbursement requirement. The third element is the most complex. We will not go into
all the details, but will merely indicate the essentials of the provision. In effect, the third
element obliges a public foundation to disburse 4.5 percent of the average total value of all its
investment properties, as calculated in a specified way, owned during the preceding twenty-
four month period. The expectation underlying this requirement is that the foundation should
be earning a real rate of return on its investments close to or a bit more than 4.5 percent, and
thus the disbursement quota is calculated so that there is little opportunity for capital growth
due to investment earnings over the long term.

64
65

This would be available where a charity has had high start-up costs or an unsuccessful and costly fundraising
campaign.

The amount accumulated is deemed to be expended in the year accumulated, and may not, therefore, be counted
towards the satisfaction of the quota in any subsequent year.

Income Tax Act, supra, note 1, s. 149.1(20).

The 4.5% quota is thought by many to be now too high.

307

The provisions mentioned above in the discussion of charitable organizations, which
provide for exceptions to the disbursement quota at the discretion of the Minister and allow
the charity to carry forward and back disbursement quota excesses, apply also to public
foundations.

(iii) The Quota for Private Foundations

The disbursement quota for private foundations is the same as that for public
foundations in respect of the first and third elements. The second element is different.
Whereas a public foundation is obliged to disburse only eighty percent of the value of its
non-specified gifts from registered charities, a private foundation must disburse one hundred
percent. This is due to the fact that there probably is no good reason why a registered charity
should be making a donation to a private foundation, so if such a donation is made, all of it
must be disbursed. The relieving rules are the same as well.

(iv) Quota Shopping and Disbursement Avoidance

The Minister has the power to designate a charity as being registered in any one of three
classifications. This power is used to prevent a charity fi*om avoiding more onerous
disbursement quotas by manipulating the classification system.

Where one charity makes a gift to another with the intention of unduly delaying
expenditures of amounts on charitable activities, the Minister may revoke the registration of
the gifting charity and, if culpable, the receiving charity. This is an important, if virtually
unenforceable anti-avoidance provision. It is required principally because organizations are
not obliged to disburse any portion of their (necessarily) unreceipted gifts from other
charities.

(e) Donations

Receipted donations by individuals to registered charities of up to twenty percent of
their income qualify for a federal tax credit equal to seventeen percent on the first $200
donated and twenty-nine percent on the remainder. Special provision is made for gifts to
American charities by Canadians resident in Canada, but working in the United States, to be

68
69
70

See Income Tax Act, supra, note 1, s. 149.1(6.3), (13).

Ibid.,s. 149.1(4.1).

See Interpretation Bulletin IT-110R2 in general. See, also, Interpretation Bulletins IT-lllR, IT-226, IT-244R2,
and IT-288. These rules are discussed extensively in this report, as our concern with the Income Tax Act, supra,
note 1, is not the privileges, per ^e, but how the Act regulates charity to police their availability.

Income Tax Act, ibid., s. 1 18.1 (3). The 1996 federal Budget raised the annual limit on charitable donations from
20% to 50% of income. The limit in the year of death and the preceding year was raised to 100% of income. The
Budget also included a provision to raise the 50% limit by the extent necessary to permit the full amount of
donations of appreciated capital property to be eligible for the tax credit.

308

treated in the same way. The Canada-United States Income Tax Convention (1980)^^
provides that Canadians with U.S. source income may claim a tax credit in Canada for
donations to American charities against taxes owing on that income, for up to twenty percent
thereof

Individuals may also claim a tax credit for gifts to Her Majesty in the right of Canada or
the provinces, but without a limit on the amount of income that can be donated for the
purposes of the credit. Gifts of Canadian cultural property and ecologically sensitive land to
certain designated institutions are treated in a similarly favorable way.

Gifts in kind of capital property to charity are also given favorable tax treatment in
respect of any capital gains that might arise because of the disposition by gift. The Act
permits the donor to determine the deemed proceeds of disposition at an amount between the

adjusted cost base and the fair market value. This flexibility allows the taxpayer to
minimize the tax liability that might arise because of the gift.

(0 Compliance

(i) The Annual Disclosure Requirement

Charities are required under the Act to file public information returns and private
information returns on an annual basis, within six months of the end of their fiscal year. The
public information return is contained in Revenue Canada's Form T3010. It requires fairly
detailed information on a charity's receipts and disbursements, its assets and liabilities, the
remuneration paid to its employees, the charity's purposes and activities, the names and
addresses of its executive officers, and its gifts to qualified donees. In addition, the form
contains several schedules requh^ing information relating to the nature of the charity's
operations, its accumulations of property, and the actual calculation of its disbursement quota.
With the annual submission of the form, the charity is required also to submit its annual
fmancial statements, not necessarily audited. The information submitted in the schedules and
the fmancial statements are not available to the public.

Charities are also obliged to maintain proper records and books of account, including
duplicates of every receipt issued. The obligation with respect to the contents of the records is

(Enacted in Canada by S.C. 1984, c. 20), art. XXI. See, also Income Tax Act, supra, note 1, s. 1 18.1(1) "total gifts"
(a), as re-en. by S.C. 1994, c. 7, Sch. II, s. 88(1).

This limit does not apply to gifts to a college or university at which the taxpayer or a family member is enrolled.

Income Tax Act, supra, note 1, s. 118.1(1) "total Crown gifts", as re-en. by S.C. 1994, c. 7, Sch. II, s. 88(1) and
am. by S.C. 1996, c. 21, s. 23(2).

Ibid., s. 1 18.1(7.1) as en. by S.C. 1994, c. 7, Sch. 11, s. 88(2). Gifts of cultural property are also treated as income
neutral and capital gain neutral events: ss. 118.1(7.1) and 39(l)(a)(i.l), as re-en. by S.C. 1994, c. 7, Sch. II,
s. 22(1).

Ibid., s. 1 18.1(6), as am. by S.C. 1994, c. 7, Sch. VIII, s. 53(1) and S.C. 1996, c. 21, s. 23(6).

73
74

75
76

309

quite general: section 230(2)(a) requires "information in such form as will enable the
Minister to determine whether there are any grounds for revocation....".

(ii) Penalties

The principal sanction under the Act is loss of registered status. This sanction is set out
in section 168(1) and is applicable to the list of eight events, set out above in section 2 (b) of
this chapter. Essentially, breach of any of the rules governing charities constitutes grounds for
revocation of registration. There is, with one minor exception, no provision anywhere in the
Act for any sanctions less severe than this.

Besides loss of registered status, the Act provides for the assessment of penalty taxes in
certain specified situations.

The Act requires a charity which loses its registered status to wind down its operations
within a year of its deregistration. If it does not, a penalty tax is assessed against the charity
that is equal to one hundred percent of the value of the charity's assets, calculated 120 days
prior to Revenue Canada's notice of intention to revoke registration, less the value of any
assets transferred to qualified donees, the amounts expended on charitable activities, and the
amounts used to repay bona fide debts during the year. If a deregistered charity is not able to
wind itself down within a year. Revenue Canada, simply takes its assets. The one hundred
percent tax ensures that none of the charity's assets go to non-charitable purposes, but
perhaps not in a way that is in compliance with provincial law, since the assets go to Revenue
Canada, not to another charity cy-pres. This penalty tax complements a Revenue Canada
requirement that the charity's constituting document provide that the assets remaining at the
time of dissolution be distributed to registered charities, or other qualified donees.
Section 188(2) makes the obligation to pay the tax joint and several for any illegitimate

recipient of the charity's property, to the extent of the illegitimate receipt.

The penalty tax technique is also used to discourage foundations from escaping their
disbursement quota requirements by transferring their property to charitable organizations.
It will be recalled that the quota regime obliges foundations to disburse 4.5 percent of the

77
78

79
80
81

Ibid., s. 230(2)(a), as re-en. by S.C. 1994, c. 21, s. 80.

The Income Tax Act, ibid., s. 162(7), as am. by S.C. 1994, c. 21, s. 80, provides generally for a penalty for every
person who fails to provide an "information return" as and when required under the Act. The penalty is equal to
$25 per day. Registered charities were recently exempted from this provision, possibly in response to the
suggestion in the Auditor General's Report, 1990, infra, note 83, that Revenue Canada had never applied the
sanction against charities and that it had no authority to waive it. Section 238 does provide that the failure to file a
retum is an offence, punishable on conviction to a fine of between $1,000 and $25,000, or fine plus imprisonment
for up to 12 months.

Ibid., s. 188 (1), as re-en. by S.C. 1994, c. 21, s. 84(1).

Ibid., s. 188(2), as re-en. by S.C. 1994, c. 21, s. 84(1).

Ibid.,s. 188(3) and (4).

310

total value of their investment assets annually, as calculated by a certain formula. The penalty
tax under discussion discourages attempts to escape this obligation through gifts to charitable
organizations whose disbursement quota does not include a requirement to disburse a
percentage of investment assets. For the tax to apply, the foundation must have transferred
more than fifty percent of its assets to a charitable organization, and it must have been one of
the main purposes of this transfer must have been to effect a reduction in the foundation's
disbursement quota. The tax is equal to twenty-five percent of the value of the assets
transferred and the obligation to pay it is joint and several where the recipient charity is
acting in concert. To our knowledge, this penalty tax provision has never been applied.

A third penalty tax provision applies in situations where a private foundation makes a
non-qualified investment. The penalty tax is assessed against the investee and is equal to the
amount, if any, by which the rate of interest prescribed under the Act for late tax payments

and refiinds exceeds the actual rate of return on the loan or share. The point of the tax, thus,
is to make sure that any investments by private foundations in related entities or loans to
related persons do in fact earn a reasonable rate of return.

a. Administration

The Commission itself has not conducted a study of the efficiency of the administration
of this regime, having neither the resources nor jurisdiction to do so. The Auditor General's

report for 1990 does, however, contain a full review of Revenue Canada's performance in
the administration and enforcement of these rules. We list some of those conclusions here,
together with some statistics we have gathered on revocations of registrations between 1985
and 1990. These statistics give some indication of the level of enforcement activity over this
five-year period.

The objective of the 1990 audit "was to determine if the legislative and administrative
rules and procedures applied have been sufficient to secure an effective check on the right of
charities to continue to qualify for registration; on the validity of income tax deduction or
credits...; and on the reliability of information provided... through the [T3010] returns". The
overall conclusion of the report was that the "rules and procedures do not provide effective

82
83

Ibid.,^. 189(1).

Canada, Report of the Auditor General to the House of Commons: Main Points (Ottawa: Department of National
Revenue, Taxation and Finance, 1991) (hereinafter referred to as "'Auditor General's Report, 1990").

The reputation of the Charities Branch of Revenue Canada is quite good. As one commentator said, in The
Canadian Taxpayer (November 27, 1990), at 182:

[The lack of media interest in the Auditor General's report on the charities branch] offers support for
the widely held notion that the charities branch of Revenue is the best run of all Revenue Canada
branches (notwithstanding its inability to rapidly handle applications)... unlike other parts of revenue
those in the charity /non-profit branch actua//y seem to be trying to help.

311

checks" for any of these three areas of regulation. We look briefly at the main points in the
report.

First, the report noted that thirty-one percent of the 63,000 charities do not file their
returns on time, but that Revenue Canada had never applied any of the administrative
penalties (fines) available and had acted to revoke registrations only when the failure to file
Form T3010 continued for two consecutive years. The report concluded:

The Department of National Revenue, Taxation should ensure that administrative rules and
procedures provide an incentive for registered charities to file the annual Registered Charity
Information and Public Information Return on Time.

Second, the report found that Revenue Canada did not have in place any procedure to
follow up on revocations to determine whether the charity had ceased issuing receipts and

whether it was liable to pay the revocation tax. The report concluded:

The Department of National Revenue, Taxation should develop administrative rules and
procedures to ensure that charities whose registrations have been revoked do not continue to
issue receipts that may be used for tax purposes, and that they have paid any required revocation
tax.

Third, the report noted that random audits are the only way to confirm compliance with
rules. It observed that the level of audit coverage equaled .5 percent of all registered charities.

The results of the audits for 1987-1990 are set out in the following table.

1 Audit Results

For the Years 1987 to 1990

Outcomes of Audits

1987

1988

1989

1990

No Change

229

Education Letter

116

100

119

Request for Undertaking

130

110

Notice of Revocation

Change of Status & Other

TOTAL

167

488

251

260

SOURCE: Department of National Revenue, Taxation

The report found nothing wrong with the audit rate or the audit procedures.

Auditor General's Report, 1990, supra, note 83, at 258.
Ibid., at 260.
76/^., at 261.
Ibid., at 262.
Ibid., at 264.

312

Fourth, the report concluded that there are insufficient incentives in the Act to
encourage charities to comply. It argued for less onerous sanctions than revocation of
registration, such as a tax on unrelated business profits. It concluded with the following
recommendation:

To ensure that registered charities have an incentive to comply with the Income Tax Act the
legislation should be reviewed, appropriate action should be recommended by the Departments of
Finance and National Revenue, Taxation to their Ministers, and Parliament should be informed.
The Department of National Revenue should also ensure that its administrative rules and
procedures provide an incentive for registered charities to comply with the Income Tax Act.

Fifth, the report noted that in 1988 more than 20 million donation receipts were filed
with income tax returns by 4.9 million taxpayers, for a total of over $2.6 billion in donations.
The report argued that there was no appropriate validation procedure for the receipts and
recommended as follows:

The Department of National Revenue, Taxation should establish an appropriate audit program
to determine the validity of charitable deductions and credits claimed by taxpayers.

b. Revocation of Registrations

The mformation on revocation contained in the following two tables was obtained from
Revenue Canada.

Revocation of Registrations, 1985-1990

1985
Ontario/Canada

1986
Ontario/Canada

1987
Ontario/Canada

1988
Ontario/Canada

1989
Ontario/Canada

1990
Ontario/Canada

Welfare
Institutions

85 225

214

575

68 236

105 329

447 1,623

132 376

Health
Institutions

33 128

215

35 96

82 160

184 486

48 147

Education
Institutions

89 224

275

759

127 369

166 418

677 189

167 362

Religious
Institutions

269 770

350

994

243 774

474 1,222

1,293 3,582

414 1,002

Benefits to
Community

75 230

197

650

91 251

120 334

450 764

100 324

Others

47 118

142

285

114 218

127 247

380 764

95 207

TOTAL

598 1,695

1,228

3,478

678 1,944

1,074 2,710

3,431 9,977

956 2,418

Ibid., at 264.

Ibid., ai 265.

313

Revocation of Registrations, 1990 - January 17, 1996

TYPE

1990

1991

1992

1993

1994

1995

1996

Delinquent*

648

842

1229

1501

1026

742

Voluntary

206

543

633

1009

476

429

592

Cause

Total

854

588

1475

2249

1974

1459

N/A

* "Delinquent" refers to organizations that have not filed T3010 Returns.

3. THE TAX TREATMENT OF CHARITABLE ORGANIZATIONS IN THE
UNITED STATES

(a) History

Charitable, religious, and educational organizations in the United States have been
entitled to tax-exempt treatment since the enactment of the Revenue Act of 1894^^ The tax
deduction for charitable organizations was first enacted in 1917 and has continued ever

since. A deduction for contributions by corporate donors was enacted in 1935.

The extension of these privileges to charitable organizations and their donors was
accompanied by a series of enactments designed to restrict and regulate their activities.
Private inurement to insiders was prohibited early, in 1909. The political activities of

charitable organizations have been restricted since 1934. The unrelated business income of
tax-exempt organizations has been subject to a separate tax since 1950.

Ch. 349, §32, 28 Stat. 509, 556 (1894). Other activities and organizations since been added to what is now
§50 1(c) of the Internal Revenue Code, 26 U.S.C. See P.E. Treusch, Tax Exempt Charitable Organizations
(Philadelphia: American Law Institute — American Bar Association Committee on Continuing Professional
Education, 1988) at 6 and 7. For other discussions of U.S. tax law, see "Developments in the Law — Non profit
Corporations" (1992), 105 Harv. L. Rev. 1578, at 1612-33; S. Rose-Ackerman, "Unfair Competition and
Corporate Income Taxation" (1982), 34 Stan. L. Rev. 1017.

See Treusch, supra, note 92.

There were restrictions on political activity before then. There was a Treasury Department regulation in 1919
which provided that "associations formed to disseminate controversial or partisan propaganda are not educational
within the meaning of the statute". In 1930, the Judge Learned Hand in the Federal Court of Appeal said, in Slee v.
Commissioner of Internal Revenue, 42 F. 2d 184 (1930), cited in Brooks, supra, note 46, at 155:

Political agitation as such is outside the statute, however innocent the aim, though it adds nothing
to dub it 'propaganda', a polemical word used to decry the publicity of the other side. Controversies of
that sort must be conducted without the public subvention; the Treasury stands aside from them.

The 1934 legislation restricted attempts "to influence legislation". Regulations were enacted in 1959 to help
clarify the restrictions, but there was much litigation throughout the 1960s challenging the law on constitutional
grounds principally on the basis that it was vague, that it violated the equal protection clause, and that it restricted
free speech. See, further, Brooks, ibid., at 158-59 and works cited therein at footnote 173. There have been several
recent cases, for example, challenging the charitable status of church organizations on account of their anti-
abortion lobbying.

314

There was a major overhaul of the treatment of tax-exempt organizations in 1969 with
the enactment of the Tax Reform Act of 1969. Most of the provisions of this legislation were
aimed at regulating the activities of private foundations. These foundations were the principal
target largely in consequence of a climate of opinion which depicted their activities in a
negative light. The Tax Reform Act of 1969, however, also put in place a number of other
reforms. Principal among these was a provision tightening up the regime governing tax
deductible donations by making those deductions conditional on the prior registration of the
charity,^^ and provisions extending the applicability of the tax on unrelated business income.

Since 1969, there have been a number of enactments — ^the Tax Reform Act of 1976^^

the Economic Recovery Tax Act of 1981, the Tax Equity and Fiscal Responsibility Act of
1982, the Deficit Reduction Act of 1984, and the Comprehensive Tax Reform Act of

102

1986. The 1976 statute established optional rules on the permissible limits for lobbying by
public charities and also allowed for the registration of organizations that sponsor amateur

95
96

100

101

102

Pub. L. No. 91-172, 83 Stat. 487.

See J.H. Myers, "United States Federal Tax Treatment of Charities and Contributions and Bequests to Them — An
overview with special emphasis on the substantial changes brought about by the Tax Reform Act of 1969", in
Report of Proceedings of the Twenty-seventh Tax Conference (Toronto: Canadian Tax Foundation, 1975) 385, at
387-88:

In the first place it was alleged that many foundations were being used to provide direct or indirect
benefit to major donors and trustees. This could be accomplished by the borrowing of fiinds from the
foundation, the sale of property to the foundation or purchase of property from the foundation. There
were arms-length rules outlawing such practices but it was claimed that they were generally ineffective.
The second major complaint was that foundations, in particular, were being used to control family
businesses and this criticism had a substantial basis in fact. It was suggested that the operation of a
foundation for the purpose of controlling business was detrimental to the charitable purpose and might
give the business a competitive advantage, even though the foundation might be fully taxable on the
activity as an unrelated trade or business. Another criticism was that the grant-making foundations
seemed to be operating in a high, wide and handsome fashion in making their awards without paying
any significant attention to what the grantees be they individuals or other charities did with the funds.
Certain special situations were very much in the limelight. The Ford Foundation had provided
substantial support for the voter-registration drive in Cleveland. This was strongly criticized since the
registration drive by reason of the facts clearly favoured one party and was a significant factor in the
election of that party's candidate. ... Finally, there was a much publicized and criticized circumstance
of a Supreme Court Justice's being compensated as an officer of a foundation even though it was
recognized that the compensation was reasonable.

See, also, U.S. Department of the Treasury, Report on Private Foundations (February 2, 1965), cited in Treusch,
supra, note 92, at 430.

Internal Revenue Code, supra, note 92, § 508(d)(2)(B).

Pub. L. No. 94-455, 90 Stat. 1520.

Pub. L. No. 97-34, 95 Stat. 172.

Pub. L. No. 97-248, 96 Stat. 324.

Pub. L. No. 98-369, 99 Stat. 782.

Pub. L. No. 99-514,100 Stat. 2085.

315

athletic competitions. The Acts subsequent to 1976, for the most part, eased slightly the
limitations on tax-exempt organizations, in accordance with the prevailing "Reaganite"
political philosophy of the time.

(b) The Current Regime

(i) Overview

a. The Exemption

Our discussion focuses on the organizations identified in section 501(c)(3) of the
Internal Revenue Code. Section 501 provides for an exemption from taxation for charities as
follows:

501. — (a) An organization described in subsection (c) or (d) or section 401(a) shall be exempt
from taxation under this subtitle unless such exemption is denied under section 502
or 503.

(3) Corporations, and any community chest, fund, or foundation, organized and
operated exclusively for religious, charitable, scientific, testing for public
safety, literary, or educational purposes, or to foster national or international
amateur sports competition (but only if no part of its activities involve the
provision of athletic facilities or equipment), or for the prevention of cruelty to
children or animals, no part of the net earnings of which inures to the benefit
of any private shareholder or individual, no substantial part of the activities of
which is carrying on propaganda, or otherwise attempting, to influence
legislation (except as otherwise provided in subsection (h)), and which does
not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any
candidate for public office.

In order to qualify for the exemption, a qualifying organization must give notice to the
Secretary of the Treasury that it is applying for recognition of such status, and must obtain an
exemption certificate. Churches, "their integrated auxiliaries, conventions or associations",
and organizations (other than private foundations) with gross receipts of less than $5,000 per
year are exempted from this registration requirement, the former for constitutional reasons.

Internal Revenue Code, supra, note 92, § 508(a).

