A. INTRODUCTION
The Charitable Gifts Act – what
is it? Perhaps more importantly, why is it?
The Charitable Gifts Act is administered
by the Ontario Public Guardian and Trustee and is concerned
with the operation of business activities by charitable
organizations. It limits charitable organizations from owning
businesses or undertaking business activities. It is a short
statute that is primarily concerned with ensuring that charitable
organizations do not carry on business. It discourages charitable
organizations from placing funds at risk in the capital
markets. For example, a charitable organization may not
own more than 10 per cent of the shares of a business. If
the charitable organization receives a gift or bequest in
excess of 10 per cent, the directors or trustees are to
dispose of the surplus within seven years in an orderly
manner.
B. THE ACT'S HISTORY
The statute was initially enacted in
1949 in Ontario. The Hon. Leslie M. Frost, then Treasurer
and later Premier, provided three reasons for introducing
the limitations. Two were related to succession duties and
taxation – the province had an interest in encouraging people
to donate portions of their estate to charities and in ensuring
that charitable purposes were being carried out by organizations
that were tax exempt. The third rationale was to ensure
that there were safeguards in place so that the charitable
intent is carried out. Mr. Frost was of the view that a
problem arises when a business either in its entirety or
a controlling interest is given to a charitable foundation
or trust.
What prompted this legislation? Joseph
E. Atkinson was the publisher of the Toronto Star for almost
50 years. At the time of his death in 1948, the shares of
the Star were valuable. In his will, shares were donated
to the Atkinson Charitable Foundation, which had been established
by Mr. Atkinson in 1942. It is assumed the fact that the
Star had a “liberal bent” and the government, about which
Mr. Atkinson and the Star were critical, was conservative
is irrelevant to the question of “why this legislation?”
C. THE ACT TODAY
Regardless of the reason for the Charitable
Gifts Act, there are a number of problems with the legislation.
The legislation is not clear and indeed, the Ontario Law
Reform Commission (OLRC), in its 1996 report entitled “Report
on the Law of Charities,” commented on the obscurity of
the language. It is far from clear what the scope of the
statute is. For example, what amounts to an “interest” for
purposes of the legislation? What is considered to be a
“business”? What types of transactions are covered? What
types of legal entities are covered? Even the Public Trustee
commented in 1983 that the legislation requires clarification.
Does the Charitable Gifts Act
require just clarification? Or should it be repealed? Is
there a continuing role for the statute? Does it fulfill
any public policy purpose? If so, what is that public policy
purpose? The Ontario Law Reform Commission questioned its
utility and appropriateness in the 1996 report. The OLRC
recommended the repeal of the legislation and its replacement
by more appropriate legislation that would govern investments
in businesses by charities.
There may very well be public policy
purposes that justify some prohibition or limitation on
ownership of businesses. For example, it is likely a legitimate
public policy to ensure that charitable organizations carry
out, over all, charitable activities and are not merely
a shell for business activities. Charities do have privileges,
such as exemption from many taxes. There is potential for
abuse. But charities also have a legitimate need to earn
revenues to carry out their charitable activities and to
advance their charitable purposes. Charitable activities
take money.
Charities may also be involved in legitimate
business activities that are related to their charitable
activities. For example, a charitable theatre may rent out
its costumes to earn revenue to buy costumes for the next
production; a social service agency that provides training
may operate a restaurant using the trainees where the money
from sales to the public is used to support the training
programs. These “business activities” are related to the
charitable objects. But the approach also exposes the charity
to liability. A business corporation owned by the charity
may be a legitimate way to carry out the charitable activities,
raise funds for those charitable activities and limit exposure
to risk by the charity. And, as a business corporation,
the “business” would be subject to taxation.
D. CONCLUSION
The issue of charities owning businesses
is not a simple one. There are likely other legitimate public
policy reasons to govern or regulate charities owning businesses.
The federal Income Tax Act places limitations on
business activities by registered charities. But after 60
years of the Charitable Gifts Act, it is time to
reassess whether the approach taken in 1949 remains the
appropriate one and achieves a balance for the 21st
century and its realities. The fact that no other province
has followed Ontario’s example with their own Charitable
Gifts Act is telling.
