Thank you, Mr. Chair.
Thank you to the committee for inviting us all to appear.
I was also a member of this national advisory board, so I won't repeat what Tim and Sarah have so eloquently expounded, but I would like to drill down a little bit into why we came up with some of the recommendations we did.
In our tax laws, there is a built-in mindset that has the creation of wealth in a parallel universe to the dispensing of it for charitable purposes. The idea that the principles of hard-headed business rules could be adapted to and incorporated into regular activities of a thing we call a registered charity or a charitable foundation, or that profitable ventures could assist in achieving the objectives of a not-for-profit organization, is foreign to our current legislation.
Let me give you an example of how this works. I think you will find this so silly that when you are drafting legislation you will pay some attention to correcting this lacuna in our tax laws.
A charity is supposed to provide benefit to the public at large or to a substantial segment of the public. It may not provide a benefit to private individuals. If a charity were dedicated to providing skills training to the chronically unemployed, that would be okay so long as the charity did not actually contact a series of specific employers, ask them what skilled jobs they were having trouble filling, and work with them to develop a program through which those very skills could be delivered to a population being assisted, since if they do the latter they are providing a benefit to a handful of employers because the program would be producing workers who would be filling an actual demand and become gainfully employed when the course is completed.
This is actually the true story of a foundation that attempted to engage in that activity and found itself offside because charitable activities cannot be directed to specific people. Yet what's the point of skills training that is done without reference to the actual employability of the people being trained because of the failure to contact the employers and work with them to develop a course that would work?
Sarah has already covered the issue of charities losing their charitable status if they engage in a business activity other than a related business that is run by volunteers to the extent of 90% or that is linked and subordinate to a charity's purpose. A hospital can run a gift shop or a parking lot and apply their revenues to the hospital's budget, but it would run afoul of our laws if the commercial activity were more substantial or ambitious, even if the proceeds were all expressly directed to the good works for which the charity was founded.
There is a very good reason for this; it's the concept of horizontal equity. Charities are not taxed, and thus it would be unfair to a taxable enterprise to have to compete in its line of business head-on with a charity when the private entity pays income tax and other taxes.
The report indicated a solution, which Sarah has covered, suggesting a hybrid standard whereby business activities beyond those currently tolerated by our system would be taxed, subject to certain de minimis rules, but the charity would not be exposed to losing its registered status.
What we have to get over here is the mindset that charity is something very different from business, and that business can make a profit, and if it chooses to use some of the proceeds of those earnings for charitable purposes, that's all very nice.
There is really no reason charities cannot be motivated by seeking to engage in commercial activities, subject to the protections for the private sector participants in those activities, in furtherance of their aims. I see this as taking some of the burden off government. I'm not sure my colleagues emphasized this as much as I would have liked. I agree that this is not intended at all to replace government funding for certain non-governmental organizations' charitable activities or public welfare activities, but in fact it certainly does take some of the burden off government if, alongside government, there can be private sector entities that are investing in social ventures with predictable, measurable outcomes, and they are doing this using private sector funding.
Tim made an allusion to outcomes funds. This comes from the precedent in the U.K. where in 2005 they established a commission on unclaimed assets and recommended that unclaimed funds in dormant bank accounts be directed to a social investment bank to provide seed capital and loan guarantees to charitable and voluntary sector projects. it has since been put into practice.
Let me give you one example of how this was, in fact, applied in the U.K. In 2010 they issued a series of bonds called the Peterborough prison bond. Under this bond, the government pays, out of savings that result from the costs of incarceration, which are reduced, a return to private sector investors that escalates according to the rate of reduction in recidivism of a defined population of paroled and released prisoners achieved by the plan's managers.
Here is a situation where the government has an interest to lower the cost of keeping people in prison. Preventing recidivism is a good way to do that. The private sector investors buy a bond, and the government promises them, from an outcomes fund that it established out of these unclaimed bank deposits, a return if they reduce the recidivism rate by a certain percentage more than a control group does.
Interestingly enough, it turns out that the first batch of prisoners had a recidivism rate lower than that of the control group but not low enough to trigger the payment from the government outcomes fund created by these unclaimed bank deposits. That's a way in which government and the private sector can work hand in hand to do socially good things while seeking a profit, but having no profit guaranteed unless the results are produced. This is a change to the parallel universe that we now live in.
The unclaimed bank deposits were something that worked in the U.K. There, apparently, a dormant bank account just lies dormant forever. Here, after a certain number of years—I believe it's 10 years—they are translated to the Consolidated Revenue Fund. That would represent an actual cost to the government. That's why we have not necessarily recommended that particular source be used to create the outcomes fund.
You can see immediately how an outcomes fund is not just a claim on government but also a benefit to government. When you mobilize private capital for public good, you reduce the pressure on government and enable them to do, perhaps, more with their available funds. There is no part of this that recommends government do less.
That is my submission for now.
Thank you.