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Full text of "Report on the law of charities"

REPORT 

ON 

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] 



VI 

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 

(c) Government Studies Elsewhere in Canada 32 

(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 

(c) Australia .v 54 



IX 



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 

(c) Canadian Centre for Business in the Community/Institute 

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 



XI 



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 

(c) Expenditures, Assets, and Liabilities 130 

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 

(c) The Meaning of "Others" 150 

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 

(c) Is the Project of "Public Benefit"? 175 

(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 

(c) Public Benefit and Religion 197 



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 

(c) Charity and Discrimination 212 

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 



XV 



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 

(c) Third Taxonomy: A Further Ordering of the Second Taxonomy 233 

(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 

(c) Political Theories 243 

(d) Conclusion 244 

4. Theories Explaining Tax Privileges 245 

(a) The Tax Exemption 245 

(b) The Tax Deduction or Tax Credit 246 

(c) Conclusion 247 

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 

(c) The Restrictions Placed on Charitable Organizations by the 

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 

(c) The 1972 Tax Reform 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 

(c) Regulation of the Activities of "Registered Charities 293 

(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 

(c) The Drafting of the Law 336 

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 

(c) Regulation of the Activities of Registered Charities 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 



XX 



(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 



I 



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? 



1 



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 



10 



11 



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. 



12 



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. 



13 



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 



16 



[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. 



14 



15 



16 



17 



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 

20 

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

22 

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

21 

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 

25 

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. 



19 



20 



21 

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): 



8 

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: 



26 



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

27 

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 

29 

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 

30 

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. 



27 

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). 



10 

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. 



32 



33 



34 



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. 



11 

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 

39 

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



35 
36 



37 
38 



39 



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. 



12 

- $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. 



13 

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 



47 

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. 

49 



50 



51 



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. 



14 

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 



52 

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



53 

54 



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. 



15 

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 



55 



56 



57 



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. 



16 

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 

eg 

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 



58 



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. 



17 

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 



62 



63 



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. 



18 

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). 



64 



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. 



19 

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] 



22 



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 



23 



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. 



24 



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. 



6 

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. 



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 

13 

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. 



10 

11 

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. 



26 



The Committee concluded with the following four recommendations concerning the 



voluntary sector 



14 



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 

16 

17 



/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. 



27 

(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 

20 

"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 

22 

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 

22 



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. 



28 



(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 

23 

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. 



25 



Ibid. 



29 

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 

28 

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. 



30 

30 

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. 



31 

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 



32 

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. 



32 



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



report provided a draft replacement Act 



37 



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. 

(c) Government Studies Elsewhere in Canada 

(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). 



33 

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- 



46 

47 



48 



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). 



34 



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 

52 

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 

51 

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). 



35 



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 

58 

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. 



54 

55 

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). 



36 



(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. 



59 



60 



61 



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, 



37 

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 

64 

65 

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 . 



38 



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 



68 

69 
70 



71 



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." 



39 

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 



72 

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

73 

Owen, supra, note 60, at 533. 

'' Ibid. 

75 

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



40 

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. 



76 

77 
78 

79 



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. 



41 



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 



80 



81 



82 



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; 



42 

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 



43 

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. 

84 

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



44 



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 

QC 

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. 

87 

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.' 



85 

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). 



45 



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



88 



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. 

89 

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.). 

90 

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; 



46 



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- 

91 

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 

92 

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 

93 

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.). 

93 

Goodman Report, supra, note 63, at 1. 



47 



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 

95 

"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 



94 

Ibid. 

95 

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



48 



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

96 

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 

98 

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. 



49 



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.). 



50 



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. 



51 



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. 



52 



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. 



53 

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. 



54 



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. 

(c) Australia 

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. 



55 



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] 



58 

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). 



59 

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 



60 



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 


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 



11 



10 



11 



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. 



61 

(c) Canadian Centre for Business in the Community/Institute for 
Donations and Public Affairs Research 

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 

12 

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. 



12 

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). 



62 

(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. 

17 

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 



15 



16 



17 



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. 



63 

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 



64 



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 

20 

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 



19 



20 



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. 



65 

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; 



66 

(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.). 



67 

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. 



23 



24 



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. 



68 

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. 



25 



26 



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). 



69 

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 



27 

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. 



70 

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. 



I 



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 



[7 



72 

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. 



73 

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 



10 

11 

12 



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). 



74 

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 

17 



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. 



75 

(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" 

20 

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). 



20 



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]. 



76 

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). 



77 

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 



24 



25 
26 

27 

28 



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). 



78 

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. 



29 

30 
31 

32 



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. 



79 

(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 

35 

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. 



33 



34 



35 



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". 



80 

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 



36 

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. 

37 

Sqq supra, note 16. 



81 

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. 



38 

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. 

39 

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. 



40 



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] 



84 

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"). 



85 



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 


60 


40 


763 


86.9% 


7.9% 


5.2% 


1971 


670 


61 


45 


776 


86.3% 


7.9% 


5.8% 


1972 


733 


81 


50 


864 


84.8% 


9.4% 


5.8% 


1973 


808 


93 


55 


956 


84.5% 


9.7% 


5.8% 


1974 


910 


122 


60 


1,092 


83.3% 


11.2% 


5.5% 


1975 


1,043 


96 


65 


1,204 


86.6% 


8.0% 


5.4% 


1976 


1,196 


118 


70 


1,384 


86.4% 


8.5% 


5.1% 


1977 


1,265 


134 


75 


1,474 


85.8% 


9.1% 


5.1% 


1978 


1,406 


144 


85 


1,635 


86.0% 


8.8% 


5.2% 


1979 


1,564 


171 


95 


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. 



86 

(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 

5% 



$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, 00 -$49, 9 99 
30% 




$ 10,000 - $ 24,999 
4 % 



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 



87 



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 
10 



4 
2 




1946 1951 1956 1961 1966 1968 1969 1970 1974 1977 197 



19 7 9 19 8 



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$ 






0$ 



ML. 



1969 



]M 




^ 







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. 



88 



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. 



89 



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 
$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 



90 



.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 



10 



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. 



91 



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% __ 

V 

u 

k. 

*■ 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. 



11 



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"). 



92 



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



o 



o 

B 
O 

z 



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 



12 



13 



14 



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



93 

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 



94 



15 



(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, ,,, 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) 



15 



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



i 



95 



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* 



96 



(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 (%) 



s 


> 


O) 


o 


1- 


CC 


C3 


z 

3 


UJ 


UJ 


5 


o 


CC 


5 




Ci 






u 





(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.*^ 



16 



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 



97 

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. 



98 



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 



© 
o 
o 



a 
_o 
'•C 

OS 

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 



Ji 

E 

>. 
a 

Om 

B 
^© 
'S 

OS 

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^:-. 




r 




'>" 








^^- 




■'.s-^ 




-x^. 








'5 




;-^V 




-3-f^ 






















^' 



>B 



>B 



QC ONT 
Provinces 



M^ 






SAS ALTA BC 



99 



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




H 5.00% 

e 

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 

i 0.80% i 

o 

^ 0.60% 



B 0.40% 

o 
•G 

I 0.20% 



0.00% 



















^> 
































4 




\ 












, y 


\ 






1 












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 











0. 



0. 



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



NFLD 



PEI 



NS 



NB QUE ONT 

Provinces 















J^' 










<r 






""' 








* 










/ 




x^ 






m\ 


r. 
















y/ 








/'' 








V' 








^ 








' 




1^^ 



















MAN SAS ALTA 



BC 



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



3.50% 





3.00% . 
















































ir^ 


















R 


2.50% _ 








'^ 








/■ 




o 




'' 














B 




'^' 






'4" 




^^g 




ni) 










'l" 
















'" 




:'•' 












> 














< 


2.00% . 