316

Section 501(c)(3) organizations may be organized in the form of corporations, trusts,
and unincorporated associations without attracting significant variation in treatment under
the Internal Revenue Code.

b. Classifications

One of the significant 1969 reforms was the classification of charitable organizations
into two main groups, private foundations and public charities. All charities are deemed to be
the former, and therefore deemed to be subject to a much stricter regime of regulation, unless
they establish otherwise by application to the Secretary. "Public charity" is not itself a
defined term under the statute. The members of this class, rather, are identified in
section 509(a) which provides that the following types of organization (among others) are not
private foundations:

(i) churches, educational institutions, hospitals and medical research organizations,
organizations which receive a "substantial part" of their income from government or
from the contributions from the public;

(ii) organizations which receive more than one-third of their gross support from any
combination of public or government gifts and contributions, membership fees, and
receipts from activities which do not constitute unrelated business activities and which
do not receive more than one-third of their gross support from investments;

(iii) organizations controlled by organizations described in (i) and (ii) and operated
exclusively for their benefit.

The rationale for the inclusion of these types of organizations in the less regulated
"public charity" category was the belief that these types of organizations already had
considerable public accountability and responsiveness built into their operations, both
through theu' reliance on the public or the government for a substantial part of their fundmg
and by virtue of the fact that, because of the nature of their activities, they were generally
operating for the direct benefit of the public. Among the many advantages of being classified
in this group are the availability of a higher deduction limit for individual donations, more
favourable treatment for donors of gifts of appreciated capital property, exemption fi-om
numerous record keeping and public filing requirements, exemptions from certain excise
taxes such as the excise tax on investment income to which private foundations are subject,
and the absence of any personal liability on the part of directors and trustees of these
organizations for any of the many excise taxes assessable against certam proscribed activities

104
105

106

But not partnerships and not individuals.

Two notable exceptions concem the treatment of the unrelated business income and the treatment of a private
foundation when it surrenders or loses its tax exempt status. In these situations the tax treatment varies according
to the form of organization.

Internal Revenue Code, supra, note 92, § 508(b).

317

of private foundations. They are nonetheless subject to annual filing requirements and the
information which is filed is available to the public.

The classification "private foundation" is itself further divided into two sub-classes,
operating and non-operating, with the former being subject to a slightly less strict regime.
The former is defined in section 4942(j)(2) to include private foundations that use
substantially all of their net income in the active conduct of their own charitable activities,
and that either devote substantially more than half (sixty-five percent) of their assets to the
active conduct of their charitable activities or use more than two-thirds of their investment
return in the active conduct of their charitable activities, or that do not derive more than half
their support from the return on their investments. The advantages of being classified as an
operating foundation include a less onerous minimum annual distribution requirement and a
higher donation deductibility limit for donors. This intermediate status was thought to be
justified by the greater degree of public accountability and public service of these types of
organizations. The status is designed for institutions such as private museums and private art
galleries.

(ii) The Donation Deduction

The deduction for contributions to charitable organizations is set out in section 170 of
the Internal Revenue Code. Limits are established in section 170(b). Individuals who
contribute to public charities and operating foundations may deduct up to fifty percent of
their contribution base, individuals who contribute to private non-operating charities may
deduct up to thirty percent of their contribution base. Corporations may deduct up to only ten
percent of their contribution base, in either case, and corporate donations are deductible only
to the extent that the recipient organization uses the donation in the United States. There is
provision in both cases (individual and corporate) to carry forward five years of excess
donations.

(iii) Regulation of Charities Generally: Section 501(c)(3) of the Internal
Revenue Code

Section 501(c)(3) establishes the general regime of regulation applicable to all
organizations wanting to qualify for the exemption and the deduction privileges available to

107

charities. More restrictive rules, to be discussed immediately below, apply to private
foundations. Section 501(c)(3) sets out the following conditions and modalities.

First, the organization must be "explicitly organized for exclusively charitable
purposes". This means that "the provisions of [its] charter or governing instrument ...(a) limit
its purposes to one or more exempt purposes and (b) do not expressly empower it to engage,
other than as a substantial part of its activities, in activities that in themselves are not in
furtherance of one or more exempt purposes".

107

Although it should be noted that § 170 and § 501(c)(3)(a) are not precisely co-extensive in definition.

108

Treusch, supra, note 92, at 90.

318

Second, the assets of the organization must be "permanently dedicated to exempt
purposes". This means that the assets must remain dedicated to those exempt purposes when
the organization is dissolved, either by virtue of specific language in the constituting
instrument or by virtue of the applicable state's doctrine oi cy-pres.

Third, the organization must be operated "exclusively" for exempt purposes. This is
interpreted by regulation to mean that the organization is operated "primarily" for exempt
purposes and does not devote a "substantial" part of its activities to non-exempt purposes.
There is no definition of "primarily" and "substantial" in the regulations adopted by the
Treasury Department under the Internal Revenue Code.

Among the many significant activities of charities partially regulated by this "purpose"
test are their commercial activities. The commercial activities of exempt organizations are
prima facie permitted by this test, provided the primary purpose of the organization remains
its exempt purpose. An early United States Supreme Court decision, Trinidad v. Segrada
Orden,^^^ and a subsequent Second Circuit Court of Appeal decision, Roche's Beach Inc. v.
Commissioner, both held that the commercial activities of an exempt organization did not
contaminate its status, provided only that the purpose of the commercial activity was to raise

112

funds for the exempt purpose. This is the so-called "destination of funds" test. Despite this
early and strong support for it, its current status under U.S. law remains unclear, since there is
a substantial body of case law which does not seem to follow it. As well, as a result of the
enactment by Congress of the tax on the unrelated business income of exempt organizations
in 1950, the relevance of the destination test has been considerably diminished. For separate
entities established to operate commercial enterprises, the profits of which go exclusively to a
tax-exempt charitable parent, the 1950 reform resulted in what is now section 502 of the
Internal Revenue Code. Section 502 makes the following provision for what are called
"feeder organizations":

(a) An organization operated for the primary purpose of carrying on a trade or business for
profit shall not be exempt from taxation under Section 501 on the ground that all of its profit are
payable to one or more organizations exempt from taxation under Section 501.

There are a number of exceptions to the application of this rule. It does not apply where
the trade or business is one in which "substantially all the work ... is performed for the
organization without compensation" or one in which the "business" is the selling of
merchandise, "substantially all of which has been received by the organization as gifts".

109
110
111
112
113
114

Ibid, at 102.

263 U.S. 578 (1924).

96 F. 2d 776 (2nd Cir., 1938), cited in Treusch, supra, note 92, at 95, 1 10.

See Treusch, ibid, at 107.

76/^., at 110.

Internal Revenue Code, supra, note 92, § 502(b).

319

Fourth, the exempt purposes listed in section 501(c)(3) are: religious, charitable,
scientific, testing for public safety, literary, educational, and prevention of cruelty to children
or animals. There is an extensive jurisprudence and there are lengthy regulations interpreting
these terms. That jurisprudence is based on the same classic precedents as apply in English
and Canadian law, including the venerable Statute of Elizabeth, although it is considerably
richer than the comparable jurisprudence in Canada.

Fifth, no part of the net earnings of the organization may "inure to the benefit of any
private shareholder or individual". This provision prohibits, among other things,
unreasonable non-arm's length transactions between the exempt organization and any persons
close to it. The proscribed transactions include asset sales, property rentals, and loans to or
from the organizations.

Sixth, political activity — carrying on propaganda or attempting to influence
legislation — is only permitted if it does not constitute a "substantial part of the activities" of
the organization. Partisan political activities are prohibited altogether. Certain public
charities, including certain educational institutions, hospitals, and medical research
organizations but not including religious organizations, may elect under section 501(h) to
be governed by an alternative rule that permits grass-roots expenditures, defined as
expenditures for the purpose of influencing legislation through an attempt to affect public
opinion, and lobbying expenditures, defined as expenditures for the purpose of influencing
legislation, within certain precisely specified monetary limits. Those limits are established in
section 4911 and section 501(h). Section 4911 also provides a detailed list of activities

120

considered not to be lobbying and therefore restriction free. Expenditures in excess of the

115
116
117
118
119

120

See mfra, Appendix F.

Statute of Charitable Uses 1601, 43 Eliz. 1, c. 4 (U.K.).

Internal Revenue Code, supra, note 92, § 501(c)(3).

The exception is intended to protect the confidentiality of their operations from excessive government scrutiny.

The effect of these two provisions is to permit smaller organizations to spend proportionately more on lobbying
activity than larger organization. Small organizations may spend up to 20% of their expenditure on lobbying; the
permissible amount declines to $225,000 plus 5% of exempt purpose expenditures over $1.5 million.

Internal Revenue Code, supra, note 92, § 49 1 1 .

Tax on excess expenditures to influence legislation
(d) Influencing legislation

(1) General rule. Except as otherwise provided in paragraph (2), for purposes of this section, the
term "influencing legislation" means —

(A) any attempt to influence any legislation through an attempt to affect the opinions of the
general public or any segment thereof, [grass-roots lobbying] and

(B) any attempt to influence any legislation through communication with any member or
employee, legislative body, or with any government official, employee who may

320

prescribed amounts are subject to a twenty-five percent tax on the excess expenditure.
Organizations which exceed the expenditure limits can lose their tax-exempt status.

Section 4955 establishes excise taxes on prohibited partisan political expenditures. It
imposes an initial tax often percent of the amount expended by the organization and a tax of
2.5 percent on culpable management. It also provides that if the expenditure is not corrected
within the taxable period, the organization is taxed on one hundred percent of the
expenditure, and culpable management is taxed on sixty percent of the expenditure. There is
provision for the abatement of the first tier of tax if the organization's political expenditure
was not "willful and flagrant".

Challenges to the constitutionality of the restrictions have failed.

participate in the formulation of the legislation [lobbying] exempt purpose for
organizations with expenditure in excess of $1.5 million.

(2) Exceptions. For purposes of this section, the term "influencing legislation", with respect to an
organization, does not include —

(A) making available the results of nonpartisan analysis, study, or research;

(B) providing of technical advice or assistance (where such advice would otherwise
constitute influencing of legislation) to a governmental body to a committee or other
subdivision thereof in response to a written request by such body or subdivision, as the
case may be;

(C) appearances before, or communications to, legislative body with respect to a possible
decision of such body which might affect the existence of the organization, its powers
and duties, tax-exempt status, or the deduction of contributions to the organization;

(D) communications between the organization and its bona fide members with respect to
legislation or proposed legislation of direct interest to the organization and such
members, other than communications described in paragraph (3); and

(E) any communication with a government official employee, other than -

(i) a communication with a member or employee of a legislative body (where such
communication would otherwise constitute the influencing of legislation), or

(ii) a communication the principal purpose of which is to influence legislation.

^^^ Ibid., § 4962(c).

122

Taxation with Representation of Washington v. Regan, 676 F. 2d 715 (D.C. Cir.,1982); rev'd 461 U.S. 540 (1983).
The legislative scheme was attacked as an unconstitutional denial of the equal protection rights of charities on the
basis that veterans' organizations could lobby without being subject to comparable restrictions. The Supreme
Court upheld the validity of the restrictions on the basis that there was a valid distinction between the veterans'
organizations and charities, and that Congress was not required to subsidize lobbying and that Congress "has the
authority to determine whether the advantage the public would receive from additional lobbying by charities is
worth the money the public would pay to subsidize that lobbying": ibid., at 550, cited in Treusch, supra, note 92,
at 268.

321

(iv) The Treatment of Business Income of Charities^"

As stated above, an organization may not have as one of its primary purposes the
carrying on of a business and it may not have as one of its powers the power to carry on a
business for more than an insubstantial part of its activities. Where an organization has as its
primary purpose the carrying on of a trade or business for profit, it will be denied the
section 501(c)(3) exemption outright. At best, it will be classified as a " feeder" organization
under section 502.

The 1950 changes to the Internal Revenue Code, as mentioned above, also introduced a
tax on the unrelated business income of tax-exempt organizations. The principal justification
for the tax on unrelated business income advanced at the time of its adoption, and still
advanced by its supporters today, is the fear of unfair competition from tax-exempt
organizations. The tax is imposed under section 511 on the "unrelated business taxable
income" of the exempt organization. This, in turn, is defmed in section 512 as,

the "gross income derived by any organization from any unrelated trade or business regularly
carried on by it, less the deductions allowed by this chapter which are directly connected with
the carrying on of such trade or business".

"Unrelated trade or business" is also defmed. Section 513 states that "an unrelated business"

124

means,

a trade or business the conduct of which is not substantially related ... to the exercise or
performance by such organization of its charitable, educational or other purpose or function
constituting the basis of its exemption.

Certain activities are excepted from this broad defmition, including business activities
performed for the organization without compensation; business activities carried on by the
organization primarily for the convenience of its members, students, patients, officers, or
employees; and business activities relating to the sale of donated merchandise, the conduct of
certain kinds of public entertainment and bingo games, and certain hospital services. Further,
section 513 permits certain modifications in the computation of the unrelated business

123

124

For commentaries on the unrelated business income tax, see Rose-Ackemian, supra, note 92; B.I. Bittker and
Rahdert, "The Exemption of Nonprofit Organizations from Federal Income Taxation" (1976), 85 Yale L.J. 299;
and Cooper, "Trends in the Taxation of Unrelated Business Activity" (1971), 29 N.Y.U. Inst, on Fed. Taxation
1999. On the issue of unfair competition generally, see J.T. Bennett and T.D.D. Lorenzo, Unfair Competition: The
Profits of Nonprofits (Lanham, Md.: Hamilton Press, 1989).

See, for example, United States v. American College of Physicians, 475 U.S. 834 (1986), and United States v.
American Bar Endowment, 411 U.S. 105, 106 S.C. 426 (1986). In the former, the advertising income of the
American College of Physicians from the sale of advertising space in one of its journals was held to be subject to
the unrelated business tax. In the latter, dividend income of the American Bar Endowment on insurance policies
on the lives of the American Bar Association members was also held to be subject to the unrelated business tax.
The income derived from the farm operations of an order of brothers was also held to be subject to the unrelated
business tax. See, also, St. Joseph Farms of Indiana Brothers of Congressional Holy Cross, South West Province
Inc., 85 T.C. 9 (1985). The cases are cited in Treusch, supra, note 92, at 360.

322
income of tax-exempt organizations. Among these is a provision for the exclusion of passive

1 25

income, such as dividends, interest payments, royalties, and rents. However, there are
complex rules that require the inclusion in income of rent received from certain "debt
financed property". '^^ The object of this latter provision is to prevent the use of sale and
leaseback arrangements involving exempt organizations to "launder" otherwise taxable
income as rental expenses paid to the purchasing tax-exempt organization.

As severe as the unrelated business tax is, there have been recent suggestions that it is
insufficiently broad in its coverage. A report of a subcommittee of the House Ways and
Means Committee has suggested recently that the substantially related test should be replaced
by a directly related test, and that certain income, such as income from gift shops, bookstores,
health and fitness centres, travel and tour services, cafeterias in colleges and universities, and

127

Other adjunct food sales, should also be subject to the unrelated business tax.

(v) The Treatment of Private Foundations

a, Record-Keeping and Returns

The 1969 reform increased the accountability requirements of private foundations
considerably. The basic approach of the statute is to require private foundations to keep
detailed records of certain proscribed transactions and to report on these transactions on an
annual basis. The obligation to report the transactions is supported by the imposition of a
relatively low tax on the proscribed transaction. If, once discovered and reported, the
offending transaction is not corrected, the private foundation can be subject to a second and a
third tier of taxes, and if the transaction was willful and flagrant, the foundation's charitable

128

Status is revoked. We will examine each of the proscribed transactions and the tiered tax
applicable to them shortly. At this point, we examine the record-keeping and reporting
requirements which are necessary to make this system work.

Private foundations are required to identify "disqualified persons" and to keep detailed
records in respect of these persons. "Disqualified persons" is defined in detail in section 4946
to include the following: (a) a substantial contributor to the foundation; (b) a foundation

125
126
127

128

Internal Revenue Code, supra, note 92, §5 12(b).
lbid.,%5U.

Treusch, supra, note 92, at 422-24. For a critique of the UBIT, see Rose-Ackerman, supra, note 92. Rose-
Ackerman argues that unfair competition occurs only where non-profit businesses force their for-profit
competitors to accept sub-competitive returns and that this can only arise where a sufficient number of non-profits
enter the same business so that they can affect market returns. In her view, therefore, the tax law ought not to
channel inadvertently non-profits into the same businesses. Rose-Ackerman argues that the relatedness test of the
UBIT, in effect, does just that and is therefore misguided. She argues for repeal of the UBIT so that non-profit
business activity will be more diffused and for a better targeted unfair competition tax.

Internal Revenue Code, supra, note 92, § 507(a). On revocation of charitable status, the foundation is liable to pay
as tax the lower of its aggregate benefit derived fi-om s. 501(c)(3) status and its net asset value. The tax may be
abated if the net assets are distributed to another s. 501(c)(3) charity.

323

manager; (c) a more than twenty percent owner of a corporation, partnership, beneficial
interest in a trust, or unincorporated enterprise which is a substantial contributor to the
foundation; (d) a family member of any of the above; (e) a corporation in which any of the
above own more than thirty-five percent; and (f) for certain purposes, certain government
officials. Records in respect of the names and addresses of these people must be kept in order
to guard against innocent violations of the various proscribed transaction rules to be discussed
shortly, including in particular those rules governing "self-dealing" transactions and
transactions resulting in "excessive business holdings". In the latter case, the foundation will
be required to keep a record of the business holdings of "disqualified persons" in order to
avoid breaches of the rule against "excessive business holdings".

There are other complex and detailed record-keeping requirements applicable to private
foundations. Some of these requirements relate to the proper reporting of the foundation's
income and expenses; others relate to the activities of organizations to which the foundation
has made grants ("qualifying distributions"); still others relate to the lobbying and other
political expenditures of private foundations.

Regardless of its size, the private foundation must file an annual tax return detailing its
income from all sources for the year and its activities in the proscribed areas. Section 603 3 c3
also requires managers of private foundations to furnish copies of the foundation's annual
return to state officials.

b. The Two Percent Tax on Investment Income

All non-operating private foundations are subject to an annual two percent excise tax on

• 129

their net mvestment income. The object of this tax is to help defray the costs to the
Department of the Treasury of administering the provisions of the Internal Revenue Code
applicable to private foundations. Section 4940, which imposes the tax, establishes detailed
defmitions to be used in the calculation of the tax base "net investment income".

c. Related Party Transactions

Section 4941 imposes several tiers of tax on transactions involving "self-dealing"
between a disqualified person and a private foundation. A tax of five percent of the amount
involved m the "self-dealing" transaction is assessed against the "self-dealer" and a tax of 2.5
percent of the amount involved in the transaction is assessed against the foundation manager
(up to a limit of $10,000). The term "self-dealing" is defined in detail. ^^^ It includes sales,

129

Ibid, §4940.

130

"Self-dealing" is defined, in Internal Revenue Code, ibid., § 4191(d), as follows:

(1) In general. For purposes of this section, the term "self-dealing" means any direct or indirect-

(A) sale or exchange, or leasing, of property between a private foundation and a disqualified
person;

(B) lending a money or other extension of credit between a private foundation and a disqualified
person;

324

exchanges, or leasing of property, loans, the furnishing of goods and services, the payment of
compensation, and the use of foundation assets. Loans by a disqualified person without
interest are permitted. The expression "amount involved" is defined as the fair market value
of the greater of the permitted property received by the disqualified person as a result of the
transaction. If the self-dealing transaction is not corrected (that is, undone so that it meets the
highest fiduciary standards), a second tax of 200 percent is imposed on the self-dealer.

d. Minimum Distribution Requirements

Section 4942 imposes an initial fifteen percent tax on the "undistributed income" of a
private foundation. Undistributed income is defined as the difference between "the
distributable amount" and "the qualifying distributions". In turn, the former term is defined as
a ftinction of a prescribed minimum investment return which, at the present time, is equal to
five percent of the net fair market value of all non-operating assets of the foundation. If the
undistributed income is not distributed within one year of the subsequent taxable period, there
is a second tier tax of one hundred percent of the remaining undistributed income.

These disbursement provisions thus encourage private foundations to earn at least a five
percent return on their investments and to distribute all of those earnings annually. There are
detailed Treasury regulations that establish the valuation procedures to be used in calculating
the value of the investment subject to the five percent quota. Generally speaking, these
regulations require a valuation at fair market value of all such assets. There are detailed
provisions permitting "set-asides" for specific projects approved by the Secretary and for
carrying forward excess qualifying distributions.

e. Excess Business Holdings

Section 4943 imposes a tax equal to five percent of the "excess business holdings" of a
private foundation. If the holdings are not disposed of by the end of the taxable period and an
additional tax of 200 percent of such "excess business holdings" is imposed, these taxes are
imposed on the private foundation. The section provides a detailed definition of "excess
business holdings". In essence, an excess business holding is a holding, by the private
foundation and all disqualified persons, of an interest in a business that is greater than twenty
percent, provided a private foundation itself owns at least two percent of the business. Excess
business holdings acquired by a private foundation by gift or bequest may be held for a

(D) payment of compensation (or payment or reimbursement of expenses) by a private
foundation to a disqualified person;

(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a
private foundation; and

(F) agreement by a private foundation to make any payment of money or other property to a
government official (as defined in section 4946(c)), other than an agreement to employ such
individual for any period after the termination of his government service if such individual
is terminating his government service within a 90-day period.

325

period of five years, without being subject to the tax on excess business holdings, thus giving
the private foundation time to dispose of the excess business holding.

