Finance Committee on Nov. 29th, 2010

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you.

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

You can't get this information in Canada.

[The Chair, Conservative, James Rajotte]

Very well, thank you.

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

Actually, if I might add a footnote—

[The Chair, Conservative, James Rajotte]

Very briefly.

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

—the reporter in question who first broke the story told me that's how he got the information, because they weren't forthcoming.

[The Chair, Conservative, James Rajotte]

Thank you.

You have the floor, Mr. Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

The more we discuss your bill, the more we learn about the shortcomings that it needs to address, given the lack of information on charitable organizations.

You said earlier that accessing information from the Canada Revenue Agency was not an easy task. I agree with you. I did not even take the time needed to find out how to obtain such information.

Your bill would no doubt lead to a number of improvements, but it does not address the issue of how information is made available. Will improvements be made on that front? Will people still have to navigate through a complex website in order to obtain the information they would like to have?

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

If the CRA website would, at the very least, disclose the top five salaries, the highest-paid salaries and the associated names, along with whatever other information is on their website, I think that would be a step forward. It would be a baby step towards transparency, but at least....

The highest salaries are really a symptom of high fundraising costs, and the charities that pay the most have costs that run anywhere from 30% to 50% on every dollar. I would argue that the donors deserve better value than that, that costs have to come down and that we have to start at the top with full disclosure.

As I said earlier, donors can then make a rational decision about where to place their money.

Merci.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

We will still depend on the Canada Revenue Agency to improve access. I think that we will be meeting with agency officials following your appearance. We might then discuss the impact of your bill, if it is adopted, on improving accessibility.

Earlier, my colleague Mr. Mulcair suggested we add contract workers to the list of people receiving compensation, as a way to avoid a potential loophole in the bill. Technically speaking, does such an amendment have to be put forward by the mover of the bill, and would that be in addition to the amendments you have already presented?

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

As I said earlier, I would view it as a friendly amendment. Anything that moves us towards the goal of more transparency, if the amendments are in order, I'd certainly welcome.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Mr. Chair, will the committee be able to amend the bill? Technically speaking, would it be possible to move an amendment?

[The Chair, Conservative, James Rajotte]

Absolutely.

In fact we will have clause-by-clause on Wednesday, December 8. Ms. Guarnieri has brought forward two amendments, which are in order. I believe Mr. Chong will be submitting an amendment. Monsieur Mulcair may submit an amendment.

So that's entirely appropriate either prior to or on that day.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Very well. Thank you.

[The Chair, Conservative, James Rajotte]

I know that members want to get to the CRA and Finance officials.

Ms. Guarnieri, I just wanted to follow up first. I certainly have heard from a lot of organizations on this bill. Their primary concern to me seemed to be about the amounts, so you've certainly addressed that with your two amendments.

I just wanted to follow up on Mr. Pacetti's question, because I'm not quite sure I understand. You talk about the information on the CRA website. You talk about only 12% of Canadians going there. Then Mr. Pacetti's question was about the minister making this information available. So with that amendment, if Parliament adopts this bill, how exactly will it change what information Canadians see and who in fact puts it up? Is it by changing the form that CRA would have people fill out? Is this the specific change your bill would accomplish?

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

I'm sure the CRA officials could speak to how that would change their form, but essentially it would simply designate, much like publicly traded companies, the top five salaried individuals and their names. I'm sure the officials can tell you the details of how that would be enacted, should this amendment be accepted.

[The Chair, Conservative, James Rajotte]

And would people still find this information by going to the CRA website, or are you prescribing that the charities themselves be compelled to post it on their own websites?

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

My amendments don't compel the charities to post it on the websites, but I'm hoping the CRA would make this information readily available, much like it is in the United States.

[The Chair, Conservative, James Rajotte]

Okay. I appreciate that. We'll certainly get them to comment on that as well.

[Albina Guarnieri, Liberal, Mississauga East—Cooksville, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

I want to thank you for being with us here as a witness, as the mover of this bill. Obviously you're welcome to stay as a colleague and listen to the Finance and CRA officials.

We'll suspend for about two minutes, colleagues, and I will bring in the other guests. Thank you.

