Bill C-470 (Historical)

An Act to amend the Income Tax Act (revocation of registration)

This enactment amends the Income Tax Act to revoke the registration of a charitable organization, public foundation or private foundation if the annual compensation it pays to any single executive or employee exceeds $250,000.

[Gary Bizzo, As an Individual]

Thank you, Mr. Chairman.

First, there are a great many charities in Canada that provide exceptional service, above and beyond, to the Canadian public. I represent donors.

I work for a society with charitable status in Vancouver called SUCCESS. Our 400 dedicated employees will tell you that they are committed to the good of our community. We operate dozens of programs that are not-for-profit. As a senior manager with eight years of experience, I earn $60,000 a year—comfortable by many standards. For the most part, my colleagues and I work for SUCCESS because we like the work and the 180,327 clients we served in 14 languages in 2009.

At the airport on the way here, I ran into my ex-CEO, who had just retired two weeks ago, Tung Chan. He candidly told me he made $110,000 to manage our $40 million society. He said there is a trend to find experienced CEOs who have retired and who are willing to give something back to the community. He felt transparency was paramount and expected.

Transparency is needed with charities. The vast majority of charities fear nothing from openness around the percentage of contributions that go to administration. I prefer to give to charities that understand that as a middle-class person, my contributions represent a big deal to me. I want a charity that has a low administration percentage.

Corporations are obliged to give shareholders information. Why should executives of large charities have any special status? When we the people give them tax benefits, should we not get the same obligation on transparency?

A CEO friend of mine, Gordon Ross, a former adviser in President Clinton's White House committee on Internet security, told me that the general population has no idea what is going on around them because everything is filtered. In a digital age, we are told what people want us to know. I want to go back to the days when it was not filtered. I want disclosure.

As a social media networker with almost 100,000 followers, I put it out to my followers for their opinions on transparency. I have a word-of-mouth influential reach of just over 6.7 million, according to a website called “gripe”. In the space of an hour, I received just under 1,000 messages. The first messages were adamantly against my criticism of CEOs, mainly commenting that good mainstream people needed high compensation. Over 900 messages were against these salaries and wanted transparency.

I run a business blog, so when I switched to promoting this bill on my blog, I did not anticipate the results and fervour of my roughly 5,000 readers per month. While many bloggers with my numbers may expect three to four people to respond to their writings, on my first blog on “excessive charity salaries and transparency”, April 14, 2010, I received 129 comments. The numbers are roughly 50 to 60 times the usual average of responses. Nearly all support Bill C-470, transparency, and salary cap.

I insist that, as important as it is that there is a cap on the size of salaries, transparency is fundamental for me to make an informed determination whether I will contribute to make the world a better place through donations. However, it must be my choice.

Thank you.

[Terry Anne Boyles, Vice-President, Public Affairs, Association of Canadian Community Colleges]

Thank you.

I'm Terry Anne Boyles. I'm vice-president of public affairs with the Association of Canadian Community Colleges. We represent Canada's 150 colleges, institutes, CÉGEPs, polytechnics, and universities with a college mandate. We have campuses in over 1,000 communities in the country and work very closely with the charitable sector in each of those communities and in the wider communities, the regions the colleges serve.

Colleges and their foundations, both formats, are registered charities under the Income Tax Act. We also appreciate the changes within the legislation, as Alain Pineau has just mentioned. I won't address that much further, except to say that while we support the goal of increased transparency and accountability that motivated the bill, there are elements that do have a direct negative impact on member institutions. They're particularly concerned about some of the cost factors that will impact the administration of the bill.

We believe the existing authority of the CRA's charities directorate does provide an adequate mechanism for ensuring transparency and accountability, and we would urge you to defeat Bill C-470. Our members are multi-million-dollar organizations that deal with complex management issues. If the cap hadn't been removed, we would have been telling you about how to attract the high-calibre people they need to run these institutions, being able to have that flexibility. It's important in terms of the salaries. We believe reporting those salaries on the form T3010 through CRA is an adequate, accountable, and transparent way to do the reportings, and we support that. As public institutions, our member institutions report their top salaries, both within the annual reports of their institutions and under whatever the provincial or territorial government accountability measures are.

