Thank you, Mr. Chair.
My name is Miodrag Jovanovic. I am director of the personal income tax division with the Department of Finance.
Thank you very much for your invitation to appear here today before the committee regarding your study of the potential for social finance in Canada.
First, I would like to speak briefly in broad terms about the Canadian taxation and regulatory framework for registered charities in the Income Tax Act as it relates to social finance and social enterprise. I understand that my colleagues from the Canada Revenue Agency will speak in more detail about how they administer the provisions in the Income Tax Act.
Second, I would also like to draw your attention to a measure in the recent budget that responds to recommendations made to this committee.
The rules that relate to charities' involvement in social finance take into account a number of different principles, policy objectives and practical considerations. These considerations include the following:
In Canada, charities are exempt from taxes and are permitted to issue tax receipts for charitable donations for which individuals may claim a tax credit and corporations may claim a tax deduction. This results in forgone revenue and a tax expenditure of about $3 billion annually. This tax expenditure recognizes the charitable sector's important social and economic contributions. The lncome Tax Act provides a set of rules to ensure that tax assisted charitable resources are used to advance the purposes for which a charity has been established. In other words, charitable resources must be used for charitable purposes.
ln this context, the lncome Tax Act aims to strike a balance between allowing charities to engage in business activities, including social enterprise, as a source of revenue while ensuring that charities ultimately remain focused on their charitable purposes and activities.
Most charities can raise revenues directly to support their charitable activities as long as their business activities are directly related to, and subordinate to, the purposes for which they have been created. Where the business activity is closely related to the charitable purpose, it can make sense to integrate the business activities into the charity.
With the exception of private foundations, charities that wish to engage in unrelated business activities can do so by establishing a separate entity, typically a corporation, to carry out these activities. This can be an attractive option for charities since there are few, if any, restrictions on how a corporation's capital is raised and how its assets and revenues are used. Having a separate entity allows the charity to maintain its focus on charitable activities and use its charitable assets towards these activities.
The rules also attempt to provide a level playing field between businesses run by charities which are tax-exempt and businesses that pay tax. Taxpaying businesses, including small and medium-sized businesses could be placed at a competitive disadvantage if charities were able to conduct tax-exempt business activities without restriction.
To re-iterate, this suite of parameters is intended to allow charities to engage in business activities as a source of revenue while at the same time ensuring that charitable resources are not diverted from their charitable purposes.
As mentioned by my colleague from the Department of Employment and Social Development, I would like to discuss briefly a measure introduced in Budget 2015.
The Department of Finance discusses policy issues concerning registered charities with the charitable sector on an ongoing basis. We have been in touch with the charitable sector on social finance for several years. A number of stakeholders have told us that, if charities were permitted to invest in limited partnerships, they would be able to make more impact investments, that is, investments that generate both a social and financial return.
Up to now, charities have not been permitted to hold interests in limited partnerships in most cases because a charity that held an interest in a partnership was considered to be carrying on a business. Charitable organizations and public foundations can only engage in related businesses, with the result that few are in a position to hold interests in a partnership. Private foundations cannot engage in any business activities that prohibited them in all instances from holding interests in a partnership.
Charities have also told us that allowing them to invest in limited partnerships would permit them access to a wider range of investment opportunities to diversify their investment portfolios.
ln light of these recommendations, budget 2015 proposed that registered charities be permitted to invest in limited partnerships subject to certain conditions. This measure is expected to have two benefits. First, in allowing charities to diversify their investments, it will provide them with the opportunity to access a wider range of private market investments, such as infrastructure investments, and by so doing enable them to obtain better returns on their investments. This will in turn increase the resources they have available to fund charitable programs. Second, since there are many social impact investments that are structured as limited partnerships, allowing charities to invest in limited partnerships will enable them to better align their investment portfolios with their charitable purposes, and will potentially make available additional funds for social enterprise projects in Canada.
I would be pleased to respond to any questions the committee might have.
Thank you.