/ Jeopardizing Investments

Section 4944 imposes on private foundations and culpable managements a tax equal to
five percent of the value of investments that "jeopardize the carrying out of any of [the
private foundations] exempt purposes". If the jeopardizing investment is not corrected within
the taxable period, there is a further tax of twenty-five percent of the amount of the
investment on the private foundation and five percent of the amount of the investment on the
management. This provision thus encourages prudent mvestment behaviour in private
foundations and in their management. Program-related investments are of course not treated
as jeopardizing investments.

g. Taxable Expenditures, Political Activities, and Lobbying

Section 4945 provides for a ten percent tax on the foundation and a 2.5 percent tax on
culpable management on the value of any amount made by the foundation to engage in
proscribed lobbying activities. These proscribed activities are defined in detail in
section 4944 and in treasury department regulations. The provisions of section 4945 make

The Internal Revenue Code, ibid., § 4945 provides as follows:

(d) For purposes of this section, the term "taxable expenditure" means any amount paid or incurred by
a private foundation-

(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning
of subsection (e),

(2) except as provided in subsection (f), to influence the outcome of any specific public election,
or to carry on, directly or indirectly, any voter registration drive,

(3) as a grant to an individual for travel, study, or other similar purposes by such individual
unless such grant satisfies the requirements of subsection (g),

(4) as a grant to an organization unless—

(A) such organization is described in paragraph (1), (2), or (3) of section 509(a) or is an
exempt operating foundation (as defined in section 4940(d)(2)), or

(B) the private foundation exercises expenditure responsibility with respect to such grant in
accordance with subsection (h), or

(5) for any purpose other than one specified in section 170(c)(2)(B).

(e) For purposes of subsection (d)(1), the term "taxable expenditures" means any amount paid or
incurred by a private foundation for~

(1) any attempt to influence any legislation through an attempt to affect the opinion of the
general public or any segment thereof, and

(2) any attempt to influence legislation through communication with any member of employee of
a legislative body, or with any other government official or employee who may participate in
the formulation of the legislation (except technical advice or assistance provided to a

326

the tax applicable where it is the grantee of a grant from a private foundation that makes the
illegitimate expenditure, in the case where the private foundation fails to exercise a degree of
supervision over the recipient organization.

(vi) Conclusion

Although the statutory and regulatory regime under the United States tax law is
considerably more detailed than the analogous Canadian regime, the systems are surprisingly
similar in basic design and policy. In part, this is because the 1976 reforms in Canada were
inspired by the Tax Reform Act of 1969. Much of the detail in the Canadian regimes continues
to be specified at the level of interpretation bulletins and information circulars.

There are some interesting differences, however, especially with regard to the
administrative approach of the Internal Revenue Code and its innovative use of sanctions to
encourage proper behaviour. The most interesting use of sanctions is the system of tiered
excise taxes. The first level of taxation serves as an encouragement to charitable
organizations to disclose illegitimate activities. The second and third levels serve to deter and
to stop these activities. Another point of interest is the very high level of regulation of the
activities of private foundations and the corresponding lack of regulation of public charities.
Although there now seems to be political momentum in the United States to increase the
accountability of public charities, the American system still recognizes a fundamental

132

distinction between the two kinds of charitable organizations. By contrast, the Canadian
regulation of private foundations is much less severe and the Canadian regulation of public
foundations and charitable organizations, because of the disbursement quotas, is more
onerous. Still another point of interest for Canadian legislators is the Internal Revenue Code 's
device of defining acceptable expenditure levels on restricted activities and making these
defined levels optional. This device is particularly well-suited to this sector because of the
sector's inherent diversity, on the one hand, and its reliance on tax-cautious volunteers, on the
other. This sort of "safe harbour" formulation of regulatory standards could be usefully
employed in many areas of the regulation of charities. That recognition is also expressed in
the rules defining the limits of deductibility for donations. Finally of note is the federal
requirement that private foundations send their annual filings to the relevant state authorities.
This is done in part out of recognition that the federal authorities have limited capacity to

governmental body or to a committee or other subdivision thereof in response to a written
request by such body or subdivision, as the case may be),

other than through making available the results of non-partisan analysis, study, or research.
Paragraph (2) of this subsection shall not apply to any amount paid or incurred in connection with an
appearance before, or communication to, any legislative body with respect to a possible decision of such
body which might affect the existence of the private foundation, its powers and duties, its tax-exempt
status, or the deduction of contributions to such foundation.

132

The U.S. Commission on Private Philanthropy and Public Needs in Giving in America: Toward a Stronger
Voluntary Sector (Washington, D.C.: 1975) (Chair: J. H. Filer) (Filer Commission), at 164, recommended far
greater accountability for large public charities with budgets of over $100,000. It also recommended that non-
arm's length transactions be restricted for all charities, not just private charities.

327

supervise the vast number of organizations and in part out of recognition that, to some extent,
private foundations should not be able to gain much advantage from changing jurisdictions.

4. THE TAX TREATMENT OF CHARITABLE ORGANIZATIONS IN THE
UNITED KINGDOM

(a) History

Charities were first granted tax-exempt status by the Income Tax Act, 1799. That Act
established an exemption for any "corporation, fraternity or society of persons established for
charitable purposes". The tax-exempt status of charities was attacked by Gladstone as an
unnecessary and expensive tax expenditure. The scope of the entitlement to the exemption
was considered in Pemsel, where it was decided that the exemption entitlement applied to
the whole range of purposes that were considered to be charitable at common law. On several
occasions, it has been suggested that the scope of the exemption be restricted and set out in
a codified definition, on the basis that what is considered charitable for the purposes of the
law of trusts should not necessarily be entitled to tax-exempt treatment and that the
entitlement to the tax exemption should be more clearly stated. No such definition has ever
been enacted.

(b) The Current Regime

(i) Donations

There is no standard deduction for donations to charities in the United Kingdom.
Charities instead are entitled to claim from Inland Revenue a rebate of the tax paid on the
donation by the donor. The donations themselves are treated as exempt income in the hands

1 17

of the charity. The rebate is calculated as a fixed percentage, the "basic tax rate", of the
donation. The donations that qualify for this treatment are subject to several conditions. One-
time gifts by individuals or companies must be for an amount of at least £400; otherwise,

133
134

135
136

137

39 Geo. 3, c. 13 (U.K.).

Ibid., s. 5, cited in H. Picarda, The Law and Practice Relating to Charities, 2d ed. (London: Butterworths, 1995),
at 535.

Supra, note 2.

See, for example, U.K., Report of the Royal Commission on Income Tax (Cmd. 615, 1920), paras. 305-09
(hereinafter referred to as the "Colwyn Commission"), and U.K., Final Report of the Royal Commission on
Taxation of Profits and Income (Cmd. 9474, 1955), paras. 168-75 (hereinafter referred to as the "Radcliffe
Commission"), cited in Picarda, supra, note 134, at 692. The Radcliffe Commission would have expanded the
first three classes oi Pemsel, supra, note 2, and omitted the fourth on the basis that tax exemption was a costly tax
expenditure. The Colwyn Commission recommended codification of the common-law definition to make it clear
that the legal definition is wider than the common conception. See, also, U. K. The Expenditure Committee, Tenth
Report: The Charity Commissioners and their Accountability (1974-75) (London; HMSO, 1975), which
recommended codification of a modernized Pemsel test.

Income and Corporations Taxes Act, 1988, c. 1 (U.K.), s. 505(2)(c).

328

gifts must be made pursuant to a covenant to make annual payments for a period of at least

~ 138

four years.

(ii) Exemptions

There is no general exemption from the income tax for charities in the United Kingdom,
as there is in Canada and the United States. Rather, a tax exemption is specified for each of
several charging provisions of the taxing statute. Thus, charities are entitled to exemption
from some taxes, but not from others.

a. Exemption from Tax for Income from Land

Section 505(1 )(a) of the Income and Corporation Taxes Act, 1988 provides for
"exemption from tax under schedules A and D in respect of the rents and profits of any lands,
tenements, hereditaments or heritages belonging to a hospital, public school or ahns house, or
vested in trustees for charitable purposes, so far as the same are applied to charitable
purposes".

There is considerable jurisprudence dealing with the definition of the terms "hospital",
"public school", and "ahns house". For the defmition of the last term, "charitable purposes",
the common law governing charitable purpose trusts applies. In most instances, a registration
under the Charities Act 1993 is deemed conclusive evidence that the registered body is a
charity. This is based on section 4(1) of the Charities Act 1993, which deems that "an
institution shall for all purposes other than rectification of the register be conclusively
presumed to be or have been a charity at any time when it is on the register of charities".

b. Exemption from Tax for Investment Income

Section 505(1 )(c) of the Income and Corporation Taxes Act, 1988 provides for an
exemption from tax in respect of any interest, annuities, dividends, and distributions. The
income must be received by a body that is established for charitable purposes only, and the
income must be applied to those charitable purposes exclusively. As with the exemption
under section 505(1 )(a), the law of charitable purpose trusts and section 4(1) of the Charities
Act 1993 applies. Under section 505(1 )(d), a similar exemption applies to investment income
which is applicable solely towards the repair of any building used exclusively for the
purposes of divine worship.

138

Ibid., s. 660.

139

These exemptions apply regardless of the form of organization.

140 ^

Supra, x\o\& 137.

141 „,

Charities Act 1993, c. 10 (U.K.).

329

c. Exemption from Tax for Business Profits

Section 505(1 )(e) provides for an exemption from income tax for trading profits as
follows:

[A charity is entitled to an exemption] in respect of the profits of any trade carried on by the
charity if the profits are applied solely to the purposes of the charity and either: i) the trade is
exercised in the course of the actual carrying out of a primary purpose of the charity or ii) the
work in connection with the trade is mainly carried out by beneficiaries of the charity.

This exemption has been held applicable to "lettmg out rooms for entertainment,
running a restaurant open to outsiders, bookselling, carrying on a public school, promotmg a
music festival to which the public were, on payment, admitted".''*^ The exemption is not
applicable to profits earned in any business not described in the section, even if all of the
protlts of such business are dedicated to charity. There is thus no "destination of funds test"
applicable to exempt the income of unrelated businesses of charitable organizations in the
United Kingdom. To avoid the harsh consequences of this result, charitable organizations in
the United Kingdom will often form a separate enterprise to carry on the business, and that
separate enterprise will covenant its profits to the charity.

There have been several cases which have taken up the issue whether a charity carrymg
on a business loses its status as a charitable organization under the Charities Act 1993 when
the business becomes one of its primary purposes. In Tennant Plays Ltd. v. Inland Revenue
Commissioners, Cohen L.J. "doubted whether a company could be said to be established
for charitable purposes only if it carried on a substantial non-charitable purpose, e.g. if it took
power permanently to run a public house in order to produce funds for its charitable
purpose". The Charity Commissioners in 1980 also dealt with the problem:

Drawing the line between the charity which is really raising funds and furthering its activities
by trading and what is in substance a trading institution wearing a charitable mantel is not easy:
each case must be considered on its own facts. There can be no objection to transitory and
incidental trading by charities, for example, by jumble sales or by the running of shops to sell
articles given by charitably minded people. But running a shop to make profit from goods
specially bought for the purpose or other trading on a permanent basis if permitted by the trusts
might mean that the institution was not established for exclusively charitable purposes, and
accordingly was not a charity within the meaning of sections 45 and 46 of the Charities Act
1960.

142
143
144
145

Picarda, supra, note 134, at 699. See cases cited therein.

[1948]1 AllE.R. 506(C.A.).

Cited in D. G. Cracknell, Law Relating to Charities, 2d ed. (London: Oyez Longman, 1982), at 21 1 ,

Report of the Charity Commissioners, 1980, at 7, cited in Cracknell, supra, note 144, at 21 1 .

330

d. Exemption from Tax for Income from Fundraising Events

Income from fundraising events arranged by voluntary organizations is also, by extra
statutory concession, exempt from tax if the organization meets four conditions: (1) it is not
regularly trading; (2) it is not competing with other traders; (3) the public is aware that the
event is for the benefit of charity; and (4) the profits from the event are transferred or applied
to charitable purposes.

e. Exemption from Tax on Capital Gains

147

Charities are exempt under the statutory provisions which tax capital gains. Gifts or
transfers at less than fair market value of property otherwise subject to capital gains are

148

subject to roll-over provisions so as to avoid tax liability in the donor.

/ Exemption from Rates

The law governing liability for rates is based on section 40 of the General Rate Act,
1967 which has been preserved by the Local Government Finance Act 1988. Under this
regime, charities "are granted substantial concessions, part mandatory and part discretionary,
in relation to liability for rates".

149

151

For preferential tax treatment under this regime, the property subject to tax must be
"occupied by" the charity and be "wholly or mainly for charitable purposes". Fleshing out

152

these requirements has led to a substantial body of case law.

g. Other Exemptions

There is no general exemption for charities from the value-added tax. Charities are
required to pay and are required to collect the value-added tax on taxable supplies and
services. A number of transactions that typically involve charitable organizations are zero
rated, such as supplies of magnetic tapes to charities organized for the benefit of the blind, or
the supply of medical and scientific equipment to a medical research institution. Supplies

146

See, further, Picarda, supra, note 134, at 71 1.

147

Taxation of Chargeable Gains Act 1992, c. 12 (U.K.), s. 256.

148

For gifts on death, see, the Inheritance Tax Act 1984, c. 51 (U.K.), s. 23. Section 26 of that Act provides similar

relief for gifts of property that are of historic, scenic, artistic, or scientific value. For inter vivos gifts, see Taxation

of Chargeable Gains Act, 1992, supra, note 147, s. 257.

149 ^

General Rate Act, 1967, c. 9 (U. K.).

Local Government Finance Act 1988, c. 9 (U. K.).

151 ^ ^

See Cracknell, supra, note 144.

Ibid., at 229-37.

331

made consistently below cost such, as meals on wheels, are also not taxable events because
they are not made in the course of a business.

(iii) Regulation of the Activities of Charities

There are two regimes of regulation, one for charities with income over £10,000 and
one for charities with income under £10,000. For the former, the exemptions are denied to the
extent that the charity's total income (including gifts) and capital gains exceed its "qualifying
expenditures" or, if these are less, to the extent of its "non-qualifying expenditures". Where
the non-qualiiying expenditures are greater than the difference between total income plus
gains and the qualifying expenditures, they are, to that extent, taxed as income in previous

153

years.

Section 506(1) defines "qualifying expenditure as an "expenditure incurred... for
charitable purposes only". "Non-qualifying expenditure" is defined as any expenditure which
is not a qualifying expenditure. Certain international activities and certain investment and
loan activities are specifically identified as "non-qualifying expenditures". In the case of
international activities, the charity concerned must "take such steps as may be reasonable in
the circumstances to ensure that the payment will be applied for charitable purposes";
otherwise the international activities are "non-qualifying expenditures". In the case of
investments and loans, the range permitted under the Act are very narrowly circumscribed.
Investments not on the list of permitted investments (this would include non-arm's length
transactions) are non-qualifying expenditures. Interestingly, program-related investments
are specifically permitted.

For smaller charities — those with income of under £10,000 — there is a general anti-
avoidance provision in section 505(7). Where these charities act in concert by entering
transactions whose purpose is to avoid tax, then the strict scheme of expenditure, and
investment regulation, just outlined, applies.

Transfers of funds from one charity to another are specifically permitted, provided the
funds continue to be used for exclusively charitable purposes. The latter can include saving
and investing the funds for future expenditure.

153

Income and Corporations Taxes Act, 1988, supra, note 137, s. 505(3).

'^'^ 76;^., Sch. 20.

'^^ Ibid., s. 505(2).

Inland Revenue Commissioners v. Helen Slater Charitable Trust Ltd., supra, note 54.

332

(iv) Conclusion

There are several features of the United Kingdom system that are of particular interest.
The first is the fact that the status for tax purposes of a tax-exempt organization is determined
by an administrative agency that has general supervisory authority over charitable
organizations, and not by administrators under the tax regime. Assuming that it is desirable
that the definition of charity be uniform for all purposes, it may make sense to assign full
administrative authority to a single expert agency, and make the tax consequences flow
automatically from that agency's assignment of the status.

A second interesting feature of the United Kingdom system is the covenant system.
Much of the North American literature on the deduction and tax credit regards their
efficiency to be a function of the extent to which they encourage people to donate. This
literature thus understands the tax expenditure as a way of attracting private funds to public
purposes. The United Kingdom system is not on its face designed to encourage giving. It is a
straightforward matching grant system of subsidization of the charity sector.

A third is the use of a tax, in some ways like the American excise taxes, to encourage
compliance with the regulatory restrictions. Although those restrictions are not as well
defined in the United Kingdom regime as they are in the Canadian and American regime, it is
interesting to note that non-compliance is sanctioned with a loss of the tax exemption, to the
extent of the non-compliance. Thus, income from proscribed business activities, investments,
and loans are taxed, as are the expenditures on non-charitable purpose activities. The United
Kingdom system also uses the "exclusively charitable" test, since recognition of eligibility for
the exemptions by the tax authorities is generally conditioned on whether the organization is
registered with the Charity Commissioners. Registration with the Charity Commissioners, in
turn, requires that a charity be exclusively charitable.

A fourth set of provisions of interest concern the regulation of business activities. The
rules parallel the Canadian rules in respect of what we call "related business" income,
including the deemed inclusion of businesses run by volunteers. However, it is of interest to
note that, through the covenant system, the profits from an unrelated business carried on by a
separate entity are entitled to the exemption and rebate, to the extent they are paid to a
charity.

Finally, the specific provisions in favour of program-related investment are interesting,
and worth following.

CHAPTER 12

THE SUPERVISION OF
CHARITIES BY REVENUE
CANADA: PROPOSALS FOR
REFORM

1. INTRODUCTION

The basic principles of the scheme of regulation of charities under the Income Tax Act^
are sound. The Commission therefore does not suggest radical reform of the federal tax law.
However, there are many provisions of the Act that should be improved and there are several
areas where the legal regulation of charities at the federal level is seriously lacking. We
therefore suggest a number of substantial changes that will require a complete redraftmg of
the provisions.

The recommendations for reform that the Commission suggests in this section are
intended to result, as a whole, in a comprehensive and coherent scheme of regulation that is
complementary to and consistent with the provincial regulation we recommend in Part IV.
Ideally, the federal and provmcial governments of Canada should cooperate m any reform,
but most of the proposals are such that cooperation is not required.

The structure of this chapter, with one or two exceptions, is the same as section 2 of
chapter 11. We make recommendations in each of the six areas discussed. In this introduction
we make some general comments and general recommendations concerning (a) the basic
premise of federal regulation, (b) the use of qualitative versus quantitative standards in that
regulation, and (c) the drafting styles employed in the formulation of the law.

(a) The Basic Premise of the Federal Regulation of Charity

The federal regime of regulation should not be based exclusively or even largely on the
general premise that charities are doing the work of government and, therefore, that the
exemption, the deduction, and the credit are in some sense state subsidies and/or state
incentives. The tax expenditure analysis, in our view, does not do justice to the diversity of
the sector; it does not apply to a very substantial number of charities, and even with respect to
the ones for which it seems plausible, it often serves merely to undermine the sector's own

R.S.C. 1985, c. 1 (5th Supp.).

[333]

334

self-understanding. Few people in the sector think or feel that they are doing the
government's work, and many would be mildly offended if the government insisted they
were.

This is not to say, however, that there is not an element of truth in the tax expenditure
analysis of the sector. For example, social welfare charities do certainly complement the
social welfare efforts of the state. The tax privileges, whatever their justification, are
substantial and costly. Some targeting of the tax privileges to complement and advance state
goals is, thus, a defensible objective in many areas of charitable work. Effectively policing
the tax privileges to ensure that eligibility conditions are maintained is only prudent, given
the amounts of money involved.

In our view, the best general premise for federal or provincial involvement in the
charity sector is that the sector is a third order of organization in society, one whose principal
characteristic is that the people who work in it are motivated predominantly by altruistic
purposes. The role of the state, on this view, is to facilitate charitable activity and to protect
the sector from waste, fraud, and abuse. In our view, however, the provincial government
should take the lead in filling this role because the facilitation and protection of charity
historically has been the exclusive jurisdiction of the provinces. At the provincial level these
goals are pursued mainly through the laws that govern the two main fiduciary duties of
charitable fiduciaries, namely, their duty of care, skill, and diligence (the duty of "prudence")
and their duty to act in the best interests of the charity (the duty of "loyalty"). Federal
regulatory involvement should be restricted to pursuing these goals only to the extent that the
resultant federal regulation can also be justified by the need to protect the integrity of the tax
system. This implies that the dominant, we would argue exclusive, regulatory standard at the
federal level should continue to be the "exclusively charitable" standard — ^that is, entities
eligible for favourable tax treatment must be exclusively charitable in their purpose(s) and in
their activity(ies). This in turn suggests a federal law oriented more to the regulation of the
behaviour of entities than to the behaviour of individuals, since it is entities which ultimately
must satisfy the exclusively charitable standard. This somewhat narrower objective justifies a
rigorous regime of regulation and an administration adequate to the task of enforcing those
regulations, but one that is somewhat less expansive than what is required at the provincial
level.

Since the charity sector shares the nonprofit motive with the other members of the
nonprofit sector, there is good reason to include the rest of the nonprofit sector with the
charity sector under one common public administration and, in some cases, to the same
regime of regulation. In Part IV, we recommend that the provincial law and administration be
organized and administered accordingly. In this chapter, we do not follow this suggestion up
with any specific recommendations for the federal government, since we have not studied the
federal regulation of nonprofits in any detail. We do note that the federal government appears
to be heading in this direction with the recent changes to the reporting requirements of
nonprofit organizations. The Commission would merely encourage that development.

Income Tax Act, ibid., s. 149 (12).

335

(b) The Use of Qualitative Versus Quantitative Standards

One of the complaints people in the charity sector have about the law governing the
sector is its apparent vagueness on issues where they expect to find clear direction as to what
is required and what is prohibited. Sometimes the vagueness results from a poor
understanding on the part of the legislator, sometimes from a poor implementation or
formulation of a policy that is otherwise well understood. We address these causes
throughout the discussion in this chapter and in Part IV. Sometimes, however, the problem
arises because the correct formulation of a rule establishes only a general qualitative standard
that cannot be stated more precisely or specifically, and that leaves much to the judgment of
individuals in particular cases.