Fundraising is absolutely vital. One of the points is that within the economic context of the country, our member institutions are struggling with the raising of funds to meet the capacity needs of those institutions and provide access for those who are disadvantaged, and maintaining their charitable status is absolutely critical to moving forward.

The other point we want to address is to support the points of all the other charities. We and our member institutions are concerned about the small charities and their communities and the disclosure requirements for the top five salaries. We believe this disclosure is unnecessary and an unwarranted invasion of privacy. We're also concerned that this puts the employees of some charities at substantive risk.

We are pleased to be working with the other charities appearing before the committee. We each represent quite different areas of the charitable sector in the country, but we are united in our view that the legislation is flawed, unnecessary, and will increase costs, both to the charities and to the Government of Canada. As we've said before, the CRA's charities directorate already has the tools at its disposal to guarantee transparency and accountability. The Income Tax Act provides the minister with the authority to investigate and take action where necessary on those who have undue benefit from their positions at charities, and certainly in our sector the provincial-territorial legislative frameworks do the same.

We urge the committee to defeat Bill C-470.

Thank you.

[Alain Pineau, National Director, Canadian Conference of the Arts]

Thank you, Mr. Chair.

Good afternoon, members of the committee. My name is Alain Pineau and I'm the national director of the Canadian Conference of the Arts. Thank you for giving me the opportunity to present our views on Bill C-470.

The CCA is the oldest and most broadly based cultural umbrella organization in Canada. The CCA provides a national forum for the entire arts, culture, and heritage community, from all disciplines and regions. Our membership reaches over 300,000 artists, creators, and cultural workers.

The CCA fully supports the objectives of transparency within the structures of charitable organizations in Canada, but it is our opinion that Bill C-470 is fundamentally unnecessary, intrusive, and ill-conceived. Like other members of Imagine Canada, we rejoice in the fact that the sponsor of the bill has proposed to drop the controversial cap on salaries. This suggestion was certainly the most intrusive aspect of the bill. While it may not affect many organizations in the cultural sector, salaries of over $250,000 are rarely found in our arts sector. We all object to this unjustified intervention of the government in the governance of civil society organizations.

In our view, the second aspect of the bill remains objectionable, even after the proposed amendment to establish a $100,000 floor on salaries to be made public. Again, this would not apply to many people or organizations in the arts sector, but it is our opinion that it remains intrusive and unjustified. A large number of organizations in the arts, culture, and heritage sector have the status of charitable organizations. However, the vast majority receive only a small percentage of their revenue from donations. Very few arts, culture, or heritage organizations receive even 10% of their revenue from charitable donations.

Take the CCA's own case. Over the past three years charitable donations have contributed a small but much needed 1% of the total revenue of our organization. People who give to an organization like ours do so because they support the work we do and want to help us pay the expenses related to our main activities. Our case is not unique in the arts, culture, and heritage sector. It is our position that even with a floor of $100,000, this clause in Bill C-470 would still constitute an unwarranted and unnecessary intrusion on Canadians' right to privacy.

Why do we think it unnecessary? Because the CCA believes that Revenue Canada already has measures in place to regulate non-profit spending. Canadian charities are already required to publicly account for their organizational activities and finances, including information on staff compensation. Form T3010 requires the provision of a substantial amount of information, including contact information, details about directors, detailed revenue and expenditure information, description of charitable programs, political activities, transfers to qualified organizations, and fundraising revenues and expenditure. Charities must also report compensation information on schedule 3 to form T3010, to include total number of full-time staff, total amount of staff compensation, and the total amount paid to part-time staff.