- 










^t& 




'i|v 




.^.^ 




r/l'^ 




> , 








* -«* 1 




ss 


1.50% . 








{ \ 




«*«? 












V- ; 




\% 








^^ 




- r' 








- 




B 


























, ! : 




'y< 




■J^ 




< 




-^^' 




_o 


1.00% . 




















A 




--; ' 




>'>■ 








'^- 




^^; 




S 


















't''. 




' 




■^ '-< 




;^4^ 








' ' 




\-# 




9 


















y, {■ 












"'% @ 




'^^^ 




.> 








Q 


0.50% . 
















'^ji 




<, , 




~ 




x5 
















U) 

> 
< 


0.00% 




-' 








C%' 




%,:■ 








:lf 




V'<y 




I'jf, 




•.■1 




^■^ 








NFLD PEI NS NB QUE ONT MAN SAS ALT/ 


\ BC 
























Pr 


ovincc 


!S 





















(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. 



c 

H 

e 



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% ._ 



s 

o 

lO* 
V 












Sm. 



^^ 



o <^. 









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% 



CO 



Q 

o 

(A 

e 



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? 



> 
< 



^ 



o 

a 

> 

< 



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% 




































F 


1 


10.00% 
0.00% . 


i 


- ft 


^ ,t 




ft 


£L^ 


t 


A. 


I 


Jl 


t 


a 


J 


A. 


if 


iL_ 


1 


A 


I 


1 



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 ( 


















1 

100,000$ . 




























50,000$ 




























If 




0$ 


_□ ^ 


-1 




i 


ii [^ 


n ,h 


BL- 


Jk 


IL f^ 


^ M 


iL. 


J 


a-. 


1 


Jv 



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$ 

"o 

300.00$ _. 
200.00$ __ 
100.00$ 
0.00$ 



f 






-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 

20 






^ ' ■ '"» ■ "" ' \ 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 




\ 




1 





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. 



00 



•a 
e 

c« 
U 
cT 

< 

s 

^ © 

Pi = 

V — 

U (ft 
3 3 
.^ B 

o 



B 

B 
O 



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c 



%€-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 

3% 



Ill 



Figure 39.2 
Average Annual Donation per Donor, by Occupation, Canada, 1986 



$600.00 



$500.00 -. 



$400.00 _ 



£ $300.00 __ 



a 

^ $200.00 

< 



$100.00 



$0.00 




Em 



2 E 



O ^ 

d o. 



O a. 

It 
O E 


£ a- 
O O 


.2; 

tA 

o 

c 
ID 


Of 

a. 
E 

LU 


■d i^ 


Q- o 






ii 


O 







O ccupation 





Donation 








^^ 


, 


K> 


\J» 


o 


KJt 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 


o 



Fanners 



Fishermen 



Professionals 



Self-Employed Salesmen 



Business Proprietors 



to 



B 
» 

e 
B 



Investors 



Property Owners 



Investment 



Pensioners 



Unclassified 







3 
«•♦ 

©' 

3 
O 

o 

o 

3 

to 

«■*■ 

s 



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♦-< 

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a 

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so 



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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 

19 

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% 



^ 



Oi 

e 
e 



eu 




-• — 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% 


6% 


6% 


Fulfilling religious obligations or 
beliefs 


100% 


23% 


21% 


18% 


32% 


7% 


Learning new skills 


100% 


29% 


36% 


16% 


11% 


8% 


Helping others 


100% 


63% 


29% 


2% 


0% 


5% 


Helping a cause one believes in 


100% 


60% 


28% 


4% 


2% 


6% 


Feeling that one has accomplished 
something 


100% 


54% 


32% 


6% 


2% 


6% 


Doing something one likes to do 


100% 


55% 


31% 


7% 


2% 


6% 


Helping to maintain and promote 
one's own heritage or language 


100% 


15% 


22% 


23% 


33% 


7% 


Having influence in community 
affairs 


100% 


11% 


28% 


27% 


27% 


7% 


Improving one's job opportunities 


100% 


19% 


20% 


19% 


34% 


8% 


Feeling an obligation to help other 
volunteers 


100% 


17% 


39% 


21% 


15% 


7% 


Using one's own skills and 
experience 


100% 


36% 


42% 


11% 


5% 


7% 


Doing work that benefits one's 
own children, family, or self 


100% 


43% 


26% 


11% 


13% 


7% 


Feeling one owes something to 
one's community 


100% 


21% 


40% 


19% 


13% 


6% 


Doing something with one's 
spare time 


100% 


20% 


31% 


21% 


22% 


6% 



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. 



in 

u 

3 



00 

ON 



B 

c« 

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S 

B 
B 

o 

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> 




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puB uSisjoj 



sspsnCpue mbi 



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pue jusoiuojiAu^ 



pdjejs 
)ou JO psijiiuspiufi 



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suoiib7iub9jo iiv 



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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 __ 



B 

"o 

> 

© 

u 

s 

3 



1500 ._ 



1000 . 



500 ^ 




u.i 


D> O 




« 1 


.S 5 .£ 


ill 
IP 


" i 

2 o 


rj a 
O 


II 
5 s 


CC > o 
O 


<j 






^ 


Type of Activity 



w 


"z "u 


JC 


<7 


o o 


o 














O 

£ 


i {< 


o 


o 







(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 



20 



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% 




I 



■•— <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% _ 

e 

^ 0.40% 

M 

n 
H 
i 0.30% ._ 

Cm 

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% _ 

m 

iH 

£ 0.50% _ 

ft. 

f2 0.4 0% 

I 

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 



o 

(J 



.^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 

6% 



Civic Causes 
9% 




Education 
23% 



Health and Welfare 
43% 



122 



Figure 53.1 
Destination of Corporate Donations, 1989 



Civic Causes 
7% 
Unclassified 
2% 



Other 

5% 



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. 



I 



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 



21 



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 




I 



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. 













1 




Number of Registered Charities 


Percentage Increase f 




Category 


1974 


1980 


1985 


1990 


1974-1990 




Welfare 


3,481 


5,236 


7,382 


9,568 


174.9% j 




Health 


2,283 


2,976 


3,767 


4,669 


104.5% 




Education 


3,033 


5,003 


7,398 


9,739 


221.1% 




Religious 


22,343 


24,565 


26,786 


28,449 


27.3% ; 




Benefit to Community 


3,973 


6,513 


8,558 


10,761 


170.9% 




Total 


35,113 


44,293 


53,891 


63,186 


80% 



125 



Taken together, these two tables indicate a marked difference between the sector in 
Quebec, on the one hand, and the sector in the rest of Canada, on the other. The variations in 
patterns across the provinces in English-speaking Canada, although often significant, are much 
less severe. Roughly speaking, the pattern in English Canada is that nearly fifty percent of the 
total registrations are religious charities; and nearly forty-five of the registrations are welfare, 
education, and community charities combined, each with roughly fifteen percent of the 
registrations. Quebec's registrations are significantly higher in "welfare" and "other" categories, 
and substantially lower in "religion". 

Table 57 
Number of Registered Chanties by Category, by Province, 1990 



Percentages | 


Province 


Welfare 


Health 


Education 


Religion 


Community 


Other 


Total 


Newfoundland 


0.82% 


1.53% 


0.92% 


2.19% 


0.87% 


0.17% 


1.53% 


P.E.I. 


