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.