The information is available, but I guess we can agree with the Honourable Albina Guarnieri that this information may be difficult for Canadians to understand and access. We agree that all Canadians should have easy access to the information in order to be better informed on the operations of charities. But instead of approaching the problem of transparency by applying intrusive legislation onto charities, we suggest that this is an opportunity for this committee and interested members of Parliament to work with Revenue Canada to make the information on charities more easily accessible to a Canadian audience.

Sustaining Canada's Economic Recovery Act

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, I am pleased to participate in the debate on Bill C-47, which is not a short bill. The printed version is 143 pages long. The bill includes about nine different sections and 199 clauses. I hope all hon. members will appreciate that when we get a bill this size, it is difficult for any speech to touch on the substantive matters.

The House will often deal with the issue of relevance in debate. I have heard people say that we are debating the budget from last March and they start talking about virtually every item in the budget. However, subsequent to that we have had one implementation bill and this is the second. These implementation bills are intended to put the technical mechanics in place so the representations in the budget are operable. I want to get into a few of those.

I want to advise those who are interested that this bill deals substantively with amendments to the Income Tax Act and related acts in part 1. Part 2 deals with amendments to the Air Travellers Security Charge Act. Part 3 deals with amendments to the Federal-Provincial Fiscal Arrangements Act, which is extremely important in terms of funding of provincially delivered programs and services. Part 4 deals with amendments to the Bank Act and the Financial Consumer Agency of Canada Act. Part 5 deals with amendments to the Canada Disability Savings Act, which we discussed substantively at committee. Part 6 deals with amendments to the Customs Act. Part 7 deals with amendments to the Federal-Provincial Fiscal Arrangements Act. Part 8 deals with amendments to the Office of the Superintendent of Financial Institutions Act. Bill C-47 is a very broad-based bill.

When we are dealing with a budget implementation bill, we are often not talking about anything in the bill in terms of specific amendments to legislation. We tend to drift back to the budget itself and some of its consequences.

The parliamentary secretary, on behalf of the government, led off the debate on the bill. He did not talk much about the budget implementation bill but rather he talked about the budget. This opened up the debate to virtually everything to do with the budget. That is why some people who are interested in the proposed changes to some of these acts have been somewhat ignored in the debate. To rectify that, I want to deal with the proposed amendments to the Income Tax Act and related acts. It is an area in which I have some experience.

The first important area has to do with benefits entitlement and shared custody. Under the Universal Child Care Benefit Act, an eligible individual is defined in subdivision a.1 of division E of part I of the Income Tax Act. If I repeat a lot of these references, people will not understand, so let me just say it is defined in the act. The act currently provides for only one eligible person for a given period.

Under the current provisions, the Canada Revenue Agency has rotated benefits for the universal child care benefit, the Canada child tax benefit and the GST-HST credit for families with shared parenting arrangements on a six month payment basis. The budget proposed to allow two eligible parents in a shared custody arrangement to receive child benefits, including the UCCB. I support that change. It makes sense. A lot of people are at a disadvantage by having just one eligible recipient where shared custody would be a more equitable situation.

The second item under the income tax amendments has to do with the rollover of RRSP proceeds to an RDSP, or registered disability savings plan.

The existing registered retirement savings plan rollover rules are extended under the bill to allow a rollover of a deceased individual's RRSP proceeds to a registered disability savings plan of a financially dependent, infirm child or grandchild. The reason that is important, and why I support it, is that on death of the holder of a registered retirement savings plan, if there is not a spouse for which the act already provides a tax-free rollover, it would then collapse and be taxable fully in the year of death.

If an RRSP collapses all in one year and has a tax liability, in many cases most of that would be taxed at the highest possible rate. It means the estate of the person involved would pay much more tax now than it would have paid had he or she not bought the RRSP in the first place. This would allow that investment in the RRSPs to rollover to a disabled person, financially dependent infirm child or grandchild. It would in fact help families. Members will know that anything that helps families will have my support.

