The Hudson Institute has recently released The Index of Philanthropic Freedom 2015. The survey looked at 64 countries and “Through these expert opinion surveys, in-depth information was collected on three main indicators: 1) ease of registering and operating civil society organizations; 2) tax policies for deductions, credits, and exemptions; and, 3) ease of sending and receiving cash and in-kind goods across borders.” Canada scored 4th in total score amongst the 64 countries.
The report provides an overview of each of the 64 countries. It discusses how in many countries there are increasingly difficult environments for non-governmental organizations. I have really been impressed with some of the work of the Hudson Institute in the past dealing with remittances.
Here is what the report had to say about Canada (which is not really accurate by you can judge for yourself):
Though the relationship between the current Harper government and certain CSOs, most notably those concerned with environmental causes, has grown increasingly strained since 2013, Canada nonetheless provides a very conducive environment for philanthropic activities. Provided they refrain from engaging in political activities, Canadian CSOs are free to pursue an essentially limitless range of objectives. To help them do so, and depending on the province, CSOs can benefit from a diverse array of tax incentives, including exemptions from income, property, and excise taxes. Furthermore, its deduction process, while complex, is comprehensive and allows all donors to claim deductions as though they were in the top marginal bracket. Canada’s 75% of taxable income ceiling for deductions is also one of the highest in the world, and even this cap is largely a formality that is regularly exceeded.”
Here are the countries with the top 10 scores.
What was interesting to me was that only 2 countries scored 5.0 out of 5.0 in terms of tax score. Those countries were Canada and the US. Not sure why the US got the same score as our tax incentives are more generous than the US tax incentives, but I guess we should be neighbourly with the US and accept a tie.
Here are the 7 questions that were asked to rate the various countries:
To what extent can individuals form and incorporate the organizations defined?
To what extent are CSOs free to operate without excessive government interference?
To what extent is there government discretion in shutting down CSOs?
To what extent is the tax system favorable to making charitable donations?
To what extent is the tax system favorable to CSOs in receiving charitable donations?
To what extent is the legal regulatory environment favorable to receiving cross-border donations?
To what extent is the legal regulatory environment favorable to sending cross-border donations?
Canada scored 3 out of 5 on Q7 dealing with "To what extent is the legal regulatory environment favorable to sending cross-border donations?". This is what largely dragged Canada down in terms of the Hudson score. What is interesting is Australia scored 3.5 out of 5 on Q7. As the difference between Canada and Netherlands which was #1 was only 0.2 out of 5 there is no question that the decidedly questionable scoring of Canada in the area of foreign activities meant that Canada lost its rightful place as the #1 place to carry out NGO activities!
By the way in case you are wondering about Australia and its 3.5 score on foreign activities see this note from the Hudson report:
“AUSTRALIA Australia’s philanthropic environment is decidedly disjointed. On the one hand, Australia maintains the region’s most favorable environment for the operation and registration of CSOs. With registration costing between $75 and $380 and taking between two and fifteen business days to complete, the barriers to CSO creation are lower than in most other countries. Similarly, Australia also maintains a flexible tax incentive system, one which allows donors to contribute cash, property, equities, or goods, and to spread such donations out over multiple tax years. While the Tax Office’s strict control of which groups are eligible to receive tax deductible donations is concerning, neither corporate nor individual donors are subject to deduction ceilings. On the other hand, Australia has a variety of polices that are not necessarily designed to deter cross-border flows but do exactly that. Although its reporting requirements for foreign currency transfers are not out of line with other developed countries, its requirement that tax-exempt nonprofits must keep their operations principally in Australia is a barrier to philanthropic activities. The Government’s Overseas Aid Gift Deduction Scheme technically provides an avenue for Australian groups to retain their exempt status while working overseas. The scheme’s onerous requirements, however, are such that less than a quarter of one percent of eligible groups pursue it.”[my emphasis]
In contrast almost 5 percent of Canadian registered charities declare that they do foreign activities. There are 80-100,000 Canadian non-profits that are not registered charities that can essentially undertake unlimited foreign activities and grant making in any way they wish as long as they are not conducted for the purpose of profit. Furthermore, Canadian registered charities spend about $3 billion per year on foreign activities and a Canadian charity can spend 100% of its income or assets on foreign activities. Unlike Australia which requires every group doing foreign activities to receive the approval of AUSAID, which is the equivalent of DFATD, Canada has no such requirement and Canadian charities with broad enough objects can pursue such foreign activities.