[The Chair, Conservative, James Rajotte]

Colleagues, if I can ask you to find your seats, please, we will begin our second hour of discussion here today on Bill C-470, An Act to amend the Income Tax Act, which deals with charities.

We have two departments before us today. We have the Department of Finance and we have the Canada Revenue Agency.

Thank you very much for coming this afternoon.

We have Mr. Baxter Williams, acting general director of analysis, tax policy branch. We have Ms. Sharmila Khare, chief, personal income tax division.

From the Canada Revenue Agency we have Ms. Cathy Hawara, acting director general, charities directorate, legislative policy and regulatory affairs branch; and Mr. Bryan McLean, director of policy, planning and legislation division, charities directorate, legislative policy and regulatory affairs branch.

We'll hear from the Department of Finance first and then from CRA.

We'll start with Mr. Williams, please.

[Baxter Williams, Acting General Director (Analysis), Tax Policy Branch, Department of Finance]

Hello.

I understand that amendments to the bill have been tabled. I haven't had a chance to incorporate those into my speaking notes, so I hope you take that into account.

Thank you for the introduction, and thank you for this opportunity to provide you with comments on private member's Bill C-470, which deals with compensation in registered charities.

My objective today is to provide some context about the current legislative and regulatory framework for compliance in the charitable sector, as provided in the Income Tax Act.

There are currently 85,000 registered charities in Canada, ranging from small entities run by volunteers to large charities such as hospitals and universities. To give you an idea of the diversity of charities, in terms of the size of these 85,000, about half report total annual receipts or revenues of under $100,000. Over half the registered charities in Canada report having no paid employees.

The Income Tax Act contains substantial incentives encouraging people to donate to registered charities.

Individual donors receive a 15% tax credit for annual donations of up to $200, and a 29% credit for donations over and above $200.

If you also take into account provincial and federal support measures, Canadians receive approximately 46% in tax credits, on average, for donations in excess of $200.

Organizations benefit from a tax deduction on donations received.

Over the past decade, the Government of Canada has significantly increased incentives for donating to charities. The capital gains tax associated with donations of publicly listed securities to public charities was first reduced in 1997 and was eliminated altogether in 2006. This exemption was extended to donations of listed securities to private foundations in 2007. The incentives for making donations of ecologically sensitive land to conservation charities were also significantly improved. Finally, larger gifts to charities were also made more effective by increasing the annual donation limits, as a percentage of income, from 20% of net income to 75% of net income.

In addition to their ability to issue tax receipts for donations, registered charities are also exempt from tax on their income.

In light of the generous tax support provided to encourage Canadians to donate to charities, the Income Tax Act contains a number of restrictions on how charities can operate. These provisions build on the common law and provincial statutes in place to regulate charities.

The Income Tax Act requires that registered charities be established for charitable purposes and that they devote their resources to charitable activities. While the meaning of charitable activities and charitable purposes is largely determined by jurisprudence, the Income Tax Act includes specific requirements for registration as a charity and grounds for revocation.

On compensation, the current framework for charities includes compliance tools that can be used in cases of excess compensation.

From a policy perspective, it is important to recognize that the charitable sector is in competition with the private sector for highly skilled executives. In this regard, it's appropriate for charities to pay their executives salaries that are comparable to their private sector counterparts--that is, fair market value.

The CRA's assessment of what constitutes reasonable compensation must be based on a comprehensive review of the specific circumstances under which compensation is paid.

For example, it might be reasonable to provide an executive with enhanced compensation in order to manage millions of dollars in resource expenditures as well as hundreds of employees. However, it might be ill-advised to pay the same salary to the president and sole employee of a small charity.

In cases of excessive compensation, the Income Tax Act provides the Canada Revenue Agency with the authority to impose an intermediate sanction; that is, a penalty for undue benefits, if a charity pays an unreasonable amount to any person.

If the CRA determines there is an undue benefit provided to a person, a penalty equal to 105% of the amount of undue benefit can be imposed on a charity. A 110% penalty and the suspension of tax receipting privileges can be applied in the case of repeat infractions. Penalties are normally transferred to an eligible charity, thereby keeping the funds within the charitable sector.