The third area under the Income Tax Act has to do with charities and the disbursement quota form. The finance committee presently is looking at Bill C-470, which tries to put transparency through the expenditures, particularly the human resources costs and salaries of executives of charities. Concerns have been raised that some charities pay exorbitant amounts of compensation to people with the amount of the moneys actually go for charitable purposes being substantially reduced, and that is a problem.

Interestingly enough the changes made in Bill C-47, and I do not know enough about individual cases, I suspect will help some and hurt others because it deals with a disbursement quota.

First, the disbursement quota reform for registered charities, specifically the charitable expenditure rule, would be repealed. Second, the capital accumulation rule would also be modified to increase the threshold from $25,000 to $100,000 for charitable organizations. Third, the anti-avoidance rules would be extended to situations where it could be reasonably considered that the purpose of the transaction was to delay unduly or avoid the application of the disbursement quota. Finally, measures would be implemented to ensure that transferred amounts between non-arm's-length charities would be used to satisfy the disbursement quota for only one charity.

The problem I have with that section is it goes in a different direction than Bill C-470 in terms of the transparency and the concern that there be moneys. In fact, it would allow the charity to have a higher threshold of making disbursements. It would also allow certain charities to accumulate money for capital investments, for instance, if they wanted permanent facilities or core funding for certain programs.

I can understand that in terms of, for instance, hospitals, hospital foundations. I am not sure if the same rules would not have maybe unintended consequences with regard to other charities that are not in some of those key areas of universities or hospitals or organizations like the Cancer Society or the Heart & Stroke, et cetera. There are 85,000 registered charities in Canada. When we start to play around with the disbursement quota rule, somebody will fall through the cracks and there may be some unintended consequences. It will be up to us to monitor the situation.

The next area under part 1 has to do with the employee stock options. There are various methods in the Income Tax Act to deal with the treatment of employee stock options.

First, there is an amendment that would preclude double deductions of both the employee and the employer in respect of the same stock option benefit, which would make sense. The stock option agreement to a non-arm's-length person results in an employment benefit at the time of disposition, and, again, that makes some sense.

A further measure would repeal the tax deferral election. As well, the existing tax withholding requirements would be clarified to ensure that the amount in respect of tax on the value of the employment benefit associated with the issuance of the security would be required to be remitted to the Canada Revenue Agency by the employer. Again, administrative and substantively I agree with that.

Finally, the last measure introduced is a special elective and relieving tax treatment for taxpayers who elected under the tax deferral election introduced in budget 2000 to defer taxation of their stock option benefits until the disposition of the options securities. That appears to be a sound approach.

Section (e) under part 1 deals with accelerated capital cost allowance for clean energy generation. At the finance committee's prebudget hearings, which we have recently concluded, the issue of accelerated capital cost allowance came up frequently. It is an opportunity for businesses to write off, for tax purposes, desirable investments on an accelerated or quicker basis so they pay less tax, which allows them more cash flow to meet their obligations or, more important, to reinvest and continue to roll over their assets to ensure they have the assets, the machinery, the equipment and the like to be more efficient in their work.

Accelerated capital cost allowances is with us to stay. It has been used as a tool rather than a tax cut or something like that. This is effectively a tax deferral scheme. If the businesses keep doing it, it effectively represents a permanent reduction in taxes that could carry forward as long as they continue to invest in the capital, equipment and machinery. I agree with it as a tool and it is very much supported by those who are involved in equipment.

In this one, the section deals specifically with clean energy generation. With regard to our environment and addressing greenhouse gas emissions, et cetera, this is a positive development, which I support.

Section (f) is capital cost allowance for television set-top boxes. I do not know if anybody will understand that, but the capital cost rate for satellite and cable set-top boxes that are acquired after March 4 and that have neither been used nor acquired or used before March 5 will be increased to 40% to better reflect the useful life of the assets. This is effectively a correction of a rate, which is already available in the tax act. As it indicates, it is simply to reflect the fact that these assets have a very short lifespan or utility before substitutes become available and desirable by consumers. It allows them to write them off over a short period of time.