0.48% 


1.10% 


0.73% 


7.82% 


1.19% 


0.26% 


0.80% 


Nova Scotia 


3.51% 


5.30% 


4.28% 


4.71% 


8.26% 


1.99% 


4.96% 


New Brunswick 


3.36% 


3.41% 


2.59% 


4.15% 


3.92% 


1.56% 


3.37% 


Quebec 


27.12% 


15.74% 


18.60% 


14.58% 


14.17% 


48.13% 


17.68% 


Ontario 


31.42% 


35.02% 


37.23% 


36.84% 


29.14% 


36.17% 


34.87% 


Manitoba 


6.10% 


5.94% 


5.60% 


5.73% 


6.69% 


2.52% 


5.85% 


Saskatchewan 


7.13% 


7.65% 


5.06% 


7.69% 


8.05% 


1.21% 


7.13% 


Alberta 


7.79% 


10.15% 


9.63% 


11.75% 


12.72% 


3.04% 


10.71% 


British Columbia 


11.99% 


13.81% 


14.92% 


11.20% 


14.35% 


4.86% 


12.39% 


N.W.T. 


0.13% 


0.30% 


0.27% 


0.20% 


0.30% 


0.00% 


0.22% 


Yukon 


0.16% 


0.15% 


0.17% 


0.16% 


0.32% 


0.00% 


0.18% 


Canada 


100.00% 


100.00% 


100.00% 


100.00% 


100.00% 


100.00% 


100.00% 



Source: Revenue Canada, Registration Division 

Table 58 
Number of Registered Charities by Category, by Province, 1990 









Percentages 






J 


Province 


Welfare 


Health 


Education 


Religion 


Community 


Other 


Total 


Newfoundland 


7.83% 


6.75% 


9.25% 


67.79% 


8.16% 


0.22% 


100.00% 


P.E.I. 


8.77% 


8.56% 


14.20% 


46.35% 


21.50% 


0.63% 


100.00% 


Nova Scotia 


10.30% 


7.16% 


13.24% 


44.68% 


23.85% 


0.77% 


100.00% 


New Brunswick 


13.35% 


6.25% 


10.86% 


53.37% 


15.35% 


0.81% 


100.00% 


Quebec 


22.32% 


5.97% 


16.16% 


38.84% 


11.49% 


5.21% 


100.00% 


Ontario 


13.11% 


6.73% 


16.40% 


49.79% 


11.98% 


1.98% 


100.00% 


Manitoba 


15.17% 


6.81% 


14.69% 


46.11% 


16.39% 


0.82% 


100.00% 


Saskatchewan 


14.56% 


7.20% 


10.90% 


50.83% 


16.19% 


0.33% 


100.00% 


Alberta 


10.58% 


6.35% 


13.81% 


51.68% 


17.03% 


0.54% 


100.00% 


British Columbia 


14.08% 


7.47% 


18.50% 


42.60% 


16.60% 


0.75% 


100.00% 


N.W.T. 


8.33% 


9.09% 


18.94% 


43.94% 


19.70% 


0.00% 


100.00% 


Yukon 


12.84% 


5.50% 


14.68% 


41.28% 


25.69% 


0.00% 


100.00% 


Canada 


14.56% 


6.71% 


15.37% 


47.12% 


14.34% 


1.91% 


100.00% 



Source: Revenue Canada, Registration Division 



126 



Tables 59 and 60 show the distribution of registrations by classification and by province in 
1990. One important fact is starkly evident: Ontario has a disproportionately high number of 
private foundation registrations, with just over ten percentage points more private foundation 
registrations than its share of total registrations, for a total of nearly fifty percent of the 
registrations of Canadian private foundations. Quebec shows a substantially higher relative share 
of registrations of public foundations. 

Table 59 
Proportions of Charities by Classification, per Province, 1990 



Province 


Charitable 
Organizations 


Public 
Foundations 


Private 
Foundations 


Total 


Newfoundland 


1.53% 


0.85% 


0.27% 


1.44% 


P.E.I. 


0.80% 


0.41% 


0.30% 


0.75% 


Nova Scotia 


4.96% 


4.32% 


3.21% 


4.85% 


New Brunswick 


3.37% 


3.50% 


2.27% 


3.60% 


Quebec 


17.68% 


26.47% 


22.14% 


18.30% 


Ontario 


34.87% 


33.50% 


47.94% 


35.39% 


Manitoba 


5.85% 


6.15% 


5.04% 


5.83% 


Saskatchewan 


7.13% 


7.26% 


3.14% 


6.95% 


Alberta 


10.71% 


7.38% 


6.42% 


10.36% 


British Columbia 


12.39% 


10.00% 


8.96% 


12.12% 


N.W.T. 


0.22% 


0.03% 


0.14% 


0.21% 


Yukon 


0.18% 


0.13% 


0.14% 


0.18% 


Canada 


100.00% 


100.00% 


100.00% 


100.00% 



Source: Revenue Canada, Registration Division 



Table 60 
Proportions of Charities by Classification, in each Province, 1990 



Province 


Charitable 
Organizations 


Public 
Foundations 


Private 
Foundations 


Total 


Newfoundland 


96.33% 


2.83% 


0.84% 


100.00% 


P.E.I. 


95.61% 


2.59% 


1.80% 


100.00% 


Nova Scotia 


92.80% 


4.25% 


2.95% 


100.00% 


New Brunswick 


92.54% 


4.65% 


2.81% 


100.00% 


Quebec 


87.70% 


6.91% 


5.39% 


100.00% 


Ontario 


89.44% 


4.52% 


6.04% 


100.00% 


Manitoba 


91.11% 


5.04% 


3.85% 


100.00% 


Saskatchewan 


93.00% 


4.98% 


2.01% 


100.00% 


Alberta 


93.83% 


3.40% 


2.76% 


100.00% 


British Columbia 


92.77% 


3.94% 


3.29% 


100.00% 


N.W.T. 


96.35% 


0.73% 


2.92% 


100.00% 


Yukon 


93.16% 


3.42% 


3.42% 


100.00% 


Canada 


90.77% 


4.78% 


4.46% 


100.00% 



Source: Revenue Canada, Registration Division 



127 



(b) Sources of Revenue of Canadian Charities 



The best contemporary study of the sources of revenue is the Sharpe study. We set out 
some of the findings of that study in Tables 61, 62, 63, and 64. 

Table 61 
Sources of Revenue 



Source of Revenue 


Amount 
($ millions) 


Percentage of 
Total Revenues 


Government | 


Federal 


5,331 


6.2 


Provincial 


41,205 


47.6 


Local 


2,325 


2.7 


Sub-Total 


48,861 


56.5 


Receipted Donations* 






Individuals 


6,612 


7.6 


Corporations 


1,000 


1.2 


Others 


794 


0.9 


Sub-Total 


8,406 


9.7 


Unreceipted Donations 


2046 


2.4 


Gifts from Other Charities 


2078 


2.4 


Gifts in Kind** 


540 


0.6 


Investment Income 


3015 


3.5 


Net Capital Gains 


3 


0.0 


Net Related Business Income 


644 


0.7 


Fees*** 


4376 


5.1 


Other Income**** 


16543 


19.1 


Total Revenues 


86,512 


100 



Notes: Amounts may not add due to rounding. 

* Receipted donations are amounts given to registered charities for which official donation receipts were 

issued. 
** Estimated on the basis of information collected in survey of registered charities. 
*** Includes memberships and subscriptions. 
**** Does not include Gifts in Kind. 
Source: Sharpe study, Table 8 

Table 62 

Sources of Revenue According to Charity Type 



Charity Type ($ millions) | 


Source of Revenue 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Government 


1 


Federal 


30 


822 


1,833 


2,545 


75 


26 


5,331 


Provincial 


30 


16,285 


14,347 


8,611 


1,750 


182 


41,205 


Local 


24 


144 


372 


1,409 


365 


11 


2,325 


Sub-Total 


84 


17,251 


16,552 


12,564 


2,190 


220 


48,861 


Receipted Donations* 
















Individuals 


2,964 


109 


304 


2,147 


822 


266 


6,612 


Corporations 


18 


36 


159 


361 


294 


131 


1 ,000 


Others 


189 


18 


101 


380 


76 


29 


794 


Sub-Total 


3,171 


163 


565 


2,888 


1,192 


426 


8,406 



22 



Supra, note 1. 