Canada has requirements that a Canadian charity maintain direction and control over transfer of funds to foreign intermediaries. Some people don't like the direction and control rules and view them as an impediment to foreign activities. However there is nothing stopping them from operating as a non-profit that is not a registered charity and then they don't have to comply with these rules. Ultimately if you provide extremely generous tax subsidies there will have to be some rules around what can be done with the funds. The US has requirements for “discretion and control” and some private foundations need to exercise "expenditure responsibility". The UK has requirements that charities not act as a conduit and that directors are fiduciaries over the money they are sending abroad.
Furthermore, Canada provides groups that advance religion with charitable status and they are free to undertake foreign activities including proselytizing in foreign countries. This may or may not be a good thing but it certainly should factor into the Hudson Institute’s “Philanthropic Freedom”. Canadian individuals and charities can make gifts to about 600 foreign prescribed universities without any direction and control and the Canadian individuals get the same tax benefits as when they donate to a Canadian charity. Canada provides the same lucrative tax incentives for donation to charities that will be spent inside and outside of Canada. It can result in tax support in certain cases up to 65% of the value of the donation. It does not make sense to say that the Australian system provides more philanthropic freedom when it comes to foreign activities than Canada.
Here is some further information on Australia from www.probonoaustralia.com.au and I agree with the comments of Professor Myles McGregor-Lowndes:
Professor Myles McGregor-Lowndes from the Queensland University of Technology contributed to the report, providing an insight into the Australian philanthropic sector.
McGregor-Lowndes gave a poor review of how the regulatory environment restricts cross-border donations.
“While there are few restrictions on cross-border philanthropic flows - apart from being unable to claim income tax exemption or donation deductibility status - traditionally Australian Nonprofit organisations cannot be income tax exempt unless they are operated principally in Australia, are prescribed as exempt in the Income Tax Assessment Regulation 1997 or are Deductible Gift Recipients (DGRs),” McGregor-Lowndes said.
McGregor-Lowndes said the process of becoming an overseas aid fund through AusAid was lengthy and some lawyers were advising their clients not to pursue endorsement under this category.
“This is appears to be reflected in the numbers. As of 31 October 2012, there were 218 overseas aid funds, representing just 0.75 per cent of all active DGRs,” he said.
The report said philanthropists faced “onerous” reporting requirements.
“Although its reporting requirements for foreign currency transfers are not out of line with other developed countries, its requirement that tax-exempt nonprofits must keep their operations principally in Australia is a barrier to philanthropic activities,” it said.
“The Government’s Overseas Aid Gift Deduction Scheme technically provides an avenue for Australian groups to retain their exempt status while working overseas. The scheme’s onerous requirements, however, are such that less than a quarter of one percent of eligible groups pursue it.”
In June Philanthropy Australia released its submission to the Government’s Tax Discussion Paper as part of the Tax White Paper Process, in which it called for the introduction of “an enhanced and simplified taxation and regulatory framework for international philanthropy”.
“Philanthropy Australia believes that enhancing and simplifying the taxation and regulatory framework for international philanthropy would have a relatively small cost to government, in terms of taxation revenue forgone, but could grow the funds available to support important charitable causes in countries within our region and beyond, promote private sector initiatives which support international development and also help support the achievement of Australia’s foreign policy objectives.”
Look at some of the countries that according to the Hudson survey have easier "legal regulatory environment favorable to sending cross-border donations" than Canada at 3.0 (and you wonder about the adequacy of the rankings and the methodology used):
These countries are tied with Canada:
As none of the expert reports are released as part of the survey it is not possible to assess them or what adjustments have been made. Many in the non-profit sector have criticized charity rating agencies when they attempt to rate different charities with grades or stars. I think some similar concerns will exist with this attempt to rate countries and their regulatory environment.
You can read the entire report at The Index of Philanthropic Freedom 2015. Look forward to seeing the next report.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.