Section (g) under part 1 deals with the Canadian renewable and conservation expenses to do with principle business corporations. The definition of that will be amended to clarify that flow-through share eligibility extends to corporations the principle business of which is one or any combination of producing fuel, generating energy or distributing energy. I agree with that. It is a constructive move to make that change.

Section (h) deals with international financial reporting standards. It gets a little too technical, so I will not go to go there. Having looked at it, there is a five-year transition rule, and I think it works.

There is a sub-item on that. Amendments to the Canada pension plan and the Employment Insurance Act and the Income Tax Act will be made to provide legislative authority for Revenue Canada to issue online notices where authorized by a taxpayer. Again, this is an efficiency in terms of the process.

In addition, part 1 of the bill implements a number of other income tax measures. Employee life and health trust is new. The working income tax benefit will be amended for 2009 to $925 for single individuals with no eligible dependents and to $1,680 for individuals with at least one eligible dependent.

The amendments in this bill will ensure that the working income tax benefit amounts will continue to be indexed to inflation on an annual basis. Thank you, Mr. Minister. I think it is an important change.

There are some technical amendments to the tax-free savings account. I want to comment more fully on that, but I will move on.

Finally, there are the labour-sponsored venture capital corporation rules. Very few people will understand very much about that, but there are consequential amendments related to the tax-free savings account, which I want to address now.

First of all, I certainly support the tax-free savings account instrument, which allows Canadian residents who are 18 years of age or older to be eligible to contribute up to $5,000 annually in a tax-free savings account. The contributions are not tax deductible, but the investment income earned in a tax-free savings account will not be taxed. Since the contributions were not deductible when deposited, there will be no tax when withdrawn.

It is a good instrument to save money if one has money. This is of benefit certainly to middle and higher income Canadians who have cash that they are presently investing and paying income tax on the investment income. Now there is an instrument where they, their spouses and kids can have tax-free savings accounts. All of a sudden, formerly taxable investment income is going to be growing up in non-taxable instruments.

Eventually, I suppose, the taxes will ultimately come when that money is taken out and disbursed for consumption purposes and it works its way through the system. However, it is a leakage of tax revenue to the government, no question about it.

I raised my concern on this with the finance minister and officials last Tuesday. It has to do with the number of amendments they have to make. This is a simple program. One can put up to $5,000 a year in there, and on any income earned on eligible investments, one will not have to pay any tax ever.

We have amendments to make the income attributed to deliberate overcontributions and prohibited investments subject to existing anti-avoidance rules. We also want to make any income attributable to non-qualified investments taxable at regular tax rates. As well, we want to ensure that withdrawals of deliberate overcontributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions or related investment income from a tax-free savings account would not create additional tax-free savings account contribution room. Finally, we want to effectively prohibit asset transfer transactions between tax-free savings accounts and other accounts.

It is a simple program, but the amendments that are being made say to me that the crafters of this and all the levels of care and due diligence that took place in the process somehow did not consider what would happen if people made overcontributions. The government did not consider that if people made an overcontribution, a penalty of 1% was actually a lower amount than what they could earn on those investments, so 1% was not a deterrent. People realized that they could invest at 3%, and if it cost 1% in penalties, they would still make 2% on something that is not going to be taxable anyway. It is getting around the rules.

How is it that the government could not deal with the issues of non-qualified investments? Obviously there are some. It could not deal with deliberate overcontributions, prohibited investments, non-qualified investments, or amounts attributable to swap transactions and what happens if this is done and what are the consequences.

The point I made there and I will make again today in the House is that I did not get a strong comfort level that there was rigorous due diligence and careful thought given to this particular program. With all the things that the government missed in a very simple program, in my view, if the little things are not done well, there is not a great confidence level with regard to the larger items.