128 



Source of Revenue 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Unreceipted Donations 


555 


71 


295 


896 


197 


33 


2,046 


Gifts from Other 
Charities 


419 


239 


136 


1.067 


176 


40 


2,078 


Gifts in Kind** 


22 


17 


84 


402 


15 





540 


Investment Income 


342 


345 


616 


1,067 


370 


274 


3,015 


Net Capital Gains 








1 


1 








3 


Net Related Business 
Income 


21 


137 


77 


372 


22 


14 


644 


Fees*** 


73 


41 


2,557 


1,534 


150 


21 


4,376 


Other Income 


440 


8,050 


2,880 


4,695 


418 


59 


16,543 


Total Revenues 


5,128 


26,314 


23,763 


25,488 


4,730 


1,088 


86,512 


Number of Charities 


25,177 


1,071 


2,516 


34,285 


3,148 


3,033 


69,230 



Notes: CO. = Charitable Organizations 

Percentages may not add up to 100 due to rounding. 

* Receipted donations are amounts given to registered charities for which official donation receipts were issued. 

** Estimated on the basis of information collected in survey of registered charities. 

*** Includes memberships and subscriptions. 

**** Does not include Gifts in Kind. 

Source: Sharpe study, Table 9 

Table 63 

Percentage of Each Source of Revenue Received by Each Charity Type 



Charity Type (Percentages) | 


Source of Revenue 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Government | 


Federal 


0.6 


15.4 


34.4 


47.7 


1.4 


0.5 


100 


Provincial 


0.1 


39.5 


34.8 


20.9 


4.2 


0.4 


100 


Local 


1.0 


6.2 


16.0 


60.6 


15.7 


0.5 


100 


Sub-Total 


0.2 


35.3 


33.9 


25.7 


4.5 


0.4 


100 


Receipted Donations* 
















Individuals 


44.8 


1.6 


4.6 


32.5 


12.4 


4.0 


100 


Corporations 


1.8 


3.6 


15.9 


36.1 


29.4 


13.1 


100 


Others 


23.9 


2.3 


12.8 


47.9 


9.6 


3.6 


100 


Sub-Total 


37.7 


1.9 


6.7 


34.4 


14.2 


5.1 


100 


Unreceipted Donations 


27.1 


3.5 


14.4 


43.8 


9.6 


1.6 


100 


Gifts from Other 
Charities 


20.2 


11.5 


6.5 


51.4 


8.5 


1.9 


100 


Gifts in Kind** 


4.0 


3.1 


15.6 


74.4 


2.9 


0.0 


100 


Investment Income 


11.4 


11.4 


20.4 


35.4 


12.3 


9.1 


100 


Net Capital Gains 


13.4 


5.8 


39.5 


26.7 


12.4 


2.2 


100 


Net Related Business 
Income 


3.3 


21.3 


12.0 


57.8 


3.5 


2.2 


100 


Fees*** 


1.7 


0.9 


58.4 


35.1 


3.4 


0.5 


100 


Other Income**** 


2.7 


48.7 


17.4 


28.4 


2.5 


0.4 


100 


Total Revenues 


5.9 


30.4 


27.5 


29.5 


5.5 


1.3 


100 


Percentage of all 
Charities 


36.4 


1.5 


3.6 


49.5 


4.5 


4.4 


100 



Notes: CO. = Charitable Organizations 

Percentages may not add up to 100 due to rounding. 

* Receipted donations are amounts given to registered charities for which official donation receipts were issued. 

** Estimated on the basis of information collected in survey of registered charities. 

*** Includes memberships and subscriptions. 

**** Does not include Gifts in Kind. 

Source: Sharpe study, Table 10 



129 



Table 64 
Percentage of Charity-Type Revenue Obtained from Each Source (Percentages) 



Charity Type (Percentages) | 


Source of Revenue 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Government 
















Federal 


0.6 


3.1 


7.7 


10.0 


1.6 


2.4 


6.2 


Provincial 


0.6 


61.9 


60.4 


33.8 


37.0 


16.8 


47.6 


Local 


0.5 


0.5 


1.6 


5.5 


7.7 


1.0 


2.7 


Sub-Total 


L6 


65.6 


69.7 


49.3 


46.3 


20.2 


56.5 


Receipted Donations* 
















Individuals 


57.8 


0.4 


1.3 


8.4 


17.4 


24.5 


7.6 


Corporations 


0.3 


0.1 


0.7 


1.4 


6.2 


12.1 


1.2 


Others 


3.7 


0.1 


0.4 


1.5 


1.6 


2.7 


0.9 


Sub-Total 


6L8 


0.6 


2.4 


1L3 


25.2 


39.2 


9.7 


Unreceipted Donations 


10.8 


0.3 


1.2 


3.5 


4.2 


3.0 


2.4 


Gifts from Other 
Charities 


8.2 


0.9 


0.6 


4.2 


3.7 


3.7 


2.4 


Gifts in Kind** 


0.4 


0.1 


0.4 


1.6 


0.3 


0.0 


0.6 


Investment Income 


6.7 


1.3 


2.6 


4.2 


7.8 


25.2 


3.5 


Net Capital Gains 


0.0 


0.0 


0.0 


0.0 


0.0 


0.0 


0.0 


Net Related Business 
Income 


0.4 


0.5 


0.3 


1.5 


0.5 


1.3 


0.7 


Fees*** 


1.4 


0.2 


10.8 


6.0 


3.2 


1.9 


5.1 


Other Income**** 


8.6 


30.6 


12.1 


18.4 


8.8 


5.5 


19.1 


TOTAL REVENUES 


5.9 


30.4 


27.5 


29.5 


5.5 


L3 


100 



Notes: CO. = Charitable Organizations 

Percentages may not add up to 100 due to rounding. 

* Receipted donations are amounts given to registered charities for which official donation receipts were issued. 

** Estimated on the basis of information collected in survey of registered charities. 

*** Includes memberships and subscriptions. 

**** Does not include Gifts in Kind. 

Source: Sharpe study, Table 1 1 

In summary, the conclusions to be drawn from this information that are important to the 
present study are as follows: 

(1) Government funding currently constitutes over half the revenues of the sector while 
donations account for just over twelve percent of revenues, with the bulk of these (9.5 percent 
when receipted and unreceipted donations are added together) from individuals. Thus, to the 
extent that the efficiency of this sector is a concern to governments, it ought be so, more because 
of the substantial amount of direct government frinding involved than because of the donation 
dollars at risk. 



(2) The bulk of government funding (approximately seventy percent) is directed to 
teaching institutions and hospitals, with roughly twenty-five percent going to charities in the 
other categories. Very little government funding is directed to public foundations 
(approximately 4.5 percent), private foundations (.4 percent), and places of worship (.2 percent). 
On the assumption that the current accountability regimes governing hospitals and teaching 



130 



institutions are adequate, the amount of government funding that might be subject to a new 
regime of regulation would be approximately $15 billion Canada-wide. Total donations to the 
sector were approximately $11 billion. No figures are available for Ontario alone. 

(3) The largest government supporter is the provincial government, providing roughly 
eighty-four percent of the government funding. Forty percent of this went to hospitals, thirty- 
five percent to teaching institutions, and twenty-one percent to other charitable organizations. 

(4) Individual donations go to places of worship (forty-five percent), other charitable 
organizations (thirty-three percent), and public foundations (twelve percent). 