One technique for avoiding the uncertainty that this type of rule engenders is to make
available to lay decisionmakers in the sector optional quantitative rules that attempt to state
the qualitative standard in approximate quantitative terms. ^ This latter type of rule is best
understood as a surrogate or proxy for the qualitative standard. Its appropriateness is
measured by the quality of its approximation, which in turn is assessed by comparing the
results of its application to the results obtained by applying the qualitative standard to the
facts at hand. Similarly, where a quantitative standard is difficult to formulate, the legislator
can employ other formulation techniques that foster certainty, but that result in only an
approximation of the true standard.

We suggest that the federal tax regime use optional quantitative or other approximate
but certain standards in three key areas of regulation of the charity sector, namely,
permissible flmdraising expenditures, permissible political activity, and permissible
commercial or business activity. Fundraising expenditures are currently generally permitted,
but are restricted somewhat by the disbursement quotas. The law now permits, or should be
construed as permitting, political and business activity that is related or is ancillary or
incidental to the charitable purposes of the charity. To some extent, the current law
concerning permissible political activity is also formulated as a quantitative standard. Recall
that only ten percent of a charity's resources may be devoted to such political activity, and
that not more than twenty percent of its donations can be devoted to such political activity. In
our view, the general qualitative standards in these areas are poorly formulated or poorly
understood, and the quantitative standards are inappropriate and, in any event, not optional.
In any reformulation and redrafting of the Act, consideration will have to be given to
remedying the first defect. As well, we are suggesting that these general standards should be
supplemented in some cases by optional quantitative or approximate but certain rules. We
discuss what we believe are more appropriate quantitative and approximate standards in
greater detail below.

Another technique, of course, is to provide explanations, interpretations, and examples in information circulars
and information bulletins.

The Commission recommends infra, this ch., sec. 2(c)(i), that the correct focus for regulation is commercial, not
business, activity.

336

Section 149.1 of the Income Tax Act is poorly drafted and in some places inadequately
conceived. Too much is accomplished through the use of deeming provisions or by
indirection. Section 149.1 is the cumulation of several reforms, and parts of it have been in
place for many decades. Fortunately, there have been only a few cases in which the section
has had to be interpreted and applied. Most of the federal litigation involving charities has
dealt simply with the entitlement to registration, and therefore just the meaning of "charity".
There have been cases, however, where the section has proved difficult to decipher, and there
are more than a few instances where a court has been led astray. Alberta Institute on Mental
Retardation v. Canada^ is perhaps one example. Another is the judgment of Marceau J. in
Scarborough Community Legal Services v. The Queen . In that case Marceau J. relied on the
differences in wording of the definitions for "charitable organization" and "charitable
foundation". The former requires that all the resources of the organization be devoted to
charitable activities. The latter states that a foundation must be constituted and operated
exclusively for charitable purposes. Relying on the differences in meaning between "activity"
and "purpose", Marceau J. came to the conclusion that a means/end distinction could not be
applied to permit incidental political activity in the case of an organization because the
concept "activity" did not admit of such a distinction. In our opinion, the mistake was in the
drafting of the definitions and the inadvertent use of different formulations of the
"exclusively charitable" test. There are several other such traps in section 149.1 which a
complete redrafting should aim to eliminate.

Much of the federal regulation of charities is contained in information bulletins and
circulars, as well as regulations and forms. We make no general recommendation whether
this style of norm presentation is adequate or advisable. It certainly has the virtues of
flexibility and adaptability. The basic concepts (except for "charity" itself), however, must be
clearly defined in the Act. In our view, the Act is deficient for failing to define the following
concepts with sufficient precision: "related" and "unrelated" business, "ancillary" and
"incidental" political activity, "charitable activities", and the "exclusively charitable"
requirement. In this chapter we will look at the improved approaches to definitions for each
of these.

Unlike the American regime, the federal regime does not attempt to make reference to
or incorporate elements of the provincial law or the provincial regulatory framework. There
are at least three areas where we think it is important for the federal law or administration to
do this. First, some effort should be made to accommodate the provincial law governing

Supra, note 1, as am. by S.C. 1994, c. 7, Sch. II, s. 123; 1994, c. 21, s. 74.

[1987] 3 F.C. 286, 87 D.T.C. 5306 (Fed. C.A.).

[1985] 2 F.C. 555, 17 D.L.R. (4th) 308 (Fed. C.A.).

A different problem arising out of the same language was discussed in Toronto Volgograd Committee v. Minister
of National Revenue, [1983] 3 F.C. 251, 83 N.R. 241 (Fed. C.A.). In that case it was argued, without success, that
the Court could not look at an organization's purposes, only its activities, to determine if it is charitable.

337

changes in the use of charitable funds and the disposition of those funds when the charitable
entity ceases to operate. Second, better use should be made of provincial agencies that
regulate charities, such as is done in the United States with respect to the annual filings of
private foundations. Third, the provincial law establishes sound general norms governing the
standard of behaviour of the directors and trustees of charitable organizations. These norms,
or elements of them, should be used by the federal regime as well, and there should be tax
law consequences attached to their breach. Remarkably, the current federal law nowhere
makes any reference to, let alone use of, the fact that the directors, the trustees, and others,
are fiduciaries with substantial and well-defmed duties of prudence (care and skill) and

loyalty under their charity's organic law. There are other areas where integration of the two
regimes is advisable and where action is required at the federal level to effect the integration.
These issues are examined in more detail as they arise in the followmg discussion.

2. CRITIQUE AND SUGGESTIONS FOR REFORM OF SPECIFIC PROVISIONS

(a) DEFINITION OF BASIC TERMS

(i) "Charity"

For the reasons advanced in chapter 7, the Commission does not recommend that the
federal tax regime adopt a defmition of charity. However, we do think that the common-law
defmition is in need of improvement and, therefore, that federal decisionmakers should be
open to developments m that definition along the lines suggested in Part II. One of our
suggestions in Part II, if accepted federally, would make the separate registration status of
amateur athletic associations and national arts organizations redundant, since these
associations or organizations, to the extent that they pursue the goods of play or aesthetic
experience for the benefit of others, are charitable. Perhaps this fact has already been
appreciated at the federal level, and it was thought that the separate status was required only
because of the failing in this regard of the common law.

Below we take up the possibility of reforming the process by which the registration and
revocation decisions are made. Whatever changes the federal government may adopt as a
result of those recommendations, we think it would be very helpful if those decisions, at least
the contentious or interesting ones, were published. Revenue Canada deals with over 4,000
registration applications a year and decides to revoke over 2,000 registrations annually. The
vast majority of the applications for registration are accepted without controversy and without
generating a public record of the decision to register. Almost all the revocations occur
without generatmg any public record of the decision to revoke. Most of the "law of charity"
in England, by contrast, is a law of definition. In Canada, there is very little such law because
almost all the relevant decisions are made in secret by Revenue Canada. It would be
beneficial to the sector and to taxpayers in general to have better information on these
decisions.

This failing results from its focus on the behaviour of entities. We suggested above that this basic approach is
correct. The argument in the text here is that it needs to be tempered.

338

In addition, we think it advisable that Revenue Canada publish an annual report
discussing its more important registration decisions, together with other aspects of its
administrative mandate — we return to this suggestion below — similar in content to the annual
report of the Charity Commissioners in the United Kingdom. The sector, and Canadians in
general, need far better information on the sector than is currently available. An annual report
by the Charities Branch would be a very cost-effective way to make this information
available.

(ii) Tripartite Division of Charities

The tripartite division of charities into public foundations, private foundations, and
charitable organizations is, we argued in chapter 9, sound. We also believe the current
definition of each of these types of charity is sound. Those definitions describe a certain
reality and they divide the sector in a way that permits intelligent regulation. The division is
clearer than the comparable definitions under the American law and errs, properly in our
view, towards over-inclusiveness in the private foundation category. The distinction between
foundations and organizations is also sound and the method of definition — organizations are
permitted to grant no more than fifty percent of their income — although negative in
formulation, is adequate. It may, however, be useful to separate out a new sub-classification
of private foundations, namely, "operating private foundations", as American law does, for
special treatment in some situations. We are thinking, for example, of a private foundation
that runs a museum containing the donating family's extensive art collection. Technically,
under the current law, this museum could not run a coffee shop since private foundations may
not operate a business.

(iii) Organizational Form

We also think the current regime is wise to require that foundations be organized on a
more formal legal basis, as trusts or corporations, and not as unincorporated associations. The
justification for this, in the Commission's view, is that these entities generally are larger and
therefore require a more stable and detailed organic law. Given that the justification is based
on size, however, some thought should be given at the federal level to requiring organizations
structured as unincorporated associations to reorganize as corporations or as trusts, once they
reach a certain size. The chief value of the unincorporated association form of organization is
its flexibility and ease of entry. It thus facilitates the spontaneity for which the sector is so
highly valued. Once an unincorporated association has reached a certain size and has existed
for a certain time, however, concern for the adequacy of its basic law should outweigh the
need for flexibility and ease of entry. We make no suggestion as to the appropriate size;
obviously any test will be somewhat arbitrary. We suggest only that the test should include an
element going to absolute size (in revenue or assets) and an element going to durability or
staying power. We suspect that in many instances, entities registered as unincorporated
associations would discover that, in fact, they are, in whole or in part, charitable trusts.

The cost of publication could be recovered by charging for copies of the report, as is the practice in the United
Kingdom. The report could also be published in The Philanthropist.

.11

339

(iv) The Exclusively Charitable Test

The exclusively charitable standard should be set out much more clearly than it is at
present. The Income Tax Act should state clearly that the status of registered charity is
available only to entities whose purposes and activities, whether service oriented or grant
oriented, are exclusively charitable, and whose constating documents or applicable
organizational law provide that upon dissolution of the entity the property of the entity must
be applied to other charitable purposes. The Act should also state clearly that no person,
other than legitimate recipients of the charity's services or grants, may receive any
uncompensated benefits from the charity. The statutory language should be the same for all
three types of charities. It should also make clear that for the "purposes" part of the test, a
distinction between primary or preponderant purposes and secondary or subsidiary purposes
is applicable to allow what may for the moment be called "apparently" non-conforming
purposes. The same language should be used to permit apparently non-conforming activities.

"Insubstantial" is the concept that is used in American law and, to some extent, in
Canadian law to identify those apparently non-conforming purposes and activities that are
generally permitted. In our view this concept is misleading and inaccurate. The fundamental
principle at issue should be, rather, whether any apparently non-conforming purposes or
apparently non-conforming activities are in reality merely ways or means, direct or indirect,
of achieving the charitable purposes.

Admittedly, the "insubstantial" test is often an accurate way of assessing this — any
insubstantial purpose or activity is probably also merely a means. But it is an indirect test and
it is, as a consequence, sometimes over-inclusive and sometimes under-inclusive in what it
permits. It is indirect because it does not address directly the relevant question: whether there
is a substantial rational connection between the apparently non-conforming purpose or
activity and the relevant charitable purpose. It is over-inclusive — it permits activity that ought
to be prohibited — since it is possible that non-instrumental but insubstantial activities and
purposes would be included. Likewise, it is under-inclusive — it prohibits activity that ought
to be permitted — because certain substantial but defmitely instrumental purposes or activities
may be excluded. Focusing on the true test may make it clear to all concerned just what is at
stake.

A good formulation would permit all purposes and activities that are a direct means of
doing charity or that are an indirect means — ancillary to (a support to) or incidental to (a
byproduct or complement of) — doing charity. These concepts are to be preferred to tests that
focus exclusively on the relative size of the apparently non-conforming purpose or activity.
Some examples will illustrate. A foundation established by a hospital to raise donations to be
granted subsequently to the hospital is charitable even though all its efforts are taken up

We deal with the disposition of the unexpended funds of a deregistered charity infra, this ch., sec. 2(g)(ii), when
we address the 100% penalty tax.

Legitimate recipients should include members in distress (a parish helping a parishioner) and member
organizations (the national office distributing the regional chapters).

340

soliciting donations. All administrative costs of operating a charity are charitable expenditures
even though some, such as accounting fees and legal fees, may seem only remotely connected
to the charitable purpose. The cafeteria, parking lot, and research income of a teaching
hospital are also all derived from activity which is charitable. In these examples, what may
appear to be a non-conforming purpose or activity is, when interpreted properly, charitable
because it is merely a direct or indirect means of achieving a charitable purpose. Conversely,
any insubstantial amount spent on an activity that does not advance a charitable purpose, or
any purpose that is not a charitable purpose, ought to be categorically prohibited. The
statutory formulation of the exclusively charitable test should be clearly based, therefore, on
the principle that what counts as charitable purposes or activities are those purposes or
activities that advance some common good for the benefit of others, directly or indirectly.

We return to apply these concepts below in the discussion of the political and business
activities and purposes of charities. We pause to emphasize this point as it is too often
misunderstood and because it is not properly reflected in the current income tax law. The Act
explicitly or implicitly restricts all forms of political activity, business activity, ftindraising
costs, and some administrative costs as non-charitable activity, although it also treats entities
that engage in these activities, within the specified limits, as meeting the exclusively
charitable standard. Thus there is a certain ambivalence, perhaps even contradiction, m the
Act over whether, to the extent these activities are permitted, they are permitted as limited
exceptions to the exclusively charitable standard or because they are in full compliance with
it. In the view just advanced, the only question that ought to be asked of any such activity is
whether it is a direct or indirect means to the end of charity. If the answer is yes, then the
exclusively charitable standard is met and any additional restriction on the activity must be
justified by some other policy rationale.

(b) The Registration Requirement

(i) The Process

We agree with the criticisms that have been voiced from time to time concerning the
process deployed in both the registration and revocation decisions. Improvements in that
decision-making process should be aimed at both enhancing the procedural rights of the
applicant or registrant and generating a better record of the facts of the case. As we stated
above in chapter 11, the reasoning in the Renaissance International v. Minister of National
Revenue decision was based both on the failure of the revocation process to meet the
requirements of natural justice and on the existence of an implicit requirement in the Income
Tax Act that the Minister of National Revenue is requked to have in place some process
capable of generating a record sufficient to support a section 172 appeal. In our view, the
second ground, if not the first, applies with equal force to the process for making registration
decisions.

[1983] 1 F.C. 860, 142 D.L.R. (3d) 529 (Fed. C.A.).

341

There are two basic design questions. One concerns the issue of competence or
expertise: what body should be vested with the authority to decide which entities are
charitable and which are not? The other concerns the precise content of the applicant's or
registrant's procedural rights.

With respect to the first question, it is worthwhile recalling that comparable decisions
are made by the Charity Commissioners in the United Kingdom. The Charity Commissioners
are a body whose origin and mandate sit squarely m the law of trusts and whose tax-law
functions are important but clearly secondary. The Commissioners have a long and
distinguished history and very rich experience from which to draw. It does not appear
possible, however, to adapt that particular model of decision-making, as effective and sound
as it is, to the Canadian context, smce it makes no sense delegating the tax-law registration
and revocation decisions to twelve different provincial and territorial authorities, where the
trust-law responsibilities currently are located. The Canadian situation is exactly comparable
to that in the United States, with exactly the same consequence. It is clear that reform of the
registration and revocation decision-making process, if it is to occur, must occur entirely at
the federal level. This approach runs the risk that the body of law dealing with the issue of
definition will be too oriented to tax-law considerations and fiscal consequences. The risk is
unavoidable but capable of being managed effectively. Additionally, it runs the risk that there
will be two or more definitions of charity — provincial and federal — with the consequence
that the sector will be subject to two or more incongruent legal regimes. This risk can be
largely avoided.

Two options for federal reform come readily to mind — a more robust internal
administrative procedure within Revenue Canada or an appeal from the admmistrative
decisions of Revenue Canada to the Tax Court, along the lines of an assessment appeal,
which, in essence, is a trial de novo. Expertise is one important factor to take into
consideration in making this choice. Expertise argues in favour of a tribunal devoted
exclusively to the question of the definition of charity and applying the exclusively charitable
test. This may imply a preference for some internal departmental procedure in the Charities
Branch of the Registration Directorate. Nevertheless, reducing administrative costs, and
accomplishing the other objectives of procedural fairness, openness, and generating a record
might more easily be achieved by tying into an existing judicial institution. This suggests the
Tax Court, or something higher in the judicial hierarchy. The Tax Court, moreover, would
entail a less expensive procedure for all involved. On balance, therefore, we prefer the option
of placing the matter under the jurisdiction of the Tax Court, with the hope that a stronger
body of case law and a certain expertise will develop over time. Revenue Canada's expertise
would therefore be deployed only at the initial administrative stage of the registration and
revocation processes, and only the contentious cases would go beyond that. There should
also be a provision in the Act establishing a right in applicants to proceed to the Tax Court
after there has been a certain delay and no decision from Revenue Canada, along the lines of
section 172(4) of the Income Tax Act. This section deems a delay of 180 days to be a refusal
to register, thereby giving rise to a right to proceed to the Federal Court of Appeal. We think

Revenue Canada's decision should still be reported, as suggested above.

342

that 180 days is far too long, however. Half that time should be adequate for Revenue Canada
to process applications.

(ii) A Provincial Right of Participation in the Decision-Making Process

In addition to making the process more open and procedurally just, the reform should
contain a provision requiring Revenue Canada to consult the provincial agency having
jurisdiction over the applicant or registrant. The Commission recommends that the reform
contain provisions establishing at least a right of comment in the relevant provincial agency
exercisable at the administrative stage and a right to intervene at any judicial stage. Ideally,
provincial authorities should have the power to initiate proceedings and to take up the
question of initial or continued eligibility for registrations, with full rights of appeal. As will
be seen in Part IV, we will be recommending that all Ontario laws regulating charities be
made applicable to all entities that are registered federally as a charity, a registered Canadian
amateur athletic association, or a national arts service organization. This is one justification
for allowing the provincial agencies these procedural rights. Such participation rights are also
justifiable on the basis that they recognize the provincial interest and expertise in charity law,
that they help lower or avoid the risk that the law of definition is too oriented to tax law
considerations, and that they encourage greater federal-provincial cooperation and
coordination in the regulation of charities.

In the vast majority of cases (if our recommendations in Part IV are implemented), the
provincial authority in Ontario will already have passed judgment on the entity's charitable
status when the decision to incorporate or, if our recommendation on the registration of
charitable trusts and charitable associations is implemented, the decision to register is made.
Therefore, the administrative expense of allowing a right of comment should be low in cases
mvolving Ontario charities, since the provincial decision to incorporate or to register will
have been made and the province's endorsement of the candidacy for federal registration will
be evident from the positive incorporation or registration decision. Only where the entity
pursues a registration after a negative provincial decision will the federal authority be obliged
to communicate with the provincial agency in Ontario dh^ectly. In cases where the federal
decision is positive and the provincial decision is negative, the Ontario authorities should be
obliged by provincial legislation to revise their decision so that it conforms with the federal
decision. Such a rule would contribute to the coherence of the law of definition and would
make the regulatory regime simpler for charities, since it would make the federal decision-
making process the most important source of law on the question of definition. In cases
where the provincial decision is positive and the federal decision is negative, there need be no
revision of the decisions since the provincial law of charity would remain applicable. Thus all
federal charities will be provincial charities, but, possibly, not all provincial charities will be
federal charities.

This right would be similar to the right of the tax authorities in the United Kingdom to appeal the registration
decision of the Charity Commissioner under s. 4 of the Chanties Act 1993, c. 10 (U.K.).

Provincial law would remain applicable to entities not so registered but which are, under the common-law
definition, charities.

343

(iii) Third Party Rights

Should other parties be given an opportunity to be heard or any other rights, such as a
right to invoke an administrative review of a registrant? For example, should a taxpayer's
association or another nonprofit entity be given some legal recourse to object to the political
activities of a registrant or of an applicant for registration? To take another example, should a
small business be permitted to object formally to the business activities of a charity or of an
applicant for registration? Currently, under section 10 of Ontario's Charities Accounting
Act, two or more persons alleging a breach of trust may apply for and obtain a court order
directing the Public Trustee to investigate the charity at issue. Should a similar scheme be put
in place at the federal level?

Provided that any such rights of participation or intervention are made conditional on
prior approval of some judicial authority, such as the Tax Court or the Federal Court, the
Commission believes this innovation would be a very useful one to adopt at the federal level.
Both the private interests of some parties (the small business example) and the public interest
in the maintenance of the integrity of the sector (the taxpayer association and other nonprofit
examples) warrant creating some right of participation in interested parties and members of
the public. Without specifying those rights in too much detail, we would suggest that, where a
person or organization alleges a breach of the exclusively charitable rule or, perhaps, any
other specific rule under the Income Tax Act by a registrant or applicant, then they should be
permitted to apply, at their own expense, to a court for an order granting them intervenor
status in an ongoing proceeding, an order requu*ing Revenue Canada to investigate, or an
order that the charity comply with the relevant requirement.

(i) Regulation of Commercial Activity

a. The Qualitative Standard

The general matter under consideration in this section is better referred to as the
"commercial" activities, not the "business" activities of charities. The concept "commercial"
is preferable because it identifies the entire subject-matter and only the subject-matter that is
of present concern. It captures all transactions that are relevant for consideration here, since it
includes isolated commercial transactions and events in a way "business" does not; it captures
only the relevant activities — those involving an element of commerce — in a way that
"business" (as in the "business" of charities is charity) does not. Moreover, it provides us
with one way to make the distinction that lies at the heart of the legal regulation in this area:
commercial activities are and should be permitted to be carried on by charities up to the point
where the charity conducting them becomes, in whole or in part, a commercial "business".

'^ R.S.O. 1990,c.C.10.

