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Abigail Payne holds a Canada Research Chair in Public Economics and is an Associate Professor at the Department of Economics at McMaster University.
Charitable organizations play an important role in Canadian society. They provide beneficial goods and services not undertaken by government or the private sector. These organizations, however, rely on the support of private donors, whose contributions fund the goods and services provided by public and private foundations and other charities.
To encourage donor support for socially desirable charitable activity, governments provide charities with favorable tax status. For one thing, donations to organizations involved in grant-making or direct provision of charitable goods and services are eligible for federal and provincial tax credits against the donor's income tax liability. For another, charitable organizations can receive tax exempt status, enabling them to raise revenue for the services they provide without incurring income tax. In cases where individuals donate to organizations with which they have a close relationship, it raises the question of whether they - and the receiving body - should face a greater level of regulatory scrutiny than would occur if they had an arm's-length relationship. Underlying this issue is the potential for abuse of the tax system.
Individuals seek a variety of non-taxable ways to share their wealth with their communities. One method is through the use of foundations. Foundations give donors the greatest control over the use and investment of their donations and a means to promote both current and future charitable activities.
Charities have different levels of restrictions and limitations based on how the Canada Revenue Agency (CRA) classifies them. The key is whether the organization is a grant maker or a service provider. If 50 percent or more of an organization's activity is devoted to grant-making (supporting other registered charitable groups), CRA designates it as a foundation and it is subject to more limits than if the primary purpose was service provision.
Because many foundations are controlled by a few individuals, such as a family, CRA delineated foundations into public and private organizations. The assumption underpinning this distinction is that if a foundation is closely controlled there is more room for abuse of the organization - and it therefore merits greater scrutiny. Foundations are classified as private...