(c) Expenditures, Assets, and Liabilities 

We complete the profile of charitable organizations by presenting information on 
expenditures and assets, again relying on the data provided by the Sharpe study on the assets of 
charities. 



Table 65 
Allocation of Expenditures by Each Charity Type 



Charity Type ($ Millions) | 


Expenditure 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Fundraising Costs 


113 


78 


89 


680 


164 


8 


1,131 


Fees to Consultants 


4 


1 


4 


29 


6 





45 


Administration 


742 


3,345 


3,804 


4,181 


607 


90 


12,769 


Political Expenditures 


2 








10 


1 


6 


20 


Gifts to Qualified Donees 


783 


331 


101 


933 


1,096 


327 


3,572 


Programs 


2,809 


17,891 


14,488 


15,620 


2,223 


209 


53,241 


Accumulated with Permission 


34 


27 


4 


156 


134 


10 


365 


Other Expenditures 


371 


4,296 


4,023 


2,436 


135 


24 


11,284 


Total Expenditures 


4,859 


25,970 


22,513 


24,046 


4,366 


675 


82,428 


Total Number of Charities 


25,177 


1,071 


2,516 


34,280 


3,148 


3,133 


69,230 



Notes: 



Source: 



CO. = Charitable Organizations 
Salaries and benefits are included in these figures. 
Figures may not add up due to rounding. 
Sharpe study. Table 14 



23 



A recent study published by the Canadian Centre for Philanthropy provides an in-depth analysis of fundraising in 
Canada. See M.H. Hall, Charitable Fundraising in Canada (Toronto: Canadian Centre for Philanthropy, 1996). 



131 



Table 66 
Percentage of Expenditures Incurred by Each Charity Type 



Charity Type (Percentages) | 


Expenditure 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Fundraising Costs 


10.0 


6.9 


7.8 


60.1 


14.5 


0.7 


100 


Fees to Consultants 


8.4 


1.7 


9.0 


65.8 


14.3 


0.9 


100 


Administration 


5.8 


26.2 


29.8 


32.7 


4.8 


0.7 


100 


Political Expenditures 


11.3 


0.0 


0.2 


50.6 


6.2 


31.7 


100 


Gifts to Qualified Donees 


21.9 


9.3 


2.8 


26.1 


30.7 


9.2 


100 


Programs 


5.3 


33.6 


27.2 


29.3 


4.2 


0.4 


100 


Accumulated with Permission 


9.2 


7.5 


1.2 


42.6 


36.7 


2.8 


100 


Other Expenditures 


3.3 


38.1 


35.6 


21.6 


1.2 


0.2 


100 


Total Expenditures 


5.9 


31.5 


27.3 


29.2 


5.3 


0.8 


100 


Total Number s of Charities 


36.4 


1.5 


3.6 


49.5 


4.5 


4.5 


100 



Notes: CO. = Charitable Organizations 

Percentages may not add up to 100 due to rounding. 
Source: Sharpe study. Table 15 

Table 67 
Expenditures as Share of Each Chanty's Total Expenditure 



Charity Type (Percentages) 


Expenditure 


Places of 
Worship 


Hospitals 


Teaching 
Institutions 


Other 
CO. 


Public 
Foundations 


Private 
Foundations 


All 


Fundraising Costs 


2.3 


0.3 


0.4 


2.8 


3.7 


1.1 


1.4 


Fees to Consultants 


0.1 


0.0 


0.0 


0.1 


0.1 


0.1 


0.1 


Administration 


15.3 


12.9 


16.9 


17.4 


13.9 


13.4 


15.5 


Political Expenditures 


0.0 


0.0 


0.0 


0.0 


0.0 


0.9 


0.0 


Gifts to Qualified Donees 


16.1 


1.3 


0.5 


3.9 


25.1 


48.4 


4.3 


Programs 


57.8 


68.9 


64.4 


65.0 


50.9 


31.0 


64.6 


Accumulated with Permission 


0.7 


0.1 


0.0 


0.6 


3.1 


1.5 


0.4 


Other Expenditures 


7.6 


16.5 


17.9 


10.1 


3.1 


3.5 


13.7 


Total Expenditures 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 



Notes: CO. = Charitable Organizations 

Percentages may not add up due to rounding. 
Source: Sharpe study, Table 1 6 



132 



Table 68 
Assets and Liabilities 



Assets 


Liabilities 1 


Charity Type 


$ millions 


% Percent 


S millions 


% Percent 


Places of Worship 


$17,542 


16.2% 


$3,248 


9.9% 


Hospitals 


20,740 


19.1% 


6,951 


21.2% 


Teaching Institutions 


32,768 


30.2% 


8,886 


27.1% 


Other Charitable Organizations 


27,402 


25.2% 


11,584 


35.3% 


Public Foundations 


6,825 


6.3% 


1,662 


5.1% 


Private Foundations 


3,289 


3.0% 


476 


1.5% 


All Charities 


$108,566 


100.0% 


$32,807 


100.0% 



Source; Sharpe study, Table 25 

4. FOUNDATIONS 

(a) Introduction 

(i) General Profile 

According to the Canadian Centre for Philanthropy's two recent studies of Canadian 
foundations, there are between three and four thousand foundations in Canada. Of these, 
however, the Centre's second study identified only 944 as "active", that is, as generally open to 
outside applications and granting at least $10,000 per year 



25 



The development of foundations in Canada is a fairly recent phenomenon. Only two 
percent of the foundations that exist today were established prior to the 1950s; thirty-six percent 
were established during the 1950s and 1960s, forty-two percent in the 1970s, and twenty-one 
percent in the 1980s. In addition to the Canadian-based foundations, there are more than sixty 
American foundations that award grants in Canada on a regular basis. These include the Alcoa 



24 



25 



26 



See N. McClintock (ed.), Canadian Directory to Foundations, 9th ed. (Toronto: Canadian Centre for 
Philanthropy, 1991) (hereinafter referred to as "" Directory (9th ed.)"), at i-xvi, and R. van Rotterdam (ed.), 
Canadian Directory to Foundations, 11th ed. (Toronto: Canadian Centre for Philanthropy, 1994), at v-vii 
(hereinafter referred to as ""Directory (1 1th ed.)"). The earliest source of information on Canadian foundations as a 
group is J. Andrew, Guide to Foundations and Granting Agencies (Toronto: Association of Universities and 
Colleges, 1966). 

The Directory (9th ed.), supra, note 24, cites the following definition of foundation, at iv: "A foundation (is) a 
non-governmental, non-profit organization with flinds (usually fi^om a single source, either an individual, a family 
or a corporation) and program managed by its own trustees or directors, established to maintain or aid social, 
educational, charitable, religious, or other activities serving the common welfare, primarily through the making of 
grants." 

Directory (9th ed.), ibid.. Table 15, at xv. 



133 



Foundation, Carnegie Corporation of New York, The Ford Foundation, The Kresge Foundation, 
and The Procter & Gamble Fund.^^ 

(ii) Geographic Distribution of Foundations, 1994 

Close to sixty percent of the Centre's 944 "active" Canadian foundations were based in 
Ontario in 1994. These foundations accounted for 41.8 percent ($1.66 billion) of assets of listed 
foundations and 44.2 percent ($153 million) of listed grants (Table 69). Ontario's population in 
1988 was, by comparison, only thirty-six percent of the Canadian total. 

Table 69 
Geographic Analysis of Foundations, 1994 



Province 


Total U of 
Foundations 


%of 

Total 

in 

Directory 


Assets 


Number 
Reporting 


% of Total 
Assets in 
Directory 


Grants 


Number 
Reporting 


% of Total 
Grants in 
Directory 


Western 
Canada 


















B.C. 


82 


8.6% 


$ 505,224,699 


82 


12.7% 


$42,953,311 


82 


12.4% 


Alta. 