[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.

[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]

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.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you, Mr. Chair. Thank you, Madam Guarnieri.

I just have a comment and then a proposal that I would put to the committee when it goes to clause-by-clause.

First of all, I support the intent of this bill. I support your proposed amendments. I think it would shed much-needed transparency and light on the compensation issue regarding many charities in Canada.

My concern is with related corporations. In recent years, these for-profit share capital corporations have emerged that are very tightly and closely related to federally registered charities. These are for-profit enterprises that are not subject to any public reporting requirements, as they're often CCPCs, Canadian-controlled private corporations.

What they are doing is using the goodwill, the good name, of federally registered charities in order to promote their for-profit enterprises. Their give-back to the charity is that they somehow apportion a portion of their profits—give a portion, a percentage of their profits—back to this charity. It's not clear how much of those profits they're giving back in terms of their overall revenue base and what the compensation is of the senior executives who work for these for-profit corporations.

So I would propose to you that Bill C-470, in clause 1, be amended, by adding after line 18, the following: the name, job title, and annual compensation of the five executives or employees with the highest compensation, provided it exceeds $100,000 annually, of any corporations related to the registered or previously registered charity. What that would do is shed transparency on very closely related share capital corporations whose executives might be profiting from the goodwill of a close association with a federally registered charity.

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

Thank you, Mr. Chair.

I would like to begin by thanking committee members for participating in the study of Bill C-470, which would bring about more transparency with regard to the salaries paid by charities.

Mr. Chairman, when I introduced Bill C-470 last fall, I genuinely believed it was a mere accessory to motherhood and apple pie. I doubted anyone would actually argue with the idea that Canadian charities should have the same type of salary disclosure that American charities already have, that all Canadian public corporations like Rogers and Bell have, and that most provincial governments already have. The fierce resistance made me wonder if I had innocently stumbled onto something.

I met with countless charities and with even more donors and started asking why transparency could be so frightening to so many. The small measure of transparency my bill seeks is the disclosure of the names, titles, and salaries of just the five highest-paid employees. Charities would still report ranges of the top ten, as they do now, but the top five would be fully disclosed.

A second prong of my bill adds to the minister's long list of rarely or never-used powers to actually regulate charities. It would allow the minister the discretionary ability to deregister a charity if it pays an executive more than a quarter-million dollars in a year. While lately the media are full of reports of abuses by charities, I should say at the outset that there are many excellent charities in this country.

One is the St. Peter's Parish Dominican Relief Fund. It delivers hundreds of thousands of dollars in aid every year to Haitians living in the bateyes, in the Dominican Republic. Father Michael Corcione, Dr. Dario Del Rizzo, and a team of volunteers set up medical clinics, provide medical care, medicine, and clothing, and handle fundraising, logistics, and program delivery without spending a single dime in administration or fundraising costs.

At the other end of the scale is World Vision. It collects over $350 million in donations annually, spends less than 20% on fundraising and administration, and pays its CEO $188,000. The largest issuer of tax receipts in Canada appears to pay far less than the discretionary cap suggested by this bill. Tiny charities and massive charities can both put the cause first and keep salaries in check.

In the middle are charities as small as 2% of the size of World Vision that pay much more to executives and spend twice or three times as much on administration and fundraising. Transparency itself will not cure self-interest and the temptation to take home more charity in pay and perks; however, it will provide some measure of restraint and donor awareness. Better-run charities may benefit from donations redirected from those that burn more than half of every dollar on fundraising companies and administrative salaries, where the president hires himself as a consultant, where nepotism pays six-figure salaries to spouses and children, where the executives pocket donated prizes, or where the charity helps facilitate a $2.5 billion tax fraud by issuing inflated tax receipts through gifting tax shelters.

