When an organization seeks charitable status and is refused by the Canada Revenue Agency (CRA), the organization may challenge the CRA's decision in court. Our courts, therefore, ultimately decide the legal meaning of charity.
There are three clearly enumerated categories or "heads" of charity: the relief of poverty, the advancement of education, and the advancement of religion. There is also a fourth head of charity – "other purposes beneficial to the community not falling in the other categories" – which is effectively a residual category that provides for purposes not falling within the first three heads.
The Canadian judiciary has taken a conservative approach to interpreting the fourth head of charity. The Supreme Court of Canada in a recent case held that the appropriate place to effect a wholesale modernization of charity law is the Parliament of Canada, so courts will resist the expansion of the fourth head.
B. THE COURTS' ANALYSIS
Judges apply a complex test to analyze whether a purpose is charitable under the fourth head.
Courts begin by considering whether the proposed purposes are an "objectively measurable and socially useful benefit to the public." In other words: does the public as a whole, or a significant segment of the public, benefit from the proposed purposes or is the purpose to convey some sort of private advantage?
The court, however, does not end the analysis with whether there is a public benefit, as the law must view a purpose as charitable. Factors a court will consider in determining if the law regards a purpose as charitable include:
- whether the purposes were previously held to be for a public benefit which the law regards as charitable;
- the scheme of the Income Tax Act (Canada);
- whether an applicant is seeking an incremental change or a broad reform;
- whether the proposed purposes are vague; and
- whether the proposed purposes are exclusively charitable.
Prior court decisions recognizing charitable purposes are therefore helpful to applicants seeking an expansion of the meaning of charity. Below are some of the purposes which have been recognized by Canadian courts as charitable under the fourth head:
- Public works. The provision of internet services in a local community was charitable as it was analogous to the following existing charitable purposes set out in the Preamble: "to repair bridges, ports, havens, causeways, seabanks and highways".
- The benefit of a locality or the country. An organization which developed programs for native people in a province has been considered charitable as it was analogous "to the aid or ease of any poor inhabitants concerning payments of fifteens and other taxes" which was previously set out in the Preamble.
- Health and medicine. A health clinic was held to be charitable as it was analogous to the following existing charitable purposes set out in the Preamble: "the relief of impotent people and the maintenance of sick and maimed soldiers and mariners".
It is also useful for applicants to understand some proposed purposes which were not recognized as charitable:
- Sports. Promotion of amateur athletics is not charitable. The court held that "21% of all non-profit organizations in Canada are sports and recreation organizations, and the recognition of these organizations could have a significant impact on the income tax system."
- Politics. Courts have not recognized political purposes as charitable. Organizations whose purposes are to "sway public opinion on controversial social issues" or advocate change in law are political and therefore not charitable.
- Not Having Exclusive Charitable Purposes / Conveying Private Advantage. An organization that provided assistance to immigrant women by educating them and finding employment for them in Canada was held not to be charitable because the objects of the organization, as written, were not exclusively charitable (the objects included political purposes and overbroad language). The court also questioned whether the benefits to the individual women would constitute a private advantage, which is contrary to the public benefit requirement of charity law.
C. CRA POLICIES
While the courts have the final decision on what is charitable, the CRA issues policies summarizing how it will interpret the fourth head of charity. These policies have expanded the meaning of charity to include, for example, protecting the environment, assisting ethno-cultural communities, and promoting racial equality.
D. RISKS WITH CHARITABLE OBJECTS
The scope of what is charitable under the fourth head is certainly expanding; however, courts have been cautious to only grow the fourth head of charity incrementally, allowing expansion when and where appropriate, but firmly denying it in other circumstances.
As a result, organizations whose proposed purposes do not fit squarely into the three enumerated heads, the existing case law, or CRA's policies on what is charitable under the fourth head of charity should strongly consider speaking with counsel familiar with charity law issues to understand the risks involved and assist with drafting unambiguous, exclusively charitable objects that will satisfy the legal test for determining what is charitable at law in Canada.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.