53 


5.6% 


303,219,037 


52 


7.6% 


51,923,677 


52 


15.0% 


Sask. 


17 


1.8% 


13,624,179 


17 


0.3% 


1,491,061 


17 


0.4% 


Man. 


43 


4.5% 


192,477,398 


43 


4.8% 


13,970,763 


43 


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. 


14 


1.4% 


36,834,226 


14 


0.9% 


1,826,942 


14 


0.5% 


N.S. 


12 


1.2% 


37,845,610 


13 


0.9% 


2,035,171 


12 


0.6% 


P.E.I. 





0.0% 








0.0% 








0.0% 


Nfld. 


4 


0.0% 


2,117,968 


4 


0.0% 


120,356 


4 


0.0% 


Total 


30 


3.0% 


76,797,804 


30 


1.8% 


3,972,469 


30 


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. 



27 



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% 


26% 


16% 


Atlantic Canada 


8.8% 


4% 


3% 


Northern Canada 


0.2% 


0% 


0% 



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 



28 



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 



29 



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, 



28 



29 



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 


1 


McCormell Family Foundation; 
The J.W. (1993) 


1937 


Montreal 


$371,000,000 


$16,072,800 


63 


2 


Vancouver Foundation (1993) 


1943 


Vancouver 


355,602,470 


22,001,209 


779 


3 


Chastell Foundations (1993) 


1987 


Montreal 


133,632,404 


13,631,866 


192 


4 


Hospital for Sick Children Foundation; 
The (1993) 


1972 


Toronto 


109,179,000 


15,233,000 


87 


5 


Dormer Canadian Foundation (1993) 


1950 


Toronto 


81,178,270 


2,227,845 


67 


6 


Winnipeg Foundation (1993) 


1921 


Winnipeg 


81,104,662 


4,022,471 


175 


7 


Kahanoff Foundation; The (1992) 


1979 


Calgary 


74,068,598 


4,037,305 


45 


8 


EJLB Foundation; The (1993) 


1983 


Montreal 


65,300,200 


2,409,702 


123 


9 


McLaughlin Foundation; The R. Samuel 
(1993) 


1951 


Toronto 


63,300,000 


3,438,359 


n/a 


10 


Macdonald Stewart Foundation; The 
(1993) 


1967 


Montreal 


62,538,194 


5,559,875 


25 


11 


Coutu: La Fondation Marcelle et Jean 
(1993) 


n/a 


Montreal 


58,600,861 


1,956,769 


114 


12 


Physicians' Services Incorporated 
Foundation; The (1993) 


1970 


North York 


58,161,248 


2,804,008 


63 


13 


Bronfman Family Foundation; The 
Samuel and Saidye (1992) 


1952 


Montreal 


58,109,655 


4,086,383 


87 


14 


Bickell Foundation; J.P. (1993) 


1951 


Toronto 


55,600,000 


3,251,310 


182 


15 


DeSeve; Foundation J.A. (1993) 


1967 


Montreal 


55,488,550 


3,867,500 


107 


16 


Eldee Foundation (1992) 


1961 


Montreal 


45,928,415 


3,072,318 


101 


17 


Ivey Foundation; The Richard (1993) 


1947 


London 


45,866,429 


1,144,750 


25 


18 


Webster Foundation; R. Howard (1990) 


1967 


Montreal 


44,746,175 


4,647,750 


131 


19 


Laidlaw Foundation (1993) 


1949 


Toronto 


40,562,903 


1,925,694 


201 


20 


Bell Foundation; Max (1993) 


1965 


Toronto 


40,167,000 


1,706,000 


31 


21 


Molson Family Foundation; The (1993) 


1958 


Montreal 


39,832,188 


3,235,000 


32 


22 


Morrow Foundation: F.K. (1993) 


1944 


Toronto 


38,263,663 


2,199,700 


45 


23 


Gordon Charitable Foundation; Walter 
and Duncan (1993) 


1965 


Toronto 


38,133,941 


1,412,287 


88 


24 


Associated Medical Services Inc. (1993) 


1976 


Toronto 


36,878,761 





n/a 


25 


Atkinson Charitable Foundation; The 
(1993) 


1942 


Toronto 


35,210,152 


1,099,400 


97 


26 


Lawson Foundation; The (1993) 


1956 


London 


34,687,531 


1,740,828 


104 


27 


Kinnear Foundation: The Henry White 
(1993) 


1979 


Toronto 


34.257,273 


1,577,851 


100 


28 


Bums Memorial Fund (1993) 


1939 


Calgary 


33,450,551 


1,854,885 


5 


29 


Edmonton Community Foundation; The 


1989 


Edmonton 


32,391,501 


1,327,308 


174 


30 


Counselling Foundation of Canada (1993) 


1959 


Toronto 


31,173,249 


2,166,742 


31 



136 



No. 


Foundation Name 


Year 
Est'd 


City 


Assets 


Grants 


#of 
Grants 


31 


Windsor Foundation; ITie (1993) 


1960 


Halifax 


27,007,012 


1,195,022 


12 


32 


Chan Foundation of Canada (1993) 


n/a 


Vancouver 


26,364,400 


484,235 


8 


33 


Sill Foundation Inc.; Thomas (1993) 


1987 


Winnipeg 


26,253,375 


1,020,953 


86 


34 


Jewish Community Foundation of Greater 
Montreal (1993) 


1971 


Montreal 


26,101,511 


638,953 


53 


35 


Law Foundation of Ontario; The (1990) 


1973 


Toronto 


26,004,506 


8,100,870 


64 


36 


Lunenfeld Charitable Foundation; The 
Samuel (1993) 


1954 


Toronto 


24,500,000 


1,957,878 


28 


37 


Meighen Foundation: The Catherine and 
Maxwell (1992) 


1959 


Toronto 


24,197,475 


1,114,500 


n/a 


38 


Law Foundation of British Columbia; The 
(1993) 


1969 


Vancouver 


23,626,759 


12,294,061 


72 


39 


McLean Foundation; The (1993) 


1945 


Toronto 


22,907,113 


1,116,000 


198 


40 


Crabtree Foundation; The Harold (1993) 


1951 


Ottawa 


22,799,644 


1,107,050 


133 


41 


Calgary Foundation; The 


1955 


Calgary 


21,543,766 


1,548,211 


135 


42 


Bombardier; Fondation J. Armand (1993) 


1967 


Valcourt 


21,342,226 


752,625 


263 


43 


Levesque; Fondation Jean-Louis (1993) 


1961 


Montreal 


20,488,490 


1,104,193 


34 


44 


Ivey Fund; The Richard and Jean (1993) 


1965 


London 


19,719,459 


722,750 


25 


45 


Hogg Family Foundation; The George 
(1993) 


1978 


Montreal 


19,137,914 


885,156 


29 


46 


Jackman Foundation (1993) 


1964 


Toronto 


18,500,000 


967,000 


187 


47 


Weston Foundation; The W. Garfield 
(1992) 


1987 


Toronto 


17,563,491 


2,939,500 


73 


48 


Dunn Foundation; The Sir James (1993) 


1967 


St. John 


17,237,305 


967,000 


23 


49 


Tanenbaum Charitable Foundation; The 
Joseph (1993) 


1967 


Scarborough 


16,946,994 


507,180 


33 


50 


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 


1 


Vancouver Foundation (1993) 


1943 


Vancouver 


$355,602,470 


$22,001,209 


779 


2 


Alberta Foundation for the Arts (1993) 


1991 


Edmonton 


12,172,584 


16,513,066 


n/a 


3 


McConnell Family Foundation; The J.W. 
(1993) 


1937 


Montreal 


371,000,000 


16,072,800 


63 


4 


Trillium Foundation (1994) 