To see why salary disclosure is so important to donors and so threatening to executives, let's look at the current state of disclosure. You will have read in The Toronto Star that the Oshawa Hospital Foundation paid its CEO $200,000, five-figure benefits, $10,000 a month in consulting fees, and more. All of this would have been a surprise to anyone looking at the return posted on the CRA website, which says the charity did not indicate that it incurred expenses for compensation of employees during the fiscal year. The Toronto Star total adds up to about $350,000. The CRA publishes “zero” for 2009 and previous years.

You can get classified Pentagon documents on WikiLeaks easier than you can find compensation information about charities.

I would argue that early compensation disclosure would have prevented the Oshawa situation from turning into a crisis, as there never would have been a need for an investigative reporter to dig out the truth.

Mr. Chair, with the current state of disclosure, 88% of donors don't bother to look at the CRA site and the confusing and misleading information posted there. They don't have the time to figure out the shell games. They rely on the only real regulators of charities, the media: the Toronto Star, The Globe and Mail, and CBC, to name a few.

The CRA was kind enough to provide data on donors, donations, fundraisers, and management/administration costs. I've circulated some tables for your perusal. You will see that since 2000, donors have remained flat, so high-priced fundraising talent is not attracting more donors. Charitable receipts are growing barely faster than the rate of inflation, barely more than 1% a year on average, but fundraising costs defy gravity. For every percentage point increase in donations, fundraising costs rose three and a half percentage points. Even after accounting for inflation, fundraising costs rose more than 50%, three and a half times as fast as donations.

Management and administration costs marched skyward as well, rising even faster than fundraising costs, so secrecy has certainly been a booming success for fundraisers and executives in terms of pay. It is not much of a success for frugal charities that have to spend more and more to maintain their revenue against competition that can spend 50¢ of every dollar on fundraising and administration, without sanction or salary disclosure.

Let's look at the situation from the perspective of people who need the money to reach the cause, people hoping for a cure or a helping hand. Putting a personal face on it, if you will permit me, let's take a look at the MS Society. I know that donors and sufferers are disappointed to find out that the MS Society is spending more on fundraising than research. Fundraising, management, and administration together exceed research by 75%, and exceed the total spent on all charitable programs by 20%, according to the CRA listing. Despite this, the MS Society is one of the better performers among medical charities and may just be a victim of the inflationary reality created by the fundraising industry, which you will hear from later.

Charities have become a filter that too often shrinks donations by half and leaves federal and provincial taxpayers paying for the bulk of actual programs through credits and deductions. The question my bill asks is whether secrecy is working. Are unlimited and undisclosed salaries for executives bringing down the costs or driving them up? Should Canadians continue to have to look to U.S. registrations to find out how much Canadian charities are paying themselves?

You will hear from charity executives themselves. You will hear from their lawyers and private fundraisers who rely on them. What do Canadians think? What do donors think?

I asked Pollara to ask 2,000 Canadians, and here is what they found. Only 12% said they had looked at the CRA website, so there needs to be another way to bring light to blind generosity.

When asked, do you agree or disagree that the five highest-paid executives from all Canadian charitable organizations should be required to disclose their salaries, 83% agreed and 11% disagreed.

When asked, are you aware that some charity executives earn more than $250,000 a year, 68% said no. Do they think there should be a limit? Sixty-eight per cent said yes; 22% said no.

What limit do they think is appropriate? Of those who supported a cap, 82% said it should be $100,000 or less. The median answer was $75,000. Only 3% of donors thought the cap should be higher than $250,000. So that is the best sense as to what donors are saying at large and might be saying to you. But alas, you will hear that the minister might deregister a hospital or someone might pay more than the limit for a brain surgeon. You might hear any number of other red herrings from people who know well that the minister already has the grounds to deregister countless charities on the basis of disproportionate private gain, and hasn't done so. He's hardly going to deregister a hospital, university, or orchestra for paying doctors, professors, or conductors.

Nonetheless, I have agreed to delete the part surrounding the cap, because I don't want that tangential debate to be the shield that keeps exorbitant salaries secret.

