Transparency for all?
Date: July 2, 2012
Type: Commentary

Starting this past January, the House of Commons Standing Committee of Finance began a series of hearings on tax incentives for charitable donations. Although mandated specifically to deal with donation incentives, the Committee delved into a number of other concerns with charity operations.

By Peter Broder

Starting this past January, the House of Commons Standing Committee of Finance began a series of hearings on tax incentives for charitable donations.  Although mandated specifically to deal with donation incentives, the Committee delved into a number of other concerns with charity operations.

Among the topics that came up for discussion were the political activities of registered charities, the rules around foreign funding, administrative costs, salary disclosure requirements and other obligations with respect to public reporting to promote transparency and accountability.  Interestingly, several Committee members made inquiries not just about disclosure of charities’ internal spending, but about amounts that groups devoted to services that were contracted out.

One Committee member commented that improper payments could as easily occur through outside contracts as through internal spending.  Charities’ dealings with third party for-profit entities is an area that hasn’t seen much regulatory attention in the past, except in the context of tax credit donation scams.

Whether these questions truly represents a move away from the past narrow preoccupation with the internal workings of charities remains to be seen, but it does point to some areas that are little explored in the frequent calls for charities to be more transparent and accountable.

In this context, some consideration might be given not just to payments made by the charity to third parties, but also to other dealings that might occur between for-profits and charities.  In the ubiquitous discussion of the effectiveness and efficient of charities, these arrangements often distort the reported spending on administrative or fundraising by groups.

Those organizations that benefit from sponsorships or unreceipted in-kind support from for-profit firms are able to understate their spending on administration or fundraising and contribute to unrealistic public expectations around what charities ought reasonably to be spending on these functions.  Until the repeal of the disbursement quota tied to receipted revenue, groups that could generate sponsorships, negotiate cause-related marketing agreements or other partnerships with businesses (for example, where a business agrees to underwrite some or all of a charity’s administrative costs) enjoyed a huge advantage in their spending discretion.

Removal of the receipted revenue spending aspect of the disbursement quota has not, however, eliminated the practice of some organizations continuing to promote the fiction that they operate without administrative costs.  Unfortunately, a number of the groups that most egregiously fudge their numbers are those prone to call out other charities for their spending practices. (The groups themselves may not be entirely culpable in this regard, since standard accounting rules don’t compel disclosure of some types of these charity-business arrangements.)

It is important to be wary of over-regulation here.  An onerous reporting requirement could be a disincentive for corporations to sponsor or support charities, and there are legitimate privacy and policy considerations around transactions such as a charity retaining a law firm.  That said, the current practice of heavy disclosure around internal spending with little attention paid to dealings with third parties is an invitation to distorted reporting and creates an unlevel playing field.

In the United States, charities are required to report their top five payments to independent contractors that received more than $100,000 in compensation. Requiring disclosure around sponsorship, underwriting or fundraising arrangements with for-profit entities would create even more transparency.

Looking at this issue more broadly, one reason given for charities needing to be publicly accountable for their spending is the government contribution to receipted giving, since the government foregoes tax revenue on amounts donated.  This rationale for transparency is in line with the requirement in some jurisdictions that employees of government, or of agencies receiving government funding, who receive compensation exceeding a specified threshold, are subject to having their salaries disclosed.

That said, however, it should be remarked that the Scientific Research and Experimental Development tax credit represents a roughly equivalent tax expenditure to the Charitable Donation tax credit and other incentives for charitable giving, without any comparable disclosure being required by recipients benefiting from that measure. Without gainsaying the value of charities having to be transparent about their dealings with for-profit corporations, it is worth asking why they should be treated differently.

This highlights the needs for parliamentarians, as they consider the transparency of registered charities, to be mindful of the discrepancy in how charities are treated in comparison to for-profit entities.  One telling example of this is found in Alberta (which doesn’t have a salary disclosure regime for employees of government or government-funded entities).

Here, the child care sector is composed of charities, non-profit organization and for-profit businesses.  These organizations are subject to quite different disclosure requirements.  No matter how they are structured, child care providers are eligible for a provincially-funded wage enhancement for staff members with specified credentials.  While employees working for a registered charity are subject to the salary and other disclosure obligations under Canada Revenue Agency rules (which, among other things, requires the salary ranges of the top ten employees to be revealed), their counterparts in the private sector are not required to publicly report their remuneration.   Likewise, their employers get to keep their costs confidential.

Private sector firms have long fended off calls for greater transparency by citing the risk of loss of competitive advantage if other companies gain access to detailed information on their operations.  This argument is hard to sustain if charities – which often operate in a highly competitive environment – are forced to disclose their spending.  So, as well as reporting on charities dealings with for-profits, shouldn’t private sector entities that get government dollars face similar obligations to release their costs?  If transparency is good for some, shouldn’t it be good for all?

Peter Broder is the former Executive Director of The Pemsel Case Foundation.  A version of this article was first published in LawNowmagazine, and can be found at . The views expressed do not necessarily reflect those of the Foundation.