344

The current law and administrative practice regulating the commercial activities of
charities is not as clear as it should be. In our submission, this lack of clarity should be
rectified by amendments to the Income Tax Act. The principal area of concern is the proper
classification of the permissible and impermissible commercial activities of charities. As
discussed above, the Act prohibits "unrelated business" activity for all charities and permits
"related business" activity, defined to include a "business" run substantially by volunteers,
for public foundations and charitable organizations only. In our submission these rules are in
large measure correct, but require clarification.

As the principal measure of clarification, the twofold classification of business activity
into related and unrelated should be discarded and replaced by the followmg threefold
scheme of classification:

(1) "related" commercial activity that directly advances the objects of the charity, for
example, the sale of merchandise made by the disabled in training and
employment workshops, or, in part, a literacy organization holding a book fair, or
a church bookstore;

(2) "subordinate" commercial activity that is either (a) "ancillary" to (supports) or (b)
"incidental" to (is a byproduct of or a complement of) the charitable activity or
purpose, for example, a fundraismg golf tournament (ancillary) or a parking lot or
coffee shop in a hospital (incidental), and therefore indirectly advances the objects
of the charity; and

(3) commercial activity that constitutes a busmess.

In our view the distinction between (1) and (2), on the one hand, and (3) on the other,
although often difficuh to make in practice, is foundational. The distinction rests on the
difference, just stated, between engaging in commercial activity as merely a means, direct or
indirect, of doing charity and engaging in commercial activity as an end in itself, or as a
"business". The first two types of activity, though they have several of the attributes of a
business, including significant commercial activity and a serious intention to make a profit,
are not generally understood as businesses; in common parlance they are usually not referred
to as businesses, but as charity. This is because the commercial activities of the first category
are always intended to advance directly the goals of the charity or to be a direct extension of
the charitable activities of the charity, and the profit realized or mcome earned fi-om the
commercial activity, although important, is incidental to that activity. The commercial
activities of the second category are always either ancillary to the charitable endeavour, in the
sense that they are intended merely to provide support to the main charitable goal — ^they are
principally "ftindraisingybr chanty" activity — or incidental, in the sense that they are a mere
by-product or complement of the main charitable activity. Considered in isolation they could
be businesses, but taken in context, they are charitable. The third type of commercial activity,
however, is business activity. Its founding logic and its controlling purpose is to trade to
make a profit. Activity of the third type remains non-charitable even though the ultimate
destination of the profit is the charitable activity of a charity. For this reason, in our view, a
destination of funds test is not a helpful criterion in distinguishing between the first two types
of activity and the third, since on a destination of ftinds test, the third category is

345

indistinguishable from the first two. Similarly, the presence or absence of a profit motive in
carrying out the activity is not helpftil as an identifying criterion, since on the profit motive
test the first two types of activity are indistinguishable from the third. The size of the activity,
as we suggested above in setting out the relevance of the means/end distinction in general, is
a useful indicium. So too is the relative institutional integrity and financial autonomy of the
commercial activity.

In our view there is no question that the first (related) and second (subordinate) types of
commercial activities are legitimate activities for charitable organizations and public
foundations, but not for private foundations (at least the non-operating ones), and that the
third type of commercial activity should be prohibited for all charities. This, in essence, is the
current position. The Act should be amended, however, to establish the three distinct
categories of activity clearly, just as it was amended in 1985 to establish the same distinctions
in respect of political activities.

The only consequence we would attach to the distinction between related and
subordinate commercial activity, on the one hand, and charities running busmesses, on the
other, is that the latter be permitted only if carried out by a separate taxable corporation. We
also recommend that where a charity owns one hundred percent of the shares of such a
separate corporation, that the corporation be permitted to deduct without limit, in any given
taxation year, its donations to the parent charity. To ensure that those donations do not fmd
their way back into the businesses, they should be subject to a one hundred percent
disbursement requu-ement in the charity. The explanation for this recommendation is as
follows. The prohibition against charities carrying on businesses is justified on the basis of
the exclusively charitable standard. The exclusively charitable standard in turn is the
benchmark standard for solely practical and administrative reasons: it is the simplest way to
target the tax privileges to deserving activities. Where charities running businesses are
concerned, the danger is that the tax privileges will be used to subsidize the businesses. This
is objectionable for two reasons: first, the tax privilege will have missed its target; second,
permittmg charities to run businesses subsidized in this way will frequently work unfairly to
the disadvantage of competing businesses. If the business is carried on by a separate taxable
entity, however, there is no basis for objection on either of these grounds.

We now briefly examme each category of commercial activity in turn. It is important to
emphasize at the outset that related commercial activities and subordinate commercial
activities may fall partly into one category, partly into another; but that, by definition, those
activities, on the one hand, and businesses, on the other, are mutually exclusive. Further,

Care should be taken in drafting the rules that implement this recommendation to ensure that it cannot be
circumvented by carrying on the unrelated business as a trust.

Other donations would be subject to a 80% disbursement rule: 80% of donations would have to be spent on non-
investment activities.

Additionally, donors might be afraid that their donations to charity will be used instead as risk capital in a profit-
making venture. This is the trust law concem which we take up infra, in Part IV.

346

ancillary commercial activity is often accompanied by an element of incidental activity. This
is why it is often said (mistakenly) that the test is properly framed as requiring activity that is
ancillary and incidental.

(1) Related Commercial A ctivity

Some commentators misunderstand the nature of the activity in this category. Revenue
Canada's discussion in a recent draft circular, for example, identifies "relatedness" as a
relevant criterion, but characterizes it as a "handicap" provision to safeguard against unfair
competition in the marketplace, not as the criterion which establishes the activity as charitable
per se. This is, in our view, mistaken. What is required by this criterion is that the activity be
in direct advancement of the goal of the charity or a direct extension of its activities. If it does
or if it is, it is charitable activity.

There are very few instances of commercial activity which fall into this category, and
this category alone, of permissible commercial activity . We mentioned the example of thrift
shops above. Those shops are an integral part of the provision of productive, ftilfilling, and
self-sustaining work to the handicapped. The church bookstore, the art gallery that charges
admission, and the hospital that charges a premium for a semi-private room are others.
Another example that is becoming increasingly important is micro-development enterprises
to provide business opportunities for the unemployed. In these activities the income earned is
earned in carrying out the charitable activity itself and the profit, if any, although intended, is
entirely incidental.

(2) Subordinate Commercial Activity
A. Ancillary Commercial Activity

Commercial ftindraising events are the principal kind of activity of concern here. Their
intermittent nature makes them relatively easy to distinguish fi'om businesses. We concur
ftilly with Revenue Canada's recent draft circular^^ in its discussion of the identifying
characteristics of legitimate ftindraising activity of this type. That activity should generally be
"infrequenf , as opposed to "regular and systematic"; it should be "subordinate and
ancillary", "a minor focus of the charity... clearly... directed to assisting in the achievement of
the principal charitable purpose".

More difficult to distinguish are the sustained commercial activities — such as UNICEF
Christmas card sales or OXFAM used clothing shops — of some charities. The distinction
between subordinate activities and businesses in this context is solely a question of whether
the underlying purpose of the sustained commercial activity remains subordinate to the
charitable purpose. This can be discerned only by looking at indicia — such as relative size,
integrity and autonomy, direct or indirect connections to the charity's purposes, etc. — that

Revenue Canada, Taxation, Charities Division, 1990 Draft Circular.

Ibid

347

point, on balance, to one characterization over the other. The difficulty often arises from the
fact that there is usually nothing about the commercial activity in itself that necessarily
connects it to the charity for which it is established.

If the commercial activity is conducted substantially by volunteers, that is currently
taken as conclusive proof that the activity is "related" and therefore permitted. It is probably
more true to the intentions of all concerned — the charity and the volunteer fundraisers — to
characterize the commercial fundraising event run by volunteers as donations of time and
effort. The Act's deeming this type of commercial activity to be "related" because it is carried
on by volunteers is one of its grosser fictions. What is meant, or should be meant, is that the
fact the commercial activity is run by volunteers is strong (conclusive) proof that it is
ancillary.

B. Incidental Activity

Incidental commercial activity is generally easier to characterize as such since there
usually is a strong connection between the charity and the activity: the commercial activity
arises as a byproduct or complement to the charity's work. Commercial exploitation of
university or hospital research, sale of administrative expertise developed in a large service-
oriented charity, and sale of recordings by a symphony orchestra are all byproducts or spin-
offs of the charitable activity. Another byproduct is the income earned from the exploitation
of idle or under-utilized resources. The cafeteria in the hospital and the parking lot at the
university are complementary activities: any institution with a large population base must
provide for elementary human needs.

C. Businesses

The Federal Court of Appeal in the Alberta Institute on Mental Retardation v. Canada
decision applied four criteria to determine whether the "business" in that case was an
"unrelated business" under the Act:

1. The degree of relationship of the activity to the charity;

2. Profit motive;

3. The extent to which the business operation competes with other businessmen; and

4. The length of time the operation has been carried on by the charity.

The majority m this case, interpreted and applied these criteria in a manner which treated
them essentially as a "destination of profits" test.

Supra, note 6. For a similar English case, see Oxfam v. Birmingham City District Council, [1976] A.C. 126,
[1975] 2 All E.R. 289 (H.L.), where a gift shop operated by Oxfam was denied a rating exemption, even though
all the profits fi^om the shop went to support Oxfam's charitable purposes. Thus the House of Lords declined to
apply a destination of profits test in assessing whether the gift shop was using the premises for charitable purposes.

348

Revenue Canada has improved upon this formulation of the criteria in a recent draft
circular^"* as follows:

(1) whether the business activity is linked to the exercise or performance of the purposes or
functions for which the charity has been granted registration;

(2) whether there are indications of a private profit motive;

(3) the extent to which the business operation competes unfairly with the private sector; and,

(4) whether the business is a type that has been traditionally associated with the charitable
sector, or has been carried on by charity for many years and is accepted by the community.

Revenue Canada's draft circular mentions two glosses to this version of the test. First, the
draft circular requires, as an "overriding consideration", that the "business" remain a means
of carrying out the charity, "rather than taking on a substantial character and scope of an
additional, non-charitable purpose m its own right". Second, this overriding criterion and the
second criterion in the above list — ^the profit motive — are identified as necessary conditions,
whereas the others are identified as being secondary and optional.

We thmk the four criteria propounded in the Alberta Institute case are misleading and,
as we stated above in chapter 11, we think the court in that case was mistaken to apply a
"destination of profits" test to the question of whether a "business" is "related" or not. We
think that the test Revenue Canada has set out in its draft circular is closer to the proper test,
but that it is expressed m a confusing way. In our opinion, the only portion of Revenue
Canada's test that is entirely correct, is the first gloss or "overriding consideration" — the
commercial activity in question cannot take on the character or scope of "an additional non-
charitable purpose in its own righf . In other words, the commercial activity must be related
or subordmate; it cannot be a business. Revenue Canada's test is conftising because it fails to
distinguish between the related and subordinate categories — these are conflated by Revenue
Canada and the Act into "related" — and therefore does not recognize that the real problem in
most cases is to distinguish ancillary commercial activity from businesses.

In particular:

Criterion (1) is better expressed in Revenue Canada's test than in the Alberta Institute
formulation. It should stand by itself, however, without ftirther qualification, as the test
that identifies our first category, "related" commercial activity. It is unclear how the
first gloss applies to affect or alter it. In our view, size by itself should not be a
disqualifying criterion if the commercial is truly related m the way required.

Criterion (2) is either wrong or redundant. It is wrong if it is mtended to prohibit profit
as a motive since nearly all the commercial activities under consideration, permitted and

^wpra, note21.

349

unpermitted, will run afoul of that test. All of them, at the least, are run to earn income.
It is redundant if it is meant as a way of expressing the non-distribution constraint. That
constraint applies to all aspects of a charity's activities, not just its commercial
activities, and therefore it is not a useful way to distinguish permitted from unpermitted
commercial activity.

It is not clear from Revenue Canada's discussion how criteria (3) and (4) apply. They
are admitted in Revenue Canada's discussion to be secondary. In our view these two
considerations are two of many considerations — and by no means the most useful — to be
applied in distinguishing between subordinate commercial activity and businesses.

b. Quantitative and Other Approximate but Certain Standards

The qualitative standard we have just set out may be far too uncertain in some cases for
both the charity sector and Revenue Canada. We know of no precedent in any other
jurisdiction, however, that establishes a truly optional quantitative standard in this domain. In
Canada, there are currently two rules that provide a greater measure of certainty. One is the
absolute prohibition against private foundations conducting any business. This certainly is
clear, but it may be too extreme. We mentioned above the possibility of softening this
restriction by recognizing the category "operating private foundation". The thinking behind
such an absolute prohibition must be that there are very few, if any, private foundations that
could satisfy the qualitative tests just set out, coupled with the perhaps prudent assessment
that the risk of inappropriate behaviour with this class of charity is too high. The Commission
agrees, and therefore, subject to our one qualification, we would continue this prohibition.

The other rule is the disbursement quota. The quota restricts the amount of money
available to capitalize any business activity of a charity, but is probably inadequate as a
significant restriction in the majority of cases, since in most cases it would be relatively easy
to fmance a profitable business activity without having to resort to donations. It may be
somewhat useful to Revenue Canada as a test that helps identify cases of possible
inappropriate activity, but since it does not explicitly permit business activity, it is of little use
to charities.

We suggest three additional rules to foster greater certainty. The first is a codification of
what experience has shown to be acceptable commercial activity for various types of charity.
This is in essence the American approach. Thus, a new regime would set out the general
standard as discussed above, and this would be supplemented by what would, in effect, be a
non-exclusive list of permitted commercial activities in each category.

The second rule would be a power in Revenue Canada to require a charity which is
carrying on a business, in Revenue Canada's estimation, to carry on the business in a wholly
owned separate taxable corporation. This corporation, as suggested above, could deduct each
year all donations to the parent charity, without limitation. The charity that is the subject of
such an order would be given a right to appeal it to the Tax Court and would prevail if it
could establish that the commercial activity is subordinate or related. The statute would set
out a list of criteria for the court to weigh in deciding this question. This rule — indeed any

350

regulation of commercial activity — would have to be supported by a reporting requirement
pursuant to which charities would disclose the nature and extent of their commercial activity.

The third rule would be a special regime to clarify the status of various kinds of micro-
development projects. That regime should recognize the essentially charitable nature (or, in
some cases, nonprofit/cooperative nature of these projects in their initial years, altering their
status once sustainable economic viability has been achieved.

(ii) Regulation of Investment Activities

a. Introduction

There are three reasons why governments might want to regulate the investment
activities of charities. One is to ensure that charitably endowed assets remain available over
the long term to do charitable work. This is achieved by ensuring, in one way or another, that
only sound investment decisions are taken. This objective appears to be the rationale behind
that part of the United Kingdom tax regime which provides that only certain investments
qualify as "qualifying expenditures". This is also the main justification supporting provincial
legislation restricting the investment powers of trustees, such as section 26 of the Trustee
Act in Ontario and, in part, the provisions of the Charitable Gifts Act relatmg to
permissible ownership interests in businesses. This objective is generally achieved through
the legislative imposition of investment guidelines or restrictions on charitable trustees and
directors. These in turn are best understood, in the final analysis, as specifications, in this
domain of activity, of one of the two principal duties of all charitable fiduciaries, namely, the
duty to exercise a certain level of care, diligence, and skill — what we have called the duty of
prudence — in the performance of their functions.

A second reason to regulate the investment activity of charities is to prevent the
investment activity from becoming an end in itself and to prevent the investing charity from
being transformed thereby into an investment business. This objective is concerned with one
of the two implications of the exclusively charitable standard in this sphere of activity.

A third reason to control the investment activity of charities is to prevent charitable
fiduciaries from profiting from their relationship with the charity — either personally or
through benefits to their family or associates — and, more generally, to prevent the charitable
form from becoming a front for the profit- interested activity of the principals behind the
charity. This objective is concerned with the second of the two main duties of all charitable
fiduciaries, namely, the duty to act with loyalty to and in the best interests of the charity, or
what we will refer to simply as the duty of loyalty. It is also concerned with the other
application of the exclusively charitable standard in this domain of activity.

^^ R.S.O. 1990,c.T23.
^^ R.S.O. 1990, c. C.8.

351

Currently there are four sets of provisions in the Income Tax Act which, in differing
measures, attempt to address these three objectives. Only two of these, however — the first
two — do so by regulating the investments of charity:

(1) There is the provision prohibiting foundations from acquiring more than a fifty
percent ownership interest of a corporation.^^

(2) There are the provisions that seek to ensure that the non-qualified investments of
private foundations earn a fair return for the foundation.

(3) There is the exclusively charitable test which, under its current formulation,
prohibits any income fi^om the charity going to "the proprietor, member,
shareholder, trustee or settlor thereof and, as described above, restricts the

business activity of charities.

(4) And there are the disbursement quotas which, by requiring a specified level of
expenditure on charitable purposes and activities, indirectly contribute to the
achievement of all three goals.

The discussion in the following paragraphs is an evaluation of the adequacy of these
four sets of rules in light of the three objectives. The discussion is organized, however,
around the objectives, not the rules, since in our view the rules are not entirely satisfactory.
The discussion begins with the first objective — capital preservation and the duty to invest
prudently — then, briefly, the second objective — prohibiting investment businesses. In a
further section, we examine issues relating to the federal regulation of the charitable
fiduciary's duty of loyalty. This latter discussion deals with, but extends beyond, the
regulation of investing. It is an important area of regulation that is very poorly developed in
the Act. We examine it in toto below.

Generally speaking, all our recommendations for the reform of federal legislation in
these areas are based on the basic rationale of federal regulation that we set out in the
introduction to this section. The primary objective of federal law is to safeguard the integrity
of the tax system. We said that this is achieved, in turn, by ensuring that all registered
charities maintain their eligibility conditions. Since the foundational eligibility condition is
that registered entities remain exclusively charitable, the federal government should legislate
to achieve the three objectives only to the extent that such legislation is also justified by the
exclusively charitable standard. The dominant role in pursuing the first and third objectives —
enforcement of the duty of prudence and enforcement of the duty of loyalty — in our view,

Income Tax Act, supra, note 1, s. 149.1(3)(c), (4)(c).

See, in particular, Income Tax Act, ibid., s. 189.

Ibid., s. 149.1(1) "charitable foundation" and "charitable organizations .

Ibid., s. 149.1(1) "disbursement quota".

352

should be left to provincial governments, since these objectives are integral to the exercise of
the parens patriae jurisdiction of provincial governments or pertain exclusively to the law
governing the forms of organization.

The Commission is also of the view that both federal and provincial law should be as
permissive as possible in regard to the investment activities of charities. Any proposed
restriction on the investment activities of charities, therefore, will require very careful
scrutiny. If the proposed restriction is not fiilly justified by sound legislative goals, it should
not be imposed. This posture is in accord with our more general approach to the regulation of
charity — the controlling purpose of all legislation in the charity sector is to facilitate charity
and to protect it from waste and fraud. Charities and charitable fiduciaries should therefore
not be constrained by legislative standards that do not clearly and effectively advance these
goals.

b. The First Objective: Capital Preservation and Enforcing the
Charitable Fiduciary 's Duty to Invest Prudently

Only two sets of the provisions mentioned above have any significant effect on the level
of skill and care required of charitable fiduciaries in making investment decisions. The most
important is the part of the disbursement quota for foundations that requires all foundations to
disburse a percentage of the value of their investment properties. This rule encourages
foundations and their fiduciaries to invest prudently so that they earn sufficient income to
meet the quota, while maintaining the real value of their capital base. The quota is thus a
quantitative rule which approximates the prudent investor standard by implicitly stipulating
the results the prudent investor should be able to achieve. The sanction for failure, however,
is suffered entirely by the foundation — it may be required to expend a portion of its capital
base — not the fiduciaries, even though the duty to invest prudently is or ought to be,
arguably, primarily a duty of the fiduciaries.

The second set of relevant provisions are the non-qualified investment rules. They
merely supplement the disbursement quota rules just described. They attempt to ensure that
the disbursement quota for private foundations cannot be diminished through the
manipulation of the value of the underlying investment properties.^ ^

Interestingly, from the tax policy perspective, the principal objective of the foundation
disbursement quota is not to encourage charitable fiduciaries to invest prudently. Rather, its
main purpose is to prevent charities with investment assets from becoming preoccupied with
capital growth and capital accumulation, at the expense of doing charity. This is a revealing
observation since it is certainly conceivable that the tax regime should not be concerned at all
with whether charities or their fiduciaries invest prudently. This is, of course, a major concern

A third possibly relevant rule is the 50% ownership rule. As we stated above in this ch., sec. 1, it is unclear what
the objective of this rule is. Perhaps in part it is meant as an application of the duty of prudence on the theory that
more than a 50% stake in a corporation is not generally a prudent investment. The explanation accepted at the
time of its enactment, however, was that it was adopted to control for self-dealing. See supra, ch. 10.

353

of provincial law because the duty to invest prudently is an important part of the charitable
fiduciary's more general duty of prudence. As such, it is at the heart of the definition of the
legal forms which associations of people use to pursue charity together. The policy question
from the federal or tax perspective therefore is whether there is any additional or
complementary tax law concern over whether charities or charitable fiduciaries do a poor job
investing the charity wealth. If there is another tax law concern then, possibly, the tax law
ought to do much more to enforce it; first, perhaps, by formulating it as an obligation of
charities and/or charitable fiduciaries, and second, perhaps, by sanctioning breaches.

There are three plausible arguments that it is of concern from a tax law perspective that
charities and charitable fiduciaries invest prudently. First, from a tax expenditure point of
view, it could be argued that, if the charitable fiduciaries are doing an inefficient job in any of
their domains of responsibility, includmg investing the assets of the charity, the efficiency of
the tax expenditures made available to charities is adversely affected. Second, from a tax
policy standpomt, the federal tax authorities may have reason to intervene in the investment
decisions of charities where those decisions are made so imprudently that the imprudence
borders on waste. And third, in a similar vein, at a certain point, a poorly run charity ceases,
according to the practical utility element of our definition, to be charitable.