I have received assurance from the parliamentary secretary that the government will explore the murky issue of contract fundraisers and fundraising companies. Perhaps we will finally see full disclosure of all fundraising salaries earned from donations that never make it to the cause.

Moreover, I don't want anyone to be able to hide a $1 million salary behind a secretary's privacy concerns, as if they're worried about the privacy of low-paid workers. So I have offered another amendment to create a disclosure floor of $100,000.

In conclusion, we now have a bill with a single, unambiguous purpose of delivering transparency for high-paid executives. I believe that Bill C-470 can be a small first step to reforming the charities sector into a transparent and efficient funding vehicle for good causes. I know you will need to do more.

The salaries of fundraisers and the profits of fundraising companies need to be disclosed. Fundraising costs and CEO salaries need to be disclosed right on the tax receipt or other means, as Blaine Calkins suggested in the House of Commons. Tax receipts ought to be reduced by the amount that fundraising and admin costs exceed 25%. Donor reaction would bring fundraising costs down in a frantic hurry—to the benefit of every cause, cure, or vital need.

Finally, the minister should have the same powers as the securities regulator to ban executives who hide costs, funnel funds to related companies, or participate in scams like gifting tax shelters that robbed Canadian taxpayers of over $2 billion by inflating receipts. With these measures in place, the donor dollar would no longer go through more pockets than a dry cleaner, and perhaps charities would deliver a lot more charity.

Thank you.

[The Chair, Conservative, James Rajotte]

I call the 49th meeting of the Standing Committee on Finance to order.

Our order today, pursuant to the order of reference of Wednesday, April 21, 2010, is Bill C-470, An Act to amend the Income Tax Act (revocation of registration).

We have two panels with us at this meeting, or two one-hour sessions. In the first panel, from 3:30 to 4:30 p.m., we have our colleague, the Honourable Albina Guarnieri, member of Parliament for Mississauga East—Cooksville, and the sponsor of this private member's bill.

Welcome to our committee. It's a pleasure to have you here today. We have the first hour dedicated to your opening statement and questions from members. I believe you have an opening statement of around 10 minutes. We want to welcome you to the committee and have you begin at any time.

[Paul Szabo, Liberal, Mississauga South, ON]

I have more questions, but I do want to raise that the member for Mississauga East—Cooksville has a bill with regard to charities, Bill C-470. I suspect somebody on the panel is aware of it. No? Wow.

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

What date do you need our witness list by, on Bill C-470?

[The Chair, Conservative, James Rajotte]

Thank you.

We're well over time, Mr. Brison, unfortunately.

Thank you for your presentations and your answers to our questions.

If you have anything further you wish the committee to consider, we will be considering recommendations after the break week. Please submit your comments to the clerk. I will ensure all members get them. I want to thank you all for being here this morning.

Colleagues, just very briefly, please take a look at the projected calendar and the witness list for Bill C-470. If you have any additional witnesses you wish the committee to consider, we can certainly do so, but perhaps tomorrow we'll just briefly discuss the witness list. I would like you to have a look at the list and perhaps prioritize from each of your points of view.

I see the roll of the eyes of Mr. Mulcair. That means he agrees with me.

Thank you.

Monsieur Carrier.

[The Chair, Conservative, James Rajotte]

If there's anything further you have on it, I'd certainly appreciate it.

My final point is for Ms. Pearson. As two of our colleagues mentioned, private member's Bill C-470 deals with the charitable sector. We hope to deal with that at the end of November, beginning of December. I know we have a lot of witnesses who want to appear on that bill, but I just want to highlight that for you. We have to report it back to the House on December 17.

[Vaughan Dowie]

I think you are talking about Bill C-470. Canadian universities say unanimously that this bill should not apply to universities. Universities have staff and top researchers who sometimes make more than $250,000. We are making representations to the four political parties so that everyone is aware of our situation.