1982 


Toronto 





15,294,883 


201 


5 


Hospital for Sick Children Foundation; 
The (1993) 


1972 


Toronto 


109,179,000 


15,233,000 


87 


6 


Chastell Foundation (1993) 


1987 


Montreal 


133,632,404 


13,631,866 


192 


7 


Law Foundation of British Columbia; The 
(1993) 


1969 


Vancouver 


23,626,759 


12,294,061 


72 


8 


Royal Bank of Canada Charitable 
Foundation (1994) 


1992 


Toronto 


100,000 


10,672,720 


1000 


9 


Law Foundation of Ontario; The (1990) 


1973 


Toronto 


26,004,506 


8,100,870 


64 


10 


Alberta Law Foundation (1993) 


1973 


Calgary 


11,675,101 


7,011,717 


50 


11 


Wild Rose Foundation (1994) 


1984 


Edmonton 


8,800,000 


5,600,000 


293 


12 


Macdonald Stewart Foundation; The 
(1993) 


1967 


Montreal 


62,538,194 


5,559,875 


25 


13 


Webster Foundation; R. Howard (1990) 


1967 


Montreal 


44,746,175 


4,647,750 


131 


14 


Recreation, Parks and Wildlife 
Foundation (1992) 


1976 


Edmonton 


3,838,091 


4,633,432 


645 


15 


Bronfman Family Foundation; The 
Samuel and Saidye (1992) 


1952 


Montreal 


58,109,655 


4,084,383 


87 


16 


Kahanoff Foundation; The (1992) 


1979 


Calgary 


74,068,598 


4,037,305 


45 


17 


Winnipeg Foundation; The (1993) 


1921 


Winnipeg 


81,104,662 


4,022,471 


175 


18 


De Seve; Foundation J. A. (1993) 


1967 


Montreal 


55,488,550 


3,867,500 


107 


19 


McLaughlin Foundation; The R. Samuel 
(1993) 


1951 


Toronto 


63,300,000 


3,438,359 


n/a 


20 


Bickell Foundation; J.P. (1993) 


1951 


Toronto 


55,600,000 


3,251,310 


182 


21 


Molson Family Foundation; The (1993) 


1958 


Montreal 


39,832,188 


3,235,000 


32 


22 


Eldee Foundation (1992) 


1961 


Montreal 


45,928,415 


3,072,318 


101 


23 


Weston Foundation; The W. Garfield 
(1992) 


1987 


Toronto 


17,563,491 


2,939,500 


73 


24 


Physicians' Services Incorporated 
Foundation; The (1993) 


1970 


North York 


58,161,248 


2,804,008 


63 


25 


EJLB Foundation; The (1993) 


1983 


Montreal 


65,300,200 


2,409,702 


123 


26 


Carthy Foundation (1993) 


1967 


Calgary 


76,905 


2,266,660 


166 


27 


Donner Canadian Foundation (1993) 


1950 


Toronto 


81,178,270 


2,227,845 


67 


28 


Morrow Foundation; F.K. (1993) 


1944 


Toronto 


38,263,663 


2,199,700 


45 


29 


Counselling Foundation of Canada (1993) 


1959 


Toronto 


31,173,249 


2,166,742 


31 


30 


Wood Gundy Charitable Foundation; The 
(1993) 


1967 


Toronto 





2,147,632 


347 


31 


Lunenfeld Charitable Foundation; The 
Samuel (1993) 


1954 


Toronto 


24,500,000 


1,957,878 


28 



38 



No. 


Foundation Name 


Year 
Est'd 


City 


Assets 


Grants 


#of 
Grants 


32 


Coutu; La Fondation Marcelle et Jean 
(1993) 


n/a 


Montreal 


58,600,861 


1,956,769 


114 


33 


Laidlaw Foundation (1993) 


1949 


Toronto 


40,562,903 


1,925,694 


201 


34 


Bums Memorial Fund (1993) 


1939 


Calgary 


33,450,551 


1,854,885 


5 


35 


Lawson Foundation; The (1993) 


1956 


London 


34,687,531 


1,740,828 


104 


36 


Bell Foundation; Max (1993) 


1965 


Toronto 


40,167,000 


1,706,000 


31 


37 


Eaton Foundation; The (1993) 


1958 


Toronto 


16,528,231 


1,694,887 


340 


38 


Marder Family Foundation (1992) 


1976 


Toronto 


3,194,403 


1,600,350 


356 


39 


Manitoba Law Foundation; The (1993) 


1986 


Winnipeg 


3,500,000 


1,579,557 


12 


40 


Kinnear Foundation; The Henry White 
(1993) 


1979 


Toronto 


34,257,273 


1,577,851 


100 


41 


Pattison Foundation; The Jim (1992) 


n/a 


Vancouver 


4,779,321 


1,568,215 


42 


42 


Calgary Foundation; The (1993) 


1955 


Calgary 


21,543,766 


1,548,211 


135 


43 


Molson Companies Donations Fund 
(1994) 


1973 


Toronto 


300,801 


1,450,446 


596 


44 


Gordon Charitable Foundation; Walter 
and Duncan (1993) 


1965 


Toronto 


38,133,941 


1,412,287 


88 


45 


Edmonton Community Foundation; The 
(1993) 


1989 


Edmonton 


32,391,501 


1,327,308 


174 


46 


Muttart Foundation; The (1993) 


1953 


Edmonton 


8,740,069 


1,319,688 


47 


47 


Berman Family Foundation (1992) 


1974 


Toronto 


950,965 


1,268,640 


29 


48 


Silverman Family Foundation; The Saul 
A. (1993) 


1967 


Toronto 


6,223,083 


1,205,885 


7 


49 


Windsor Foundation; The (1993) 


1960 


Halifax 


27,007,012 


1,195,022 


12 


50 


Bronfman Family Foundation; The 
Edward (1992) 


1989 


Toronto 


14,867,489 


1,176,077 


95 




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. 



30 



31 



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. 



40 



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 

33 

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 



35 



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 




A 


B 


C 


D 


E 


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 


$ 


$ 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 




A 


B 


C 


D 


E 


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 



36 



Ibid., Tabk 14, atxiv. 



142 



Table 75 



1987-1988 1 




A 


B 


C 


D 


E 


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 



37 



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 



37 



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. 



il 



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 



1 



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 



7 



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 

10 

11 

12 



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". 



13 

Ibid., at 



150 

(c) The Meaning of "Others" 

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. 



16 



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 



17 



18 



19 



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 

20 

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 



20 

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 



21 



22 



23 



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 



24 



25 



26 



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 

28 

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,^^ 



27 

Supra, note 19. 

28 



29 



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.). 



Hi 



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). 



10 

II 

12 



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 

18 

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. 



13 



14 

15 
16 
17 



19 



20 



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 

22 

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 



26 



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 



27 



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 

28 

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 

29 

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. 



28 



29 



30 



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 

32 

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"). 



31 

32 



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"). 



34 


Ibid. 


35 


Ibid. 


36 


Ibid 


37 


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 



38 



39 
40 
41 



42 



43 



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. 



44 

45 
46 

47 

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 

52 

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." 



50 



51 



52 



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 

58 

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. 



57 



58 



59 

60 



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 



64 

[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. 

(c) Is THE Project of "Public Benefit"? 

(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. 

70 

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 

73 

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. 

78 

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 



76 



77 
78 

79 



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 

82 

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. 



80 



82 



83 



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 

85 

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. 



84 



85 



86 



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 



88 



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 

93 

valid. We examine these anomolous cases in chapter 8. Those cases to one side, we suggest 



87 
88 
89 
90 



91 



92 



93 



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 

94 

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." 



94 



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 

97 

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 

98 

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. 



