“Never let a good crisis go to waste” – Winston Churchill
In an increasingly uncertain world, Canada could be an attractive destination and a safe haven for the biggest international charities – if our leaders think big and make the right changes.
Canada has many qualities that make it the ideal headquarters for an international charity, including relative political stability, access to international markets, a highly-educated and multicultural workforce, leading world-class universities, a generally progressive immigration system, ties to both the Commonwealth and the Francophonie, and a positive global reputation.
Despite these advantages, current Canadian tax rules make it effectively impossible for international charities to set up their head offices in Canada. Under the current rules – particularly the “own activities” regime – registered charities in Canada face restrictions in how they can distribute their resources, particularly when transferring funds outside of Canada.
The burden of current rules
Under the “own activities” regime, a Canadian charity can make its resources available to a foreign non-qualified donee (i.e., a person or entity that is not a Canadian registered charity, such as a non-Canadian affiliate or subsidiary) if it uses the foreign entity as the charity’s intermediary to carry out the charity’s “own activities.” Not only must the parties maintain the fiction that the funded activity is the Canadian charity’s “own,” but also the Canadian charity must exercise direction and control at all times over how the foreign entity uses the Canadian charity’s resources.
Alternatively, as a result of recent changes, Canadian charities can now send funds to the foreign entity in the form of a “qualifying disbursement,” which must fulfill certain conditions. Under one such condition, the charity must ensure that the foreign entity applies the charity’s funds exclusively on charitable activities that further at least one of the charity’s purposes. In many cases, the administrative burden required to administer a qualifying disbursement can be so great that it would be not much different from the red tape required under the “own activities” regime.
A missed opportunity
These rules pose a significant hurdle for international charities and organizations that need to operate an international treasury function and transfer funds to non-Canadian affiliates or subsidiaries. In effect, by making it hard to transfer resources overseas (compared to other jurisdictions), the law in Canada disincentivizes global charities from setting up their HQs here despite our country’s many strengths. Over the years, we have been approached by a number of international charitable organizations looking to set up their headquarters in jurisdictions other than their home country. On learning about Canada’s restrictions, these charities decide to look elsewhere. This is a missed opportunity, given Canada’s other strategic advantages.
It does not have to be this way, and there are good reasons to make changes. Making Canada a friendlier venue for the HQs of international charities would grow both Canada’s charitable sector and the Canadian economy. It would create good-paying jobs (associated with C-suite, management, and head office functions), resulting in more income tax revenue for Ottawa. There would also be positive downstream effects to other sectors of Canada’s economy, as large international charities bring their overseas revenues and personnel to Canada.
Possible solutions
One way to make Canada more hospitable for international charities is to relax the qualifying disbursement rules. For example, adjusting the risk thresholds and accountability tools in the Canada Revenue Agency’s current administrative guidance could give charities more flexibility in making qualifying disbursements to affiliates or subsidiaries in other countries without having to amend the Income Tax Act itself. However, we do not believe that this is likely or even sufficient to allow the operation of an international charity headquarters in Canada.
In the alternative, the Government of Canada could introduce a new category of “qualified donee,” specifically aimed at large international charities. Amendments to the Income Tax Act would allow entities falling into this new category to transfer resources to non-Canadian charities in its corporate family, without having to comply with the “own activities” regime or qualifying disbursements rules.
By creating this new category of qualified donee, Ottawa could help pave the way for global charities and organizations to run their international operations from within Canada, while still ensuring that their resources are used exclusively for charitable purposes. This change could make Canada both a beacon and a beachhead for large global charities, particularly those based in the United States, which face an increasingly uncertain and unstable regulatory environment and which might be convinced to move to Canada if our own regulatory environment was more favourable.
Time to seize the moment
Canada is at a crossroads. The world order is changing. Allegiances are shifting. Economic nationalism is rising. Uncertainty is the new certainty. The new Prime Minister has resolved to make Canada the strongest economy in the G7. The appetite and will of Canadians to accomplish big things – once thought improbable – is increasing, from removing interprovincial trade barriers to building pipelines. Meanwhile, a growing number of countries, including the US and the UK, have slashed their foreign aid budgets, reducing their global impact and influence.
Canada has an excellent opportunity to herald in a new “Golden Age” for its own charitable sector. By adopting a more flexible regulatory framework for global charities to carry out their worldwide operations from Canada, Canada could position itself as a leader for international charitable activity, strengthening both the Canadian charitable sector and the Canadian economy. Canadians should not let a good crisis go to waste.
Contact Miller Thomson’s Charities Law Group
Miller Thomson’s Charities Law Group is a leading advisor and advocate to Canada’s charitable and nonprofit sector, helping entrepreneurs and organizations navigate and succeed in Canada’s regulatory environment. Contact us today to discuss the proposals presented in this article or to develop solutions on how to increase your organization’s impact.