The Commission believes only the second and third rationales establish a valid basis for
federal regulation concerning the duty to invest prudently. We mentioned in the introduction
to this section that the tax expenditure analysis of the tax privileges is of limited, if any,
relevance in designing the federal law. We are not persuaded that it applies by exception, in
this instance, to justify a tax regime that aims, in part, to encourage efficient investing on the
part of charitable fiduciaries. Rather, the second and third arguments in favour of federal
regulation are, in our view, the only pertinent ones. They establish a somewhat limited basis
for federal regulation. Only investments which are imprudent to the point of being wasteftil
or ineffectual should be regulated. Such investments should be prohibited. When they occur,
they should be sanctioned (as the American law does in the case of "jeopardizing"
investments) by applymg escalating penalty taxes against the charity and against culpable
management, by requiring immediate correction of the offending investments, and, if
appropriate, by deregistration. If such an approach is adopted at the federal level, however,
we see no reason to restrict its application to private foundations, although one would expect
that private foundations would present the greatest risk of non-conforming behaviour.
Program-related investments should be explicitly excepted from its application.

Effective enforcement of this rule may prove difficult. One approach to enforcement is
to monitor the performance of charitable investments more systematically than is done at
present. At a minimum, the level of investment assets (including amounts invested in related
and subordinate businesses), investment income (including income from related and
subordinate businesses), and net capital losses and gains would have to be reported.
Alternatively, the objective of the reporting requirement might be to monitor the performance
of only those investments that constitute a certain threshold percentage value of total
investments, and therefore only those investments that present a significant risk to the
financial viability of the charity. Finally, there might be no particular provision for the
enforcement of the prohibition, save the threat of sanctions in the case of violators who
happen to get caught. For the vast majority of charities, a reasonably rigorous disbursement

354

quota would, as at present, be a reasonably adequate substitute for decent enforcement. Our
recommendation is to adopt the last of these approaches for organizations and public
foundations, and the first of these approaches for private foundations.

If, contrary to our view, it is felt that there is a sufficient interest at the federal level to
regulate further in respect of the duty of prudence in general and the duty to invest prudently
in particular, then great care should be taken to ensure that the federal regulation in the
domain of investment activity is consistent with the applicable provincial regulation, since the
provincial interest in regulating in this area is by far the greater of the two.

c. The Second Objective: Preventing Charities from Becoming
"Investment Businesses"

We think that the federal tax law is currently effective in regulating the investment
activities of charities so that charities cannot develop into investment businesses. We
therefore do not have any recommendations for reform in this regard. The current approach,
as discussed, employs a general qualitative standard — the exclusively charitable standard —
and a quantitative standard in the form of the disbursement quota for foundations. The first of
these, in this area, employs a well-developed tax-law distinction between income from
property and income from business. There is extensive case law experience with this
distinction generally, and even some experience applying it to the investment activities of
charities. The disbursement rules applicable to foundations also contribute to the achievement
of this objective to a very limited extent, since they result in less income being available for
reinvestment.

(iii) The Third Objective: Enforcing the Charitable Fiduciary's Duty of
Loyalty

a. Introduction

The current regulation under the federal tax law of the charitable fiduciary's duty of
loyalty — not just in investment decisions, but generally — is very poorly done and in our view
requires substantial reform. There is very little in the Income Tax Act concerning the duty of
loyalty and what little there is, is too narrow in application and/or too oblique in formulation.
Each of the four sets of rules mentioned above in section 2(c)(ii)a makes some, very limited,
contribution to the enforcement of the duty of loyalty:

(1) The disbursement quotas indirectly police for breaches of the duty of loyalty by
restricting somewhat the funds available for theft or misdirection.

(2) In the case of private foundations, non-qualified investments are not prohibited or
restricted in any way, as they are under provincial law. Rather, those investments
are expected, through the disbursement quota mechanism and the penalty tax, to
generate a reasonable and fair return to the charity.

355

(3) There is also that aspect of the exclusively charitable test which, under the current
formulation, prohibits any income from the charity going to a "proprietor,
member, shareholder trustee or settlor thereof.

(4) And there is the rule that prohibits the acquisition of a fifty percent ownership
stake in a corporation, which very weakly limits the occasions for abuses of the
duty of loyalty. In our view none of these rules is anywhere near to being adequate
in the task of preventing charities from being used as a front for the profiteering
activities of their principals.

The rules do not identify all the situations that ought to be regulated and are far too
timid m the types of restrictions imposed. We examine these rules and other possible
approaches in the discussion that follows. At the outset, however, it is helpful to set out a
taxonomy of the sorts of situations in which breaches of the duty of loyalty can arise and to
comment generally on the proper approach for the federal authorities to take.

b. A Taxonomy

Breaches of the duty of loyalty can occur in two types of situations: those where the
fiduciary is involved in a conflict of interest because the fiduciary, or some associate of the
fiduciary, stands to make some gain at the expense of the charity; and those situations, not
involving a conflict of interest, that result in other misdirections of charitable ftinds or
resources which do not benefit the fiduciary or some associate of the fiduciary. We look only
at the first type here. Instances of the second type are dealt with elsewhere in this chapter
wherever we take up other sorts of transactions in which charitable funds are misspent or
misdirected.

Breaches of duty of the first type can be divided further into breaches in which the gain
to the fiduciaries or the associates of the fiduciary arises directly at the expense of the charity,
through outright theft from the charity, or through unfair transactions with the charity; and
breaches in which the gain to the fiduciaries or the associates of the fiduciaries arises
indirectly at the expense of the charity, through the diversion of value from a corporation (or
other entity) in which the charity has an ownership interest. We examine these two types of
situations in the discussion below and our recommendations are organized accordingly.

c. The Proper Approach

In general, we recommend a two-tiered approach to the articulation of the norms
governing the charitable fiduciary's duty of loyalty, identical in form to the approach one
finds in all the modem North American business corporations statutes. First, there should be
some general statement or statements in the law setting out the charitable fiduciary's duty of
loyalty. We defer consideration of the precise content of this general statement, however,
until Part IV, since the content of this norm — like the content of the general duty of
prudence — raises questions of greater importance to provincial law than to federal law, and
since we do not think that it is necessary or advisable for federal law to set out the general
standard or standards.

356

The second tier of the approach to the issue of the charitable fiduciary's duty of loyalty
is to identify and specifically regulate the transactions or situations in which harm is caused
or may be caused to the charity. It makes considerably greater sense, in our view, for the
income tax law to state its own specific rules regulating these types of transactions or
situations, since the primary objective of the federal regime in this domain is to prevent
charitable funds from being diverted to non-charitable purposes. The basic philosophy of the
recommendations that follow, therefore, is that only those transactions in which harm is
caused or might be caused to the charity should be regulated, and only those transactions that
actually cause harm to the charity should be prohibited. The burden of proving that a
transaction does not cause harm to a charity should fall on the fiduciaries involved in the
transaction or involved in approving the transaction. This generally permissive approach is
justified, in part, on the basis that many charities will want to use the services of their
fiduciaries or their fiduciaries' contacts, or to ask their employees to serve as directors, etc.,
for perfectly valid reasons, such as reliability, cost, and other operational concerns. There is
no tax policy reason that would justify preventing them from doing so provided no harm is
thereby caused to the charity.

In designing these rules we think that it is advisable for the Act to differentiate among
the types of charity according to the classification "organization, private foundation and
public foundation" and not according to the classification "trust, corporation and
unincorporated association". This is because the level of risk of undesirable behaviour varies
significantly according to the type of charity concerned, with private foundations presenting a
greater risk than the others. Adopting this strategy to articulate these particular norms may
well result in federal and provincial regimes that are inconsistent in terms of what is
permitted and what is prohibited, since, in formulating the general statement of the duty of
loyalty, provincial law may well be more strict and it may well distinguish among charities
chiefly according to their form of organization. In our view, the way to deal with this
possibility is to ensure that the federal rules are, if anything, less restrictive than the
provincial rules so that no transaction prohibited under the federal rules is permitted
provincially. Some transactions permitted federally may, however, be prohibited provincially.
This difference in treatment is justifiable on the basis that the tax law concern with the
enforcement of the duty of loyalty — to prevent charitable funds from being diverted to other
purposes — may properly result in somewhat less stringent regulation.

We now consider the two main types of transactions or situations in detail.

(1) Transactions or Situations Involving the Possibility of Direct
Harm to the Charity

Here we are concerned with situations or transactions in which a fiduciary of the charity
or associate of the fiduciary receives some gain or advantage at the direct expense of the
charity. There are two sets of rules in the Act that deal with this situation, neither of which, in
our view, is adequate. The first line of defence is contained in those elements of the Act's
exclusively charitable standard which articulate the non-distribution constraint. The second
line of defence is contained in the rules governing the non-qualified investments of private
foundations. The strategy of this approach, with which we agree, is a general prohibition
against non-compensated private benefits flowing from the charity to a proscribed class of

357

persons, together with specific regulation of some particular transaction(s). The execution of
this approach in the Act, however, is seriously deficient.

A. The Formulation of the Non-Distribution Constraint

As currently formulated, the Act's exclusively charitable standard prohibits any part of
the "income" of the charity from being "payable to, or is otherwise available for, the personal
benefit of any proprietor, member, shareholder, trustee or settlor" of the charity.^^ There are
two problems with the formulation of this rule. First, the list of persons who are not permitted
to receive any of the income of the charity — we will call them the "proscribed class" in this
chapter and in subsequent chapters, for the sake of convenience — is under-inclusive,
misconceived, and anachronistic. "Proprietor" is probably irrelevant altogether since there
will be no proprietor of a charity. "Settlor" does not include all "significant contributors", but
it is clear that it is "significant contributors" that is intended.^^ Directors, managers, officers,
and other fiduciaries are also not mentioned. Neither are significant shareholders in major
contributing corporations. Neither are corporations, trusts, and partnerships in which
members of the proscribed class have material interests or in which they act in a fiduciary
capacity. Non-arm's length associates of any of the relevant persons are also not mentioned.
The defmition of the proscribed class therefore requu^es substantial reform.

Second, the prohibition in this test is formulated as a prohibition against receiving
income, instead of a prohibition against receiving a gain or advantage at the direct expense of
the charity. It thus does not prohibit members of the proscribed class from using the property
of the charity without charge. Also, it does not prohibit members of the proscribed class from
benefiting from investment, business, and contractual relations with the charity. Thus there is
no rule expressly prohibiting a charity from purchasing a recreational property and making it
available free of charge to its fiduciaries. There is no rule to prohibit a charity from paying a
large salary to the daughter of a major contributor to compensate her, for example, for her
investment services. And there is no rule (here) prohibiting a charity from lending to or
investing in a corporation at a concessional rate of return in which a member of the
proscribed class has a material interest.^'* Therefore, a better formulation of the ways in which
unfair gains and advantages arise is required.

B. Specific Transactions

The second line of defence in the Act against a very small proportion of unfair
transactions are the rules that deal with the non-qualified investments of private foundations.

32
33

Income Tax Act, supra, note 1, s. 149.1(1) "charitable foundation".

The concept — not the term — "significant contributors" is used elsewhere in the Income Tax Act, ibid., s. 149.1.
For example, see s. 149.1 "non-qualified investment" (a)(i)(B).

It could be argued that the phrases "operated exclusively" and "all the resources of which" cover these cases. As a
necessary retreat position, these may prove adequate. However, a clearer expression of the prohibition against
distributions would be far better.

358

These rules discourage unfair non-qualified investments in two ways, first, by penalizing the
parties who benefit from them and, second, by requiring that private foundations make
disbursements as though they had achieved what, in the Act's contemplation, is a fair return
on the investment, irrespective of the actual return. These two rules are inadequate because
they deal with only a very limited number of transactions between members of the proscribed
class and the charity.

The Commission recommends the federal authorities put in place a better regime to
regulate investment, business, and other contractual transactions between members of the
proscribed class and the charity. We recommend the adoption of a regime similar to the
regime regulating related-party transactions in the United States, except we would make that
regime applicable, although in varying ways, to all types of charity, not just private
foundations. The regime should have the following elements:

(1) The regime should apply to all types of transactions between members of the
proscribed class and the charity in which value is transferred. A definition,
perhaps together with a non-exclusive list of the main transactions (sales, leases,
loans, contracts of employment or for services, etc.), is required.

(2) These transactions should be prohibited (as stated above) unless they are approved
by the trustees, the board of directors, or members of the charity, and they are
"fair and reasonable" (or perhaps some other, higher standard such as "utmost
fairness") to the charity.

(3) Breaches of this rule should result in sanctions to the charity, to the individuals
involved in the offending transaction, and to the fiduciaries of the charity who
approved the transaction. In appropriate cases, breaches should be penalized with
deregistration.

(4) To ensure that non-complying transactions come to the attention of the federal
authorities, there should be an obligation on charities to report the material
provisions of all transactions between members of the proscribed class and the
charity in which value is transferred. There should be an endorsement by the
trustees, directors, or officers of the charity in the report that the transaction meets
the fair and reasonable (or other) standard. For private foundations the report
should occur prior to the transaction. For public foundations and organizations it
should occur annually, and therefore subsequently to the transactions, in the
annual report. Other techniques to make the reporting requirement simpler for
organizations and public foundations should be explored. For example, the report
might be required in respect of transactions involving a group of persons smaller
than the proscribed class.

(5) In any administrative or judicial proceeding where there is a question whether a
transaction is complying or not, the burden of proving that it complies should be
on the persons alleging that it does.

359

(2) Transactions or Situations Involving the Possibility of Indirect
Harm to the Charity

Here we are concerned with situations where value is diverted from the charity
indirectly through transactions between members of the proscribed class and a corporation^^
in which the charity has an ownership stake. These transactions are of concern since, if they
are not restricted, they could be a very effective way of taking value from the charity for the
private benefit of members of the proscribed class.

One easy, moderately effective, way to deal with this type of problem is to prohibit
charities from having ownership interests in corporations beyond a certain level — for
example, twenty percent (charity and disqualified persons combined) as in the United States,
ten percent as in Ontario under the Charitable Gifts Act^^ or fifty percent (charity alone) as in
Canada. Another similar approach is to establish a restrictive legal list of permissible
mvestments, as in the United Kingdom. The objective of these two approaches is to limit the
charity's exposure to harm of this type, and to limit the opportunity for these types of
transactions by restricting the proscribed class of persons' control or influence over the
management of the investee corporation (through their control or influence over the affairs of
the owning charity). A second approach is to ensure that the charity's return on its ownership
stake in the investee corporation is fair or reasonable (or some other standard), regardless of
whether there is also a diversion of value from the investee corporation to a member of the
proscribed class. A third approach is to regulate directly the affairs of the investee
corporation, so as to restrict or prohibit harmful self-dealing transactions. The Charities

37 38

Accounting Act and Charitable Gifts Act in Ontario, in part, do this as well.

The fifty percent control rule is one of two sets of rules which address this problem
under the Income Tax Act. In our view it is clearly inadequate. It applies only to ownership
interests oi foundations that are obtained by acquisition and, in any event, the fifty percent
level is too high to catch most of the offending transactions. Its regulation of the problem is
therefore far too weak and far too oblique.

The non-qualified investment rules also attempt to address this problem. They also fail.
The non-qualified investment rules do two things here: they require the investee corporation
to pay what in the Act's contemplation is a "fair" rate of return on the charity's investment,
on pain of a penalty tax applied to it equal to that rate of return, and they penalize the charity
by requiring it to meet a disbursement quota calculated as though such a "fair" return had
been earned. As suggested already, these rules are inadequate for several reasons. First, the

36
37
38

Or other entity such as a business trust or partnership. We deal only with stakes in corporations in the text. The
possibility of investments in other business forms would have to be addressed in any reform of this area.

Supra, note 26.

Supra, note 1 7, s. 2.

Supra, note 26, s. 4.

360

transaction between the investee corporation and the member of the proscribed class itself
may reduce or depress the fair market value of the shares in the investee corporation, thereby
undermining the effectiveness of the disbursement quota since the quota calculation is based
on the greater of the cost amount and the fair market value of the shares in the investee
corporation. Second, the penalty tax is calculated using only the cost amount of the shares,
not the higher of the cost amount and the fair market value of the shares. In consequence of
these two failings, members of the proscribed class can direct much of the entire value of the
growth of the investee corporation to themselves with impunity. Third, and in any event,
these two rules apply only to private foundations and only to combined control positions
greater than fifty percent and less than one hundred percent that are acquired by the charity.^^

We prefer the third type of approach to this problem, namely, direct regulation of the
offending transactions. What is required, is, first, some threshold ownership stake held by the
charity and members of the proscribed class in the investee corporation. This threshold
should be sufficiently low to identify the vast majority of situations where the charity (and
therefore the fiduciaries of the charity), or the charity together with the proscribed class of
persons, are in a position to influence the investee corporation's affairs to the detriment of the
charity. Other requisites are, second, a standard of fairness for the transactions and, third, an
obligation to report. There should also be sanctions for offending transactions.

We suggest a threshold of no higher than thirty percent; the thirty percent threshold
should be comprised of the combined equity stakes of the charity and all members of the
proscribed class of persons. To make matters somewhat easier for all charities, these rules
would not apply in respect of mterests in publicly traded corporations on the theory that the
affairs of such a corporation are policed well enough by other shareholders. Similarly, to
make matters simpler for organizations and public foundations, there should be an exempting
provision that exempts them from these rules, in whole or perhaps only in part, where the
charity's own stake is less than five percent of the equity of the investee corporation or,
perhaps, where the charity's total investment in the investee corporation is less than five
percent of its total investment property. By way of contrast, for private foundations, provided
the thirty percent threshold is met, a one-share interest would be sufficient to attract the
application of these rules. Private foundations should also be treated more stringently by
restricting their ownership interests in all cases to a maximum of ten percent of any
corporation.

The reporting requirement in respect of these "controlled corporations" — we will use
this term in subsequent chapters — would have to contain some type of disclosure requu*ement
concerning the existence of the relevant investment interests, as well as disclosure of possibly
offending transactions (loans, leases, investments, contracts, etc.). The first element could end
up being quite complex given the very broad definition we recommend for "proscribed

They are deficient for other reasons as well. For example, there is no general exception for program-related
investments.

Program-related investments should be excluded. On program-related investments, see K. Wessel, The Case for
Program Related Investments in Canada: Investing Today for Profits Tomorrow (1995) [unpublished].

361

class". The effect of such a reporting requirement may therefore be to discourage
organizations and public foundations from taking greater than a five percent stake in any one
corporation. We are cognizant of this difficulty but see no simple way to avoid it.

In all other respects, the rules should be the same as the rules established to deal with
self-dealing transactions between members of the proscribed class and the charity.

As a supplementary regime to this, perhaps there ought to be some regulation
concerning the general duty of prudence of the fiduciaries of these controlled corporations.
Value may be diverted as effectively through wasteful and ineffective management as by
fraud or breaches of fiduciary duty. To some extent this federal interest will be looked after
by the rule suggested above to deal with the duty to invest prudently, since a poorly run
corporation will also likely be a wasteful or ineffectual mvestment. Nevertheless some direct
regulation is also advisable. As a minimum, there also ought to be financial disclosure of the
affairs of these corporations, so that such imprudent expenditures might be detected.

d. Conclusions

It is useful to summarize our recommendations above in section 2(c)(ii) and (iii) in the
form of specific recommendations for reform:

(1) The duty to mvest prudently

The duty to invest prudently should not be enforced under federal law except to the
extent that the imprudent investing is wasteful or ineffectual. Investments that are
wasteful or ineffectual should be prohibited. Breaches of this rule should be sanctioned
with penalty taxes applied against the charity and culpable management. The rule
should apply to all types of charities. Compliance monitoring ought to vary according to
whether the charity is an organization or a public foundation, on the one hand, or a
private foundation, on the other.

(2) Investment businesses

There is no need to reform the rules that deal with the possibility of the investment
activities of a charity becoming an end in itself

(3) The duty of loyalty

Federal law should regulate only specifically identified transactions. Articulation and
enforcement of the general duty of loyalty should be left to provincial law.

(a) The exclusively charitable standard in the Income Tax Act should be reformulated
to prohibit non-compensated benefits flowing to members of the proscribed class
of persons. The latter concept requires a better and fuller definition in the Act.

(b) The Act should identify all possible types of transactions between members of the
proscribed class and the charity that might result in non-compensated benefits

362

flowing to members of the proscribed class. These transactions need not be
prohibited under federal law. However, they should be regulated by rules
requiring that they meet a certain standard of fairness and that they be reported,
either prior to their occurrence, in the case of private foundations, or subsequently,
in the case of other types of charity. Breaches of the rule should result in sanctions
against the charity, the benefiting fiduciaries, and culpable management.

(c) Transactions between a member of the proscribed class and any corporations (or
other entity) in which a charity together with members of the proscribed class of
persons hold more than thirty percent of the equity should be subject to the rules
set out in (b). Private foundations, however, should be prohibited from owning
more than ten percent share of any corporation.

(4) The duty of prudence of the fiduciaries of "controlled corporations"

At a minimum, charities which own shares in controlled corporations should be
required to report annually on the affairs of such corporations.

(iv) Regulation of Political Activities

We indicated above that the basic regime of the Income Tax Act and the administration
of the Act as it concerns political activity of charities are sound. However, there is room for
improvement. The following recommendations are inspired largely by the American
regulation of the political activities of charities.

First, political activity should be defined, and the threefold classification of political or
apparently political activity should be set out more clearly in the Act, with definitions and
perhaps non-exclusive lists of examples, although the latter could also be set out, as at
present, in a circular.