97 

Fridman, supra, note 32, at 55 1-52. 



98 

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. 



10 



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. 



I 



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 



11 



12 



13 



14 



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.). 



15 

16 
17 

18 



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 

21 

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 

22 

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 



22 



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 



23 



?4 



25 



26 



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 

28 

is also supported by academic commentary, and some general definitions have been offered. 

29 

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. 



27 



28 



29 



30 



31 



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 

32 

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 

37 

educational trust. 

38 

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 



32 

33 

34 
35 



36 



37 



38 



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 

39 

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". 



39 



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 



40 



41 



42 



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. 

(c) Public Benefit and Religion 

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. 



43 

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 

49 



50 



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 



54 



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 



56 



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 



55 



56 



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 

58 

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 

59 



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 



60 



61 

62 



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. 



63 

64 

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. 

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

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 

70 

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 

71 



[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 

77 

"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 

78 

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 



77 

78 

79 



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 

80 

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 

82 

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. 

81 

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). 

82 

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 



83 

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 



86 



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 

87 

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 



87 



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. 

(c) Charity and Discrimination 

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. 



90 



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. 

94 

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 

95 

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;... 



94 



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. 



95 



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 

99 

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. 



k 



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 



(c) Third Taxonomy; A Further Ordering of the Second Taxonomy 

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). 



10 



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. 



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s 








1— H 


X 


b 



(N 



— ' (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 


AX 


congregational religion 


small Protestant temple 


BX 


ecclesiastical religion 


Anglican Church of Canada 


CX 


shrine 


St. Joseph's Oratory, Montreal 


DX 








EX 








AY 


private religious foundation 


a parish trust 


BY 


public religious foundation 


Catholic Charities of the Archdiocese of Toronto 
(in part only) 


CY 


public religious foundation 


? perhaps 


DY 








EY 









11 



R.S.C 1985, c. l(5thSupp.). 



238 

Table VI 
CHARITABLE - SOCIAL WELFARE 



TYPE 


NAME 


EXAMPLE 


AX 


private charity 


the poor and distress relief activities of a 
parish 


BX 


public charity 


the poor and distress relief activities of 
diocese 


CX 


pubMc charity 


the poor and distress relief activities of an 
organization sponsored by donations from the 
general public, such as the Salvation Army 


DX 


government-sponsored charity 


the poor and distress relief activities of an 
organization sponsored by government 
grants, such as a children's aid society 


EX 


traditional charitable purpose trust 


a trust established to run a shelter for the poor 


AY 


private charitable foundation 


family establishing a trust for benefit of poor 


BY 


public charitable foundation 


United Way, in part 


CY 


public charitable foundation 


a community foundation, in part 


DY 


government charitable foundation 


Trillium Foundation, in part 


EY 


traditional charitable purpose trust 


a trust established to make grants to poor 
relief organizations 



Table VII 
CHARITABLE- PHILANTHROPIC 



TYPE 


NAME 


EXAMPLE 


AX 


private philanthropy 


alumni association of a private school 


BX 


public philanthropy 


a museum with a large membership 


CX 


public philanthropy 


public research institute 


DX 


government sponsored philanthropy 


a museum 


EX 


traditional philanthropic purpose trust 


endowment to run a private museum 


AY 


private philanthropic foundation 


corporate foundation that funds art galleries 


BY 


public philanthropic foundation 


Canadian Conference on the Arts, in part 


CY 


public philanthropic foundation 


a community foundation, in part 


DY 


government-sponsored philanthropic 
foundation 


Ontario Arts Council 


EY 


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 

12 

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 



12 

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. 



13 

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. 

(c) Political Theories 

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 

17 

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 



17 

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, 

18 

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 



18 



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). 



li 



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. 

(c) Conclusion 

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. 



19 



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 



10 



11 



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". 



12 

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 

17 

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 



19 



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. 

20 

One source reports on the success of the Fund as follows. From the date of its 

21 

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 



22 

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 

27 

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 

28 

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 



30 



31 



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. 



32 



33 

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 

38 

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 



41 



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 

39 

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. 



45 

46 

47 

48 

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. 

(c) The Restrictions Placed on Charitable Organizations by the 
Federal Tax Regime 

(i) World War I 

The first scheme for the regulation of charitable organizations at the federal level was 

52 

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 



53 



54 



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 

57 

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. 



51 

52 
53 

54 

55 

56 

57 



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 

58 

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. 



58 

59 

60 

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, 

or 

(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 

70 

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. 



68 



69 

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 



72 

73 



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 

77 

reported accurately were reduced proportionately along with those who had not. 

A more radical solution to the general problem was announced in Parliament on 

78 

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 

81 

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 

82 

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 

83 

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 

84 

were approved. There were another 4,322 applications processed in 1968, 3,213 of which 

85 

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 

87 

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 



86 

87 



/^/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 

89 

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 

92 

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 

93 

exemption simply reflected a ftindamental and unquestioned "societal consensus" on the 



88 

89 



90 

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 

98 

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 

99 



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. 

(c) The 1 972 Tax Reform 

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. 



I 



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 

"7 

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". 



10 

11 

12 



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: 



13 



(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 



13 



14 



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 



19 



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 

(c) Regulation of the Activities of "Registered Charities"^" 

(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 



20 



21 

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 



26 



27 
28 



29 



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 



30 

31 



32 



//)/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. 



33 

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 

38 

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 

(C) who does not deal at arm's length with any person described in clause (A) 
or (B), 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 

(c) a right held by the foundation to acquire a share referred to in paragraph (b). 

"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 



38 



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 



41 

42 



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. 



44 

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. 

45 

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. 



46 



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". 



47 



48 



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 

52 



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 

53 

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 

55 



56 



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 

58 

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 

66 

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 

66 

67 



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. 

70 

(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 

71 



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 

76 

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 

80 

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 

82 

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 

83 

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 

84 



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 

88 

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. 

89 

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 


70 


229 


34 


33 


Education Letter 


70 


116 


100 


119 


Request for Undertaking 


13 


130 


110 


81 


Notice of Revocation 


11 


13 


7 


22 


Change of Status & Other 


3 


- 


- 


5 


TOTAL 


167 


488 


251 


260 


SOURCE: Department of National Revenue, Taxation 



The report found nothing wrong with the audit rate or the audit procedures. 



85 



86 



87 



88 



89 



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 


50 


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 



90 



Ibid., at 264. 



91 



Ibid., ai 265. 



313 



Revocation of Registrations, 1990 - January 17, 1996 



TYPE 


1990 


1991 


1992 


1993 


1994 


1995 


1996 


Delinquent* 


648 


45 


842 


1229 


1501 


1026 


742 


Voluntary 


206 


543 


633 


1009 


476 


429 


592 


Cause 











11 


3 


4 


8 


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 



93 



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 

94 

charitable organizations have been restricted since 1934. The unrelated business income of 
tax-exempt organizations has been subject to a separate tax since 1950. 



92 



93 



94 



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^^ 

99 

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 



97 

98 

99 

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. 



i 



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. 

(c) The following organizations are referred to in subsection (a): 

(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 



(C) furnishing of goods, services, or facilities between a private foundation and a disqualified 
person; 

(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. 

4 

The Commission recommends infra, this ch., sec. 2(c)(i), that the correct focus for regulation is commercial, not 
business, activity. 



336 

(c) The Drafting of the Law 

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 

Q 

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. 



10 



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 



11 



12 



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 



14 

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. 



15 



16 



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. 

(c) Regulation of the Activities of Registered Charities 

(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, 



18 



19 



20 



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 



21 

Revenue Canada, Taxation, Charities Division, 1990 Draft Circular. 

22 

Ibid 



II 



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 

23 

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. 



23 



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 



24 



^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 

29 

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