Excessive compensation could be grounds for revocation in some cases because the funds spent on excessive compensation are funds that are not devoted to a charitable purpose, as required by law.

I would also like to mention that the rules in the Income Tax Act for undue benefit apply to many sorts of transactions, not just to excessive salaries. This helps ensure that charities do not pay more than what would be considered reasonable remuneration for goods and services.

The Income Tax Act requires that registered charities file annual information returns that are made publicly available. That requirement allows Canadians to access a broad range of financial information on charitable organizations, including information on compensation. The requirement to produce such returns contributes to greater transparency in the sector.

Charities are required to report the total compensation for their 10 highest paid positions by salary range. That information is available to the public on the CRA's website and helps foster transparency with regard to how resources are used by charitable organizations. Those reports help the CRA to detect potential abuse and set audit priorities.

The Department of Finance will continue its ongoing efforts to ensure that appropriate legislative and regulatory frameworks are in place to promote accountability in the charitable sector.

I would be happy to respond to any of your questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Williams.

We'll now hear from CRA.

[Cathy Hawara, Acting Director General, Charities Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Thank you, Mr. Chairperson.

Good afternoon. Thank you for the invitation to appear this afternoon on Bill C-470.

I am Cathy Hawara, the director general of the charities directorate within CRA. With me is Bryan McLean, the director of policy, planning and legislation division.

I would like to explain the existing legal and regulatory framework administered by the CRA in our role as the federal regulator of registered charities in Canada.

The CRA administers the Income Tax Act, which confers significant tax advantages on registered charities, and prescribes the requirements for obtaining and maintaining charitable registration.

CRA has the authority to revoke a charity's registration if it fails to comply with the registration requirements of the Income Tax Act. An example would be if the charity uses its resources for non-charitable purposes, including providing undue personal benefits to any member. An undue benefit would include a situation where a charity pays or otherwise compensates a person beyond reasonable remuneration for services rendered, irrespective of the level of compensation.

For example, paying an individual $50,000 for services rendered would constitute an undue benefit if, in reality, there were no services provided or if compensation did not correspond with fair market value.

Every year charities must provide information to the CRA by filing what is called an information return. The return includes information about compensation. It is made public on the CRA website and is taken into account as part of our audit program. The CRA's current audit practices include reviewing situations where staff compensation exceeds fair market value for the services rendered. In that regard, we would consider the degree of benefit conferred and whether an advantage was conveyed inadvertently or whether the situation was structured specifically to yield excessive benefits.

The current legislative framework allows the CRA to take a measured approach to resolving non-compliance based on the severity of the offence. For example, if the infraction is not found to be intentional, serious, or egregious, the CRA may choose corrective measures that provide the charity an opportunity to remedy its non-compliance. If, however, our review reveals serious or repeated offences, we may impose intermediate sanctions in the form of monetary penalties and/or a suspension of receipting privileges, or proceed directly to revocation.

With respect to disclosure requirements, the Income Tax Act provides a framework for public accountability in the charitable sector. To this end, the CRA posts on its website the registered charity information returns completed annually by each registered charity. This provides Canadians with access to detailed information about charities' annual operations, including expenditures and programming.

To enhance the clarity and relevance of public information on charities, in 2009 we updated the salary range categories in the annual information return. The upper end of the range was increased to accommodate larger charities, such as hospitals and universities, and provide the public with more meaningful information. Charities are now required to identify the salary range for their 10 highest-paid positions, and the salary categories have been expanded, with the last threshold being $350,000 and above.

In 2008, which is the last complete year that we have data on, 86% of charities reported compensating all of their employees combined less than $250,000. While our 2009 data is not yet complete, early indicators suggest that individual compensation above $250,000 principally occurs in health care charities and, to a lesser extent, in universities and educational charities. To date, fewer than 1% of the charities have reported compensating individuals in excess of $250,000.

In closing, the current legislative and regulatory frameworks allow the CRA to monitor salaries based on the information that is currently reported and made public, so that we may investigate further where warranted. The legislative framework also provides a range of compliance options to allow us to take a measured approach to remedying situations involving undue benefit, based on the specific facts in each situation, up to and including revocation of registration.

Mr. Chair, we would be pleased to answer any questions the members of the committee may have.