Second, partisan and other impermissible political activity should be clearly prohibited
on pain of deregistration and with sanctions in the form of penalty taxes against the charity
and culpable fiduciaries of the charity. Ancillary or incidental activities should be clearly
permitted. What we called "apparently" political activities in chapter 11 should not be
restricted at all.

Third, although the current regime uses the technique of a quantitative rule — the "ten
percent of resources" rule, as well as the restrictions imposed by the disbursement quotas —
his regime is too difficult to apply to be of much use or assurance to charities. Moreover, this
quantitative standard is obligatory, not optional, so it applies in some cases to restrict
ancillary or political activities that should be permitted. A better and fully optional
quantitative rule is required, and the American rule, which uses a percentage of total
expenditures test, is much clearer and easier to apply."^' If such a technique is adopted, then it

Partisan activity would still be clearly prohibited.

363

makes sense for the Act to be more definitive and precise in the description of what is
ancillary and/or incidental and what is merely apparent political activity, and therefore
permitted without restrictions, as the American rules are. In our view it also makes sense to
permit a larger proportion of the expenditures of smaller organizations to be spent on such
permissible political activity.

Fourth, the Act and the administration of the Act should recognize as much as possible
that social welfare charities, because of their nature and their mission, and because of the role
played in social welfare matters by the modem state, are going to be involved in more
ancillary and incidental political activity than, for example, arts organizations or amateur
sports organizations. Recognition can be given to this fact in a number of ways, ranging from
explicit permission to spend more on ancillary and political activity by setting a higher
expenditure limit for social welfare charities in the optional quantitative rule, to including in
the list of permitted ancillary and mcidental activities and in the list of apparent political
activities, the typical political and apparently political activities of social welfare charities.
Our suggestion to make the quantitative standard fully optional also contributes to the
achievement of this end, since it permits social welfare charities to remain under the general
regime and to argue, when the need arises, that theu- political expenditures are permitted
because they are ancillary or incidental to their charitable activities.

Fifth, consideration should be given to putting in place different and more stringent
regulations concerning the political activities of private foundations. The American rules do
this. The justification is simply that private foundations present a greater risk concerning
partisan political activity, coupled with the observation that they generally have few
operational involvements, and therefore less of an argument that a given political activity is
ancillary, incidental, or merely apparent. However, as with all regulation which treats private
foundations more severely than other charities, this suggestion might result in the frustration
of the legitimate aspirations and activities of some private foundations. For example, one can
imagine quite easily a private foundation taking a financing and organizational role in
lobbying the government to improve income security regimes. Provided such activity remains
ancillary and incidental, why should it be arbitrarily prohibited? The harm caused by an
absolute prohibition in this domain is much more severe than the harm caused by similar
restrictions on the investment activities of private foundations, since, in the latter case, a
private foundation will always be able to find other investment vehicles that meet its
investment needs. This argument suggests that the regime applicable to private foundations
concerning political activities should be carefully crafted. Our suggestion is that a non-
optional quantitative rule be designed to apply to private foundations and that this rule be
slightly more restrictive than the optional quantitative rule available for other charities.

364

(v) Regulation of Borrowing Activities

The Income Tax Act, it will be recalled, restricts the permissible debt obligations of
foundations to those required to fund current operations, incidental investment debts, and
incidental administrative debts. We see no good reason, however, for these restrictions and
recommend, therefore, that they be abolished.

The only sort of justification for the current restrictions is that they are an approximate
or surrogate standard for some other policy concern. There are two possibilities. Restrictions
on the level or kinds of debt obligations may be intended as a way of ensuring that the
foundations focus on charity and not allow themselves to be distracted by other goals. We
think this concern is adequately addressed by a well-crafted exclusively charitable standard. It
should be sufficient if foundations (indeed all charities) are obliged to report on their
borrowing activities annually — as at present, but in greater detail — so that possible problems
concerning compliance with the exclusively charitable standard might be detected. The other
possibility is that the restriction is supported by a concern that charitable fiduciaries conduct
the activities of the charity with the requisite level of care and competence, perhaps on the
theory that the prohibited types of borrowing could never or rarely meet this standard. In our
view, even if the theory is sound, there is no sufficient income tax law concern to enforce the
charitable fiduciary's duty of prudence, except as in the case of investments, where the
borrowing activity is imprudent to the point of being wasteftil or ineffectual. Thus, the current
borrowmg restrictions might be replaced by a provision sanctioning such wasteftil or
ineffectual borrowing activity. If so, the new rule should apply to all charities. The sanctions
for its breach should apply to the charity and to culpable fiduciaries of the charity.

(vi) Regulation of Granting Activities

a. Current Objectives

The rules governing permissible granting activities of charities are intended to
accomplish three objectives, all of which apply exclusively to the affairs of charitable
organizations. First, they are used to identify the major point of distinction between a
foundation and an organization. Second, they are designed to permit legitimate
reorganizations of charitable organizations and to permit coordination of activities among
associated charitable organizations. Third, they are designed, in part, to inhibit the use of
granting practices to circumvent the disbursement rules.

These rules are unnecessarily complicated, but in spite of that, largely adequate. The
ultimate source of the complexity is the fact that the method for calculating the disbursement
quota applicable to organizations does not require inclusion of gifts from other charities,
unreceipted gifts, or income from investment properties. Separate regulation of dispositions
of moneys coming from these sources is therefore required and the rules under consideration
here are rules intended in large measure to deal with the most significant problems
concerning money from these three sources. Our recommendation for reform is based partly
on the need to simplify matters, but also partly on the need to put in place a more rigorous
disbursement requirement applicable to organizations. As will be seen below, we recommend
that the disbursement quota for organizations be structurally similar to that applicable to

365

foundations and, therefore, that it include a percentage of the value of investment properties,
as well as a percentage of gifts from other charities. If this is done, much of the regulation
concerning granting activities could be simplified. We make suggestions as to how, in what
follows.

With respect to the first objective, the Income Tax Act should use a clearer standard.
Currently, the rule is that an organization may not grant more than fifty percent of its income,
and "income" is given a special definition, so that it includes all gifts, except gifts intended as
gifts of capital and gifts for which the donor cannot claim a credit or deduction. The difficulty
is that "income" has only two other, very minor, functions in the regulation of charities under
the Act. It is therefore burdensome to charities to have to make separate calculations for the
purposes of this particular rule. A simplification would tie the calculation required by this
rule to the disbursement quota, since it does not matter what basis for the calculation is
actually chosen. The rule might henceforth be that organizations may not grant more than a
certain percentage, for example, fifty percent, of their disbursement quota — redefined as
suggested in more detail below — on gifts to qualified donees.

The current sanction for failure to meet this requirement is deregistration, although most
observers suggest that Revenue Canada would never revoke a registration on account of a
breach of this requirement. Rather, most observers believe Revenue Canada would simply
reclassify the offending organization as a foundation. This issue requires clarification.
Clearly, revocation of registration is too severe. There should be a specific provision, perhaps
one that automatically changes the disbursement requirement of the offending organization to
that applicable to a public or private foundation, depending on the case.

The second objective — to permit legitimate reorganization and to permit legitimate
coordination of activities among associated charities — is accomplished in an extraordinarily
oblique fashion through two provisions. These provisions which deem grants "not made out
of income" (that is, gifts made from capital) to qualified donees and gifts of mcome among
associated charities both to be acceptable "charitable activities" for organizations. The first
rule is intended as an exception to the exclusively charitable standard as formulated in the Act
for organizations, since organizations are otherwise obliged to devote all their "resources" to
activities carried on by them. The second rule is intended as an exception to the fifty percent
of income limit which marks the distinction between organizations and foundations just
described.

The approach in any revised regulation of these two types of granting practices should
be simpler and more direct, and therefore more readily understood and more easily enforced.
If the rule implementing the first objective is recast in the way suggested, these two types of
granting activities can be cast as exceptions to the first rule. Thus, organizations would not be
permitted to grant more than a certain percentage of their disbursement quota to qualified
donees, except in the case of reorganizations or in the case of grants within a group of
associated charities. With respect to the first type of granting activity, federal law should
explicitly provide for legitimate reorganizations of charities. If the federal authorities do
address this issue more directly and explicitly, we also recommend that they should require
that the reorganization be acceptable under provincial cy-pres law.

366

The third objective is to prevent charities from evading their disbursement quotas
through back-and-forth granting between two or more charities, with the effect that the funds
involved in the back-and-forth grants are never actually expended on charity. Regulation of
this sort of behaviour in foundations is more exacting than in the case of organizations. With
foundations, inter-charity grants are included in the calculation of the subsequent years quota
for the recipient foundation. For both foundations and organizations, there is also the general
rule that the gifting and, if culpable, receiving charities, may have their registrations revoked.
However, there is nothing else covering organizations, except very obliquely and rather
weakly in the rules under consideration. In particular, since only fifty percent of an
organization's "income" may be granted to another charity, and since "income" is defined to
include gifts from another charity which are not intended as gifts of capital, this rule restricts
somewhat the ability of an organization to engage in this sort of back-and-forth granting. The
restriction is far too weak though. It would be better as a first step if the gifts from one charity
to an organization, not intended as capital gifts, were simply included in the disbursement
quota of the recipient organizations. However, this will not stop back-and-forth granting, and
more effort is required. We return to this issue below, when we take up disbursement quotas.

b. A Fourth Objective

Nowhere does the Act impose an obligation on granting charities, largely but not
exclusively foundations, to make sure that the funds they grant are used in accordance with
the terms and conditions of the grant or in furtherance of objectives which are exclusively
charitable. This is particularly worrisome in light of the fact, just mentioned, that there is only
very light regulation of the uses of funds received by an organization from another charity.
To remedy this failing of the Act, there ought to be a provision placing some responsibility
on the granting charities to ensure that the granted funds are properly expended. Perhaps an
obligation to put in place follow-up or accountability procedures would suffice. A breach of
this obligation might be sanctioned by a penalty tax in cases where it is shown that the
granted ftmds have been misapplied and that their misapplication would have been detected
by prudent "follow-up" or accountability procedures.

(vii) Regulation of Internationa! Charity

The general rule under the Act is that charities may either do charity work or donate to
qualified donees. This rule has presented problems for charities wanting to work
internationally with foreign charities (or other non-governmental organizations) or with
governments abroad, and it presents problems for Canadian donors who want to make
donations to charitable organizations which operate outside Canada. Under the present and
proposed administration of the Income Tax Act, a charity operating abroad must operate
through agents, use contracts that establish performance objectives in the foreign party, or
enter joint venture or partnership arrangements or legitimate self-help projects. Revenue
Canada requires documentation establishing the nature and terms of the foreign relationship,
as well as adequate interim monitoring of the relationship. Ownership of foreign land and
buildings must remain in the charity, unless it is manifestly destined to a charitable purpose
or is turned over to a public authority.

367

Many Canadian charities operating abroad feel that the current administration of the Act
in regard to international charity could be improved. In our view this is largely, but not
exclusively, an administrative not a legal matter since in our view the fundamental regime —
that a charity must either do charity or grant to a qualified donee — is essentially correct.
There are a number of possible minor improvements, some of which may require
amendments to the Act. First, it should be possible for foreign charities to obtain something
akin to registered status in Canada by filing an application and meeting the annual reporting
requirements. Second, a procedure could be established under which foreign projects of
Canadian charities could be pre-cleared with Revenue Canada by having the foreign charity
involved in the project make the same level of financial and other disclosures required of
Canadian charities. In some cases the foreign charity's disclosure could be confidential.
Third, the federal government could make a practice of using section 110.1(l)(<af)(vii)'*^ to
"designate" charities outside Canada as eligible for qualified donee status.

(d) Disbursement Quotas

(i) Introduction

There are six main sources of revenue or funds available to charities: donations;
revenues from capital properties; government grants; grants from other charities; loan
proceeds; and "other", chiefly income from permitted commercial operations. There are three
components to a disbursement quota — the percentage figure used in the calculation, the
revenue base against which the percentage figure is applied, and the types of expenditures
eligible to satisfy the quota. In the followmg discussion, we analyze the appropriate elements
of the disbursement quota for all types of charity.

The main, and we would suggest sole, objective of a disbursement quota is to make
charities spend rather than save and accumulate their wealth. Requiring charities to spend
forces them to do charity, as opposed to merely saving and/or doing nothing. Given this
objective, the quota should seek to strike a sensible balance between forcing current
expenditures and permitting savings for future expenditures. No matter what rule is chosen,
however, it is bound to defme a somewhat arbitrary line. Therefore there should continue to
be considerable discretion in the Minister to allow ad hoc exceptions to the quota. A more
streamlined procedure might even be designed to allow for exceptions as a matter of course.
One method of doing this is to base the quota calculation on average annual expenditures
over a five- or seven-year period. These issues are addressed to some extent in the current
Act. We merely suggest that the rationale supporting flexibility on this issue — that the line

Income Tax Act, supra, note 1, s. 11 0.1(1), as re-en. by S.C. 1994, c. 7, Sch II, s. 79(1).

A permissible secondary objective might be to encourage prudent investing. This objective would come into play
at the stage where the quota calculation is being designed.

The Income Tax Act, supra, note 1, s. 149.1(20) permits disbursement excesses to be carried back one year and
forward five years, and s. 149.1(8), as re-en. by S.C. 1994, c. 21, s. 74(5), permits accumulations.

368

imposed by the quota between savings and expenditures is arbitrary — is quite strong and
justifies considerable latitude.

If the sole function of the disbursement quota is to strike a balance between
expenditures and savings, then, subject to two exceptions — namely, that organizations will be
restricted by definition in the level of their granting activity, and that permissible capital
transfers, because they are transfers of savings, should not be part of any disbursement quota
calculation for the donor or donee — there is no reason that the third element of the quota
calculation — the eligible expenditures — should not be completely congruent with the
expenditures permitted under the exclusively charitable standard. The current regime,
however, deploys the disbursement quota to achieve several additional objectives. In
particular, and as we have seen, it is used to defme one of several limits on the political and
commercial expenditures of charities, to encourage fairness in transactions involving non-
qualified investments, and to restrict flindraising and administrative costs. The strategy of the
Act in regulating most of these matters is to impose the relevant limits by modifying the third
element of the quota calculation. We would argue that this multi-function approach to the use
of the disbursement quota is misguided and ought to be abandoned. It not only unduly
complicates matters, and therefore compromises the achievement of all the objectives
concerned, but it is also the source of a fundamental tension, indeed contradiction, in the Act
concerning the charitable nature of the expenditures on these activities; for the purposes of
the Act's exclusively charitable standard these expenditures count as eligible expenditures,
but for the purposes of the disbursement quota, they sometimes do not. It would be better, in
our view, if the tax regime dealt with special problems such as these independently of the
quota calculation, so that the regulation in these areas is simple and clear, the objective and
operation of the quota is simple and clear, and the overall scheme of regulation under the Act
is not compromised by a contradiction lying at its foundation.

The Commission has akeady suggested completely separate regimes to govern non-
arm's length investments, political activities, and commercial activities. We will deal with the
regulation of the costs of fundraising and administration before going on to discuss the
central issues of importance to the quota in more detail.

(ii) Regulation of Fundraising and Administrative Costs at the Federal Level

a. Definitions

As a preliminary matter, a defmition of "fundraising expenditures" and of
"administrative expenditures" is required. With respect to the former, it is not certain under

Even if the definition of eligible expenditures is completely congruent with expenditures permitted by the
exclusively charitable test, special provisions may still have to be enacted to deal with the accounting aspects of
certain types of expenditures. Program-related investments, for example, might be dealt with by treating the entire
value of the investment as an expenditure, and the return on the investment and repayment of the investment as
equivalent to gift income, for the purposes of the calculation of the disbursement quota. The annual reporting
requirement will therefore require a section on program-related investments. Similarly, permitted accumulations
and term gifts will require special accounting for the year of receipt and the year of expenditure.

369

the current rules to what extent, if any, educational and cause-oriented publicity is included.
Further, since the current rules do not distinguish at all between commercial fundraising and
donation fundraising, it is not clear whether the expenses of commercial fundraising are to be
counted as fundraising expenditures or administrative expenditures, and whether they should
be accounted for on a net or gross basis. The current definition of "administrative
expenditures" is also confused. This is due to the current regime's ill-advised attempt to
distinguish between program-related and non-program-related or "pure" administrative
expenditures. Any new regime should resolve this confusion by being as clear as possible
about what is meant by the regulatory concepts used.

In our view, there are three basic concepts, but as we will argue, only the first is capable
of being defined in a way that can be easily applied in this context. The three concepts are
donation fundraising, permissible commercial activities (or commercial fundraising), and
administrative costs, which can be divided again into "pure" and program-related. "Donation
fundraising" should be defined to include all expenditures, one of the main purposes of which
is to raise donations. This would include everything from the cost of a simple du^ect appeal to
the cost of public relations campaigns and newsletters, to the cost of a charity dinner where a
portion of the ticket price is receipted as a donation. To make matters more clear to the sector,
it may be necessary to name this category "donation fundraising and public relations" or
some such similar name. Ideally the second category, commercial fundraising, should include
all expenditures on permissible commercial activities, and the third category, administration
costs, should include all administrative expenditures. However, a moment's reflection reveals
that approaching the last two categories of expenditures in this way is highly problematic. It
may be reasonably easy for most charities to identify their expenditures on ancillary
commercial activities, because most of these will be discrete fundraising events or discrete
commercial units for which profit and loss calculations can be made. Many will not be
discrete entities, however. Moreover, the profits and losses deriving from incidental
commercial activities — such as the hospital coffee shop, the rental of surplus space, or
income from a university-owned patent — will be very difficult for most charities to identify.
This is due to the degree of integration these activities have in the general operations of the
charity and, therefore, due to their call on the basic administrative infrastructure of the
charity. Further, the distinction between ancillary and incidental commercial activities,
although conceptually sound, will certainly blur in practice. Similarly, the purely
administrative expenses, as opposed to program-delivery expenses — that is, the
administrative expenses that we might especially want to isolate for regulatory purposes — of
any reasonably complex charity with a service orientation will also be quite difficult to
identify and quantify; most of these expenses are tied intimately to the very existence of the
organization. It is difficult to understand, therefore, how reasonably useable definitions of
"commercial fundraising expenditures" and "administration expenditures" could be created.

An alternative approach for commercial fundraising and administrative expenditures is
therefore required. We set out our suggestions in what follows, organized so that the
suggested regulation is tied explicitly to a legitimate federal regulatory objective. Generally

This issue is completely fiidged in the current regime.

370

speaking, we resolve the problem of definition by avoiding it. Instead, we isolate certain
specific "problematic" expenditures which come within one or both of these broad categories
and regulate appropriately.

b. Regulation

The general fear concerning fundraising costs and administrative costs is that these
costs may be incurred either imprudently or fraudulently. The federal government might be
interested in this, and therefore regulate administrative and/or fundraising expenditures, for
the sorts of reasons mentioned above in the discussion of the federal role in enforcing the
charitable fiduciary's duties of prudence and loyalty. We look at each of the possible reasons
in turn.

First, there is the tax expenditure point of view. It suggests a federal role in the
regulation of fundraising and administrative expenditures is required to protect the overall
efficiency of the tax expenditures. We were not persuaded by this reasoning above, however,
and are not persuaded that it applies here.

Second, there is the government's interest in enforcing the charitable fiduciary's duty of
prudence. We argued above that there is some justification supporting federal regulation in
respect of the duty of prudence. The justification derives from the exclusively charitable
standard and the recognition of the fact that, at a certain level of inefficiency, an inefficient
charity is no longer effectively doing charity. We defined that situation above as the point at
which the imprudence of the fiduciaries results in wasteful or ineffectual investments. We
would use that as the pomt at which, under the federal law, a charity's fundraising (donation
and commercial) or administrative expenditures exceed the permissible and ought to be
prohibited. We would recommend, therefore, the adoption of a qualitative rule, similar to the
one recommended above governing imprudent investments, to govern such imprudent
fundraising (donation and commercial) and administrative expenditures. This qualitative rule
should be supported by an annual disclosure requirement. That requirement should mandate
disclosure of the following categories of information:

(1) Legal fees and accounting fees;

(2) Total salaries of all employees and some related information, such as the number
of employees; highest, lowest, and median salary; etc.;

(3) Total expenditures on donation fundraising and public relations, including an
estimate of the proportion of legal fees, accounting fees, and salaries spent on such
activities;"*^

(4) The nature and essential elements of contracts with third-party fundraisers for both
commercial and donation fundraising. For commercial fundraising there should be

Donation fundraising would be defined to include any event where receipts are issued.

371

a description of the project or event, and a disclosure of the amount of
compensation paid to the third party (including amounts paid to employees of the
third party hired by the charity), the total cost of all inputs (even if these are paid
directly by purchasers of the products sold), and gross revenues. For donation
fundraising there should be disclosure of compensation paid (including amounts
paid to employees of the third party hired by the charity) and gross donations
directly related to the campaign.

(5) The nature of commercial activities and financial disclosure with respect to those
activities, itemized to include specific disclosure of rental income.

The only objective of these disclosure requirements is to aid in the detection of the breaches
of the qualitative standard. Breach of the qualitative standard should result in sanctions
against the charity and culpable management.

We also recommend the adoption of an optional quantitative rule available in regard to
donation fundraising expenditures. This optional quantitative rule for donation fundraising
expenditures should exempt those expenditures from the application of the qualitative rule
where the net amount of those expenditures constitutes less than a certain percentage, for
example, ten percent of the total disbursement quota. Charities that meet this requirement
could not subsequently be attacked for failing to comply with the qualitative standard. This
will provide complying charities with a certain measure of security.

At the same time, to address the particular issue of payments to third-party fundraisers
(donation or commercial), the federal government might also exempt from the qualitative rule
charities which apply for and obtain prior approval of their third-party fundraising contracts.
Such a procedure may, however, require more personnel than Revenue Canada is capable of
allocating to the regulation of this sector. Alternatively, therefore, there might be some
provision in the Income Tax Act or regulations to accept as reasonable any such expenditure
where there has been a similar provincial process of approval.

Third, there is the state's role in enforcing the duty of loyalty. The Commission has
argued for a transactions-based approach to this role at the federal level. If that approach is
adopted in the way we suggested above, then any fraudulent fundraising that involves a
benefit to a member of the proscribed class will be caught by the rules we recommended.
Similarly, fraudulently inflated administrative expenditures that benefit members of the
proscribed class will also be caught.

Fourth, governments have concerns with fraudulent fundraising to the extent that
innocent donors are victimized or charity in general is given a bad name by people who have
no intention of benefiting charity. Similarly, governments have concerns with fundraising

By net amount, we mean expenditures less any expenditure recovery, but not net of donations received as a result
of the expenditures. Therefore, in the case of a charity dinner where the price of the event includes a donation for
which receipts are issued, the net expenditures would be the non-donation revenue less the costs of the event.

372

schemes of less than unquestionable integrity, but not quite fraudulent. We think these
problems are of exclusive concern to the provincial governments.

If these problems are handled in the ways suggested, there will be no need to distinguish
between different types of administrative expenditures, at least in the way that seems to be
required now, since all such expenditures that are a direct or indirect means of doing charity
would be charitable. Similarly, there would be no need to distinguish between fundraising
expenses and program-related education campaigns, since all fundraising for charity — being
an indirect means of accomplishing charitable purposes — would be charitable. All that
charitable fiduciaries need concern themselves with henceforth, insofar as the federal regime
is concerned, is whether the particular expenditure at issue is so imprudent as to be wasteful
or ineffectual.

(iii) What are the Proper Elements of a Disbursement Quota?

The Commission will examine each of the sources of revenue in turn. In each case
where we think the component should be included in the base of revenue, we make
suggestions as to the proper percentage amount. If our suggestion regarding the objective of
this rule is accepted, it might be thought that the percentage amount should increase
systematically since the quota is no longer intended to restrict a certain amount of pseudo-
legitimate activity, but merely to establish a rough estimate of an appropriate
savings/expenditure ratio. Accordingly we would recommend slightly higher percentage
amounts in many cases. A second implication of our suggestion is that the appropriate
savings/expenditure ratio should generally not be a function of the source of revenue or
funds, since this would result in arbitrary distinctions among charities. Rather, the reasons
supporting the exclusion or special treatment of any particular source of revenue or funds will
have to be identified separately. As a third preliminary observation, it is worth asking
whether, given our rationale for the quota, there is a basis for distinguishing between
foundations and organizations. We think there is. Organizations, given their operational
commitments, will require more flexibility in planning for future contingencies than will
foundations and, therefore, greater flexibility in the rate of savings allowed. This need should
be reflected systematically in lower percentage amounts for organizations compared to
foundations. As a final preliminary observation, the timing of the eligible expenditures should
generally continue to be based on the principle that last year's revenues are this year's base of
revenue for the purpose of the quota. This approach is adopted for the convenience of
charities. It makes calculating the quota easier and it permits some expenditure flexibility.

a. Donations

Donations can be divided into receipted and unreceipted donations. They can also be
distinguished on the basis of whether the donor intended them as gifts of capital, as term gifts
(gifts to be spent over a limited period of time), or as unrestricted gifts. Gifts of capital can be
divided into gifts intended as endowments and gifts intended to fund improvements to
operational capital.

Generally the disbursement requirement should respect the donor's intention. Subject to
what is said below concerning the treatment of receipted versus unreceipted gifts, donations

373

intended as endowments, as funds for operational capital, and as term gifts should therefore
not be subject to any disbursement requirement that is inconsistent with the donor's intention
as to how the gift is to be spent. Endowments, therefore, should be excepted from the base of
revenue for the quota altogether. They would subsequently fall to be regulated by the rules
governing revenues from capital properties. Gifts to fund operational capital and term gifts
might be treated as a separate category, subject to quotas derived from the terms of the gift.
The terms of the former will generally be established by the charity in designing its campaign
and making its solicitation. The terms of the latter might be established in this way or by the
donor as a condition of the gift. In both cases the reason for the exemption fi-om the regular
regime also justifies restricting the eligible expenditures to those established in the campaign
or gift. Provided a reporting requirement could be devised to accommodate these elements,
gifts to ftind operational capital and term gifts should be treated in this way. Otherwise, a
broader exemption, as at present, should apply.

Unrestricted and receipted donations are the easiest case. They should continue to be
included in the revenue base for all charities. The percentage amounts should be lower for
organizations than for foundations. Gifts fi^om "controlled corporations" should be subject to
a one hundred percent disbursement requirement.

Unreceipted gifts are not currently included in the disbursement quota of any type of
charity, regardless of whether they are intended as an endowment, term, operational capital,
or unrestricted gift. The only argument in favour of this exclusion is that, since in these cases
there is no deduction or credit to the donor, there is no tax policy concern with the ultimate
use of these ftinds. One might argue, to the contrary, that these donations still benefit from
the tax exemption, but this argument is not persuasive since this money will be brought into
the quota calculation once it is invested and is earning revenue. Up until that point there is no
revenue under any conventional defmition of revenue that reaps any advantage from the tax
exemption. It could also be reasoned that the argument in favour of exclusion is based on the
false assumption that the tax regime, in general, and the disbursement quota, in particular, are
justified in whole or in part as measures to protect a tax expenditure. Our view has been that
they are not: the objective of the quota, rather, is to ensure that entities entitled to charitable
status do charity exclusively. On that basis we think that these donations ought to be included
in the base of revenue and subject to the same percentage amount as receipted donations.

b. Revenue from Capital Properties

Revenues from capital properties can be divided into three kinds: investment returns
(capital gains on and interest and dividend income from an investment property); the
proceeds of a liquidation of an investment property; and the proceeds of a liquidation of a
capital property that is used by the charity for its charitable purposes. We see no reason to
include the latter two in the base. Since they are, prior to the liquidation, legitimate savings,
they should be permitted to keep that status.

Investment revenue is a significant source of support for many charities yet it is
currently taken into account in the calculation of the quota of only foundations. We believe
this is a mistake since many organizations derive significant income from their investment
holdings. The concession made in favour of organizations may be intended as a way of

374

identifying a group of charities which do not have the administrative resources to comply
with a disbursement quota that takes into account revenues from investments. This is a valid
objective, but the target for the concessional treatment is too wide and the concession itself
too generous. A better technique would be to exclude organizations whose investment
holdings are below a certain threshold — for example, $100,000 — from any obligation to
spend revenues from those investments.

The technique of the Act in establishing the quota in respect of investment revenues is
clever and should be kept. That technique avoids the necessity of actually calculating
investment income and instead requires charities to expend a percentage of the total average
value of their investment holdings. As a rough approximation of the revenues, however, the
percentage should be chosen so that it errs, if at all, at an under-estimation of the revenues. It
should also allow for a certain amount from the revenues being recapitalized to protect
against inflation. Finally, it should aim to permit, roughly speaking, the same level of real
savings that the other percentage amounts permit. It would be fair to base the figure on the
assumption that private foundations are better investors than public foundations and that the
latter are better than organizations. Also it would be fair to differentiate between foundations
and organizations on the basis that the latter will need more flexibility to plan for operational
contingencies. Finally, charities might be given the option of satisfying a quota based on their
actual returns. The chief negative implication of this last suggestion is that the quota will not
encourage effective investing. We stated above, however, that this effect of the quota was
only an incidental benefit. The value of allowing charities the option to choose a different
basis of calculation for that portion of their quota tied to their income from investment capital
is that it may be much easier for charities to make the calculation and it may, especially for
smaller charities, be lower.

c. Government Grants

In our view there is no need for the disbursement rules to require charities to expend
any portion of their ftinds coming from governments. Other systems of control that are
currently in place, or that we recommend be put in place in Part IV, are better at regulating
the use of these ftinds. Essentially, the granting agency should itself ensure that its
expenditure requirements are met by the recipient charity.

d. Grants from Other Charities

Currently grants from other charities are included in the base of revenue only for
foundations. This is a mistake, we believe, especially considering the significant size of
foundation grants and the fact the current regime imposes no accountability requirements on
foundations for the use of their ftinds.

These grants may be motivated by one of three intentions. First, they may be intended
as an unrestricted donation, like any other unrestricted donation, to be expended more or less
immediately. Second, they may be intended as an endowment, a gift of operational capital, or
a term gift that is to remain available to generate revenue to ftind charity over the medium or
long term. Finally, they may be intended as a way for the granting charity to avoid the
disbursement quota. Any quota that includes grants from other charities in its base will have

375

to distinguish adequately among these three motivations and, as with donations from non-
charities, the donor's intention should be respected, provided it is charitable. The method of
regulation will have to pay attention to the treatment of the grant in both the granting and the
recipient charity.

The first type of gift should be treated as a grant out of the granting charity's base of
revenue for that year and, therefore, qualify as an eligible expenditure of the granting charity
for that year. In the recipient charity, it should be treated as part of the base of revenue, but be
subject to a one hundred percent disbursement requirement, since the grant will already have
been the subject of a savings calculation in the granting charity.

The second type of grant should be treated as a transfer of the granting charity's savings
for that year (if it comes out of revenues) or of its stock of investment capital. In either case,
since it is m effect a transfer of savings, current or accumulated, from the granting charity, it
will not have been included in the revenue base of the granting charity, and therefore should
not count towards the satisfaction of its quota. Similarly, as a transfer of savings it should not
form part of the revenue base of the recipient charity.

The third transaction is an attempt to evade the quota and should be prohibited. The
rules just suggested to deal with the first type of grant preclude inter-charity grants from
being used to avoid the quota to the extent that one hundred percent of any such grant must
be disbursed. This rule does not solve the problem of quota avoidance through back-and-forth
granting, however. The best way to deal with this is to prohibit it and institute a reporting
requirement to detect it. If charities are obliged to report on receipts of grants from other
charities in the previous two years, together with their own grants to other charities in the
year of the report, and/or to list all the charities to which they are "related" — a term to be
defined — then that should be sufficient to detect most, if not all, cases of back-and-forth
granting to avoid the quota. The former may be the only feasible approach since, as
experience has shown, defining "related charity" may prove too complex a task.

e. Loan Proceeds

The rules must also be designed to account for borrowed moneys. The rules should
parallel the purpose of the loan. If the loan is to ftind current operations, then the loan
proceeds should be included in the base of revenue in the year in which they are received. If
the loan is to fund capital expenditures, then it should not form part of the base of revenues in
that or any other year, nor should its expenditure on the capital project count towards the
satisfaction of the quota. Rather, the loan repayments should count as eligible expenditures.

/ Revenue from Permissible Commercial Activity

Revenue from commercial activity and other revenue generally is not currently included
in any of the quotas although, to the very limited extent that "income" is used as a regulatory
concept under the Income Tax Act, such revenue is brought within the regulatory regime.
There is good reason to exclude revenue derived from commercial activit)' from the revenue
base of the quota, because the profits from the commercial activity may be its only source of
capital. There is also the argument that the sweep of the disbursement quota rule ought not to

376

be too stringent. The revenue from commercial activity of charities seems to be an acceptable
place to exercise a little latitude. For these reasons, we recommend that this source of revenue
continue to be excluded from the revenue base.

(e) Donations

The Commission does not provide in-depth criticisms of the rules dealing with
donations for the reason, stated above, that our only major concern with the federal regime is
with the way in which it regulates charity and the way in which this scheme of regulation
interacts with the provincial scheme.

We do make a number of suggestions for improvement, however.

First, the federal regime might make provision for a new classification of donor called
"feeder" organizations. These are the entities that would carry on businesses owned by a
charity. These organizations might be permitted to make donations back to the charity
without limit, provided that the donations are subject to a one hundred percent disbursement
requirement so that they do not find their way back into the business and thereby give rise to
the possibility of unfair competition. To give effect to this latter suggestion, a separate
element of the disbursement quota calculation would have to be established to identify this
source of revenue for distinct treatment.

Second the donation credit and deduction, together with the limits on these, might be
raised for charities in sectors — such as social welfare or health — in which the government
also has an interest, on the theory that the tax expenditure analysis does have some limited
validity.

Third, the system should allow for some flexibility with regard to the deductibility or
creditability of donations to entities that do not satisfy the exclusively charitable test but do
pursue charitable purposes or purposes that are, under the circumstances of the gift,
charitable. Service clubs do not usually meet the exclusively charitable standard, but they
often pursue charitable purposes. A system might be set up that would allow them to obtain
fast-track registration of their charitable projects or programs, perhaps through an initial
registration of the service club as an entity entitled to this privilege, followed by registration
and disclosure of projects on a fast-track basis, as the need arises. Similarly, some mutual
benefits, such as the neighbourhood cooperative daycare, and some community development
projects, such as self-help micro-enterprise, might be permitted to issue receipts under certain
special conditions.

Fourth, the regime should prohibit the use of name of "registered charity" by entities
that are not registered charities.

(0 The Tax Exemption

We also do not provide in-depth criticisms of the rules that extend the tax exemption to
charities. However, one or two points are in order.

377

First, the regime should be extremely careful that the tax-exempt status of charities
cannot be exploited for profit by others. For the most part, the exclusively charitable standard
and the specific rules governing the duty of loyalty will be sufficient to manage this problem.
In most (perhaps all) cases of abuse, the exempt status will be the subject of exploitation that
benefits, ultimately, members of the proscribed class. The abuse will often also be easily
characterized as involving the charity in non-charitable activity. However, there may still be
techniques, not caught by these rules, that result in the exploitation for private profit of that
status. For example, the income from a business trust having a charity as the sole beneficiary
would not be subject to tax, but could be used to recapitalize the business, thereby giving the
business an unfair advantage — a lower cost of capital — over competitors. Another example
might be a taxpayer who sells his business undertaking to a feeder-corporation-owned
charity, which in turn might lease it back to the taxpayer; the rental payments would be tax-
free income if donated to the charity, and could therefore be used to finance a higher
purchase price as well as transform income into capital gains. To guard against this sort of
possibility, some thought should be given to dealing with this type of problem either by
enacting a general anti-abuse provision or by enacting a specific rule which ensures that the
tax-exempt income is not available to capitalize or fmance businesses.

Second, some thought might be given to extending the exemption to dividend income
by making the dividend tax credit reftindable for tax-exempt organizations.

(g) Compliance

(i) The Annual Disclosure Requirement

The annual disclosure requirement should be designed in consultation with the
provincial authorities so that it is capable of satisfying their regulatory needs as well. It
should vary in the level of disclosure required according to the type of charity involved and
the size of the charity. It should be designed so that it provides the best source of aggregate
data on the sector. Therefore it might require disclosure of information not directly relevant
to any federal regulatory objective, such as disclosure on sources and levels of government
ftinding and disclosure on the level of donations from corporate versus individual donors.
The disclosure document should be public, not confidential, except to the extent that it may
contain information about specific sources of individual or corporate donations.
Accompanymg fmancial statements should be required in all cases. They should be in accord
with generally accepted accounting principles as interpreted and adopted by the Canadian
Institute of Chartered Accountants. The statements should be audited for charities with gross
revenues over a certain amount (we would suggest $250,000) or with net assets over a certain
amount (again we would suggest $250,000). The annual reports of private foundations should
be sent directly to the relevant provincial agency, either by Revenue Canada or by the private
foundation. The disclosure statements of other charities should be made readily available to
these agencies as requested.

Disclosure of information should be required on the matters set out in the tables at the
end of this section.

No change to the books and records obligations are required.

378

(ii) Penalties

The penalties for non-compliance require greater gradation than exists at present. The
sanction of deregistration is too severe to impose for the vast majority of cases of non-
compliance, but it is virtually the only effective penalty in the Income Tax Act to encourage
charities to comply. We recommend a greater use of penalty or excise taxes, escalating in
some cases, and imposed on the charity and on culpable fiduciaries, in accordance with what
is reasonable, taking into account the importance of the provision in question and severity of
the transgression. Taxes collected in this way should go either to defray the costs of
administering the provisions of the Act or to other charities in the same sector.

One very effective lever to encourage compliance is Revenue Canada's control over the
availability of the credits or deductions. One possible way of using this lever to the ftillest is
as follows. Donation receipts could be issued by Revenue Canada to charities on an annual
basis and only after compliance by the charity with the annual reporting requirements. These
receipts should be in a form that is readable by a computer, so that they can be easily verified
and can be used to generate usefiil aggregate data on the sector. The receipts would be valid
for a limited time, and the expiry date should be stated plainly on them. Any receipt issued
after the expiry date would be invalid.

If deregistration is applied as a penalty, then the one hundred percent penalty tax should
be imposed in a way that ensures compliance with provincial cy-pres law. There should also
be some type of interim sequestration or receivership intervention available to Revenue
Canada. In both cases — deregistration and interim sequestration — Revenue Canada should
cede jurisdiction as soon as possible to the relevant provincial authorities. We say this
because the issues raised at these stages of a charity's existence raise matters of greater
concern to the provinces, which in their parens patriae role have a more substantial interest
in seeing that charitable ftands are spent on charitable projects, in accordance with the
intentions of donors. The federal jurisdiction is exhausted if the tax system is protected from
leakages.

(iii) Administration

Once it is determined that a certain level of annual public accountability is required and
is applicable to a defined range of organizations, then Revenue Canada should put in place
the resources to ensure a very high compliance rate and be prepared to apply the sanctions for
non-compliance rigorously.

More attention should be paid on an annual basis as to whether a charity still belongs in
the classification in which it was registered, since proper classification is one of the linchpins
of the whole system.

To raise the profile of the federal charities administration and the profile of the sector,
the federal government might change the name of the Charities Branch of the Registration
Directorate to the "National Charities and Non-Profit Directorate", still within Revenue
Canada. This Directorate might incorporate the ftmctions of the Voluntary Action Program to
create a federal agency more comprehensive in scope. In any event, the federal charities

379

administration should issue an annual report discussing its activities for the year, including
statistics with respect to registrations and deregistrations, problem cases, investigations and
audits, and changes in administrative techniques.

The Commission makes these suggestions while acknowledging, as we did at the end of
chapter 11, that the Charities Branch has done a very good job in recent years in fulfilling its
statutory mandate.

^ V

e
E

e
«;

o
U

the current disclosure
requirement is adequate

the current disclosure
requirement is inadequate

a statement of capital that
clearly shows revenues is
sufficient

a
o
•c

c
«•

B
3
O

>
'u

s
o

e
e

B
V

'5
w

3. DISCLOSURE

1(a) to verify continued eligibility for
classification

H (b) conceming commercial activities
- disclosure of nature and extent of related
commercial activity

1- disclosure of nature and extent of
permissible commercial activities including
itemization for rental income

- disclosure of nature and essential elements
of contracts with third-party fundraisers
regarding commercial fiindraising

1- power in Revenue Canada to require
further particulars regarding commercial
fiindraising, such as statements of profit
and loss for each event

1(c) conceming quality of investment
decisions
- report on performance of investments

(d) conceming transactions between
1 members of proscribed class and charity
- prior disclosure of nature and content of
transactions

3
t/i

3
C

4>
3
O

JO
3

c
.2

> "5

o
c

c
o

00
CO

1/3

(J C/2

c « fe

S ^ ^

Be — u.

o ^ o

^ J> J-

p o

•s 8

o « o

U 4>

.2 E

.2 1 S

ta « >

h. 3 C
C

^ a u

O 3

C C
U Q.

o c

^ c

•5 .2

o «
— J«

o. §

§ 2

q o

c
^ .2

X» ^
C TJ

c 8

.2 -o

l2 " "^

w c __

O ed

60 '-S y

c * c

O.S

2: i E

S .s «

3 -o .Si

O 60 -Q

60 4>

c .2 :2

u e8 VI

c ^ E

o «-> 5

00 E

c «
E IS

ti «

o = -

1.2 S

« ■g_.S2

^ O ^

o - 5

2 a

° E

§ 2-1

E «

3 -2

« -rr c/5

u —

c
o .2

c
o

S E
o 5

O
u

o
U

the current
reporting
requirement is
inadequate

s
_o
'S
c«

■a
c

3
O

u.
Z

3
fib.

Current
Status

•a

s
w

3
O

Current
Status

c
o

Current
Status

e
_o

«s

■o

o
u

o
a.

(h) conceming borrowing activities

- declaration regarding borrowing activities

sufficient to detect breaches of a rule

prohibiting wasteful or ineffectual

borrowing

(i) conceming granting activities
- declaration reporting grants to qualified
donees, including amounts, names of
recipients, etc.

- declaration reporting grants from other
charities, including amounts, names of
granting charities, etc.

(j) conceming expenditure accountability
- statement of expenditure accountability
procedures

(k) conceming donation fiindraising

expenses

- declaration regarding donation fundraising

expenses

- declaration regarding nature and elements
of third-party donation fundraising contracts

(1) conceming administrative expenses
- declaration, by category of expenditure of
total administrative expenses (legal fees,
accounting fees, and salaries)

(m) conceming information required to
calculate disbursement quota of total

(n) conceming information required for
statistical purposes (level and source of
government grants, amount of municipal tax
paid)

Copies of this publication may be purchased from the Ontario Government Boolcstore, 880 Bay Street,
Toronto, or by mail order, from Publications Ontario, 50 Grosvenor Sfreet, Toronto, Ontario
M7A 1N8. Telephone (416) 326-5300. Toll free long distance 1-800-668-9938

Internet Archive Audio

Featured

Top

Images

Featured

Top

Software

Featured

Top

Books

Featured

Top

Video

Featured

Top

Mobile Apps

Browser Extensions

Archive-It Subscription

Save Page Now

Full text of "Report on the law of charities"

See other formats