One Comment About Taxation – Taxation Exemption For Non-Profit Organizations

 

Ever wonder what the difference is between a non-profit organization (“NPO”) and a “registered charity”?  Well, the Canada Revenue Agency sums up the differences as follows:

Registered charities are charitable organizations, public foundations, or private foundations that are created and resident in Canada. They must use their resources for charitable activities and have charitable purposes that fall into one or more of the following categories:

• the relief of poverty
• the advancement of education
• the advancement of religion
• other purposes that benefit the community

Non-profit organizations are associations, clubs, or societies that are not charities and are organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit.

In other words, you can only be an NPO or a registered charity, not both.  Registered charities can issue valuable tax receipts to donors.  NPOs cannot.  It can be a rigorous exercise to become a registered charity (and maintain such status).  Not so for NPOs.

What the two have in common is that both organizations do not pay income tax on their receipts since they are both exempt from taxation under the Income Tax Act.

Such an exemption for NPOs has been around since the introduction of the income tax statute in 1917.  Very little review of the exemption has been done since that time.

In 2023, Statistics Canada released some data about Canada’s NPOs.  It revealed that in 2020, there were about 134,000 NPOs active in Canada that represented about 8.9% of Canada’s GDP.  That is a material number.

There is no doubt that NPOs play a valuable role in Canadian society.  However, is the tax exemption from all of its receipts still appropriate?  In 2014, then Finance Minister Flaherty announced in the Federal Budget that a consultation on the tax exemption for NPOs was going to be commenced.  He stated the following in the budget documents:

A non-profit organization (NPO) that is a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or for any other purpose except profit, qualifies for an income tax exemption if it meets certain conditions. This income tax exemption for NPOs has changed little since its introduction in 1917. Today, NPOs include such varied groups as professional associations, recreational clubs, civic improvement organizations, cultural groups, housing corporations, advocacy groups and trade associations.

Concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, making income available for the personal benefit of members or maintaining disproportionately large reserves. In addition, because reporting requirements for NPOs are limited, members of the public may not be adequately able to assess the activities of these organizations, and it may be challenging for the Canada Revenue Agency to evaluate the entitlement of an organization to the tax exemption.

In this context, Budget 2014 announces the Government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the Government will release a consultation paper for comment and will further consult with stakeholders as appropriate.

When this announcement was made, it was a bit surprising for many in the non-profit sector.  For me, I thought such a review / consultation was long overdue.  A tax exemption is a powerful thing.  And if it is not being utilized correctly – perhaps by inappropriately competing with for-profit companies that pay tax, funding activities that do not meet the classic definition of an NPO, making income available for the personal benefit of members, etc – then obviously that is not a proper use of the tax exemption.

The NPO consultation was quietly and quickly abandoned after the 2015 federal election / government change. Nothing material in this space has happened since.  In my view, a review of the tax exemption is long overdue and necessary.

For example, let’s assume NPO “ABC” is a “community organization” and sells memberships.  It was started by Mr. X in 1995 and is controlled by his family.  Members are entitled to participate in sporting events, classes and leagues organized by ABC for separate fees.  Other revenues of ABC consist of concessions, t-shirts and other merchandise (branded with ABC’s logo) sold for a profit.  ABC also owns its building that it operates out of.  It pays significant amounts to Mr. X’s family – both directly and indirectly – to operate ABC.  In this simple scenario, should ABC’s profits be subject to tax?  If not, why not?  Is it competing with for-profit organizations that pay tax thus putting such for-profit organizations at a competitive disadvantage? Obviously, the personal amounts paid to Mr. X and his family is a problem in this example.

In situations like the above (and many less “obvious” ones) it’s time for an overall review of the tax exemption for NPOs.  While NPOs can serve a very important societal purpose, there should, in my view, be “brighter lines” in an NPO’s activities – and better transparency to assess the appropriateness of the NPO’s activities – to determine whether a tax exemption is appropriate or not.

Unions are another large group of organizations whose receipts are subject to a blanket tax exemption.  In my view, these organizations are also long overdue for a review to determine whether a tax exemption is still appropriate, especially considering how politically active many unions are.  That is a topic for another newsletter.

 

One Comment About Leadership – Good Leaders Critically Think

 

Critical thinking.  What is it?  Merriam – Webster Dictionary defines the phrase as follows:

the act or practice of thinking critically (as by applying reason and questioning assumptions) in order to solve problems, evaluate information, discern biases, etc.

Whenever I think about the definition of “critical thinking”, I think of Socrates and the Socratic Method which according to the font of all wisdom, Wikipedia, is a form of argumentative dialogue between individuals, based on asking and answering questions.

Very often, when discussing issues with colleagues, friends and new acquaintances, I find that many people hold strong opinions about a particular topic but ultimately such opinions are based upon what someone has told them, what the masses are trumpeting or some form of media is pushing.  And that’s it…there has been no form of critical thinking or reasoning as to whether or not such an opinion or view is correct or if there is a better view.

Take, for example, the recent COVID pandemic.  If chief medical officers said to “wear a mask” or “stay home” or “stay 6 feet apart”, or “follow the science”, etc, it was obvious that masses of people accepted such messages without much critical thinking.  God forbid if you applied critical thinking to such messages.  You were immediately labeled by many as “virus deniers”, “anti-vaxxers”, “conspiracy theorists” or some other horrible phrase that was designed to punish such critical thinking.  Was there any credible evidence that staying 6 feet apart would do anything?  That wearing a mask works or might have other negative medical and / or psychological consequences?  Ditto for working from home?

In my view, critical thinking should never be punished.  Instead, it should be rewarded as much as possible.  It can be hard.  Daring to ask questions and perhaps even question the “norm” can require great courage as illustrated above.  But it can lead to incredible results and perhaps even “course corrections” that the masses are following.

A great historical example of course corrections in the face of critical thinking happened in the medical field and dealt with the benefits of handwashing. Today, it is widely accepted that handwashing is a basic step to staying healthy and a simple but important thing to do before treating patients.  Hungarian physician and scientist Ignaz Philipp Semmelweis was an early advocate of handwashing despite the vast majority of the medical field mocking him for it.  Here’s Wikipedia’s entry on this leader:

Ignaz Philipp Semmelweis (German: [ˈɪɡnaːts ˈzɛml̩vaɪs]; Hungarian: Semmelweis Ignác Fülöp [ˈsɛmmɛlvɛjs ˈiɡnaːtsˈfyløp]; 1 July 1818 – 13 August 1865) was a Hungarian physician and scientist of German descent, who was an early pioneer of antiseptic procedures, and was described as the “saviour of mothers”. Postpartum infection, also known as puerperal fever or childbed fever, consists of any bacterial infection of the reproductive tract following birth, and in the 19th century was common and often fatal. Semmelweis discovered that the incidence of infection could be drastically reduced by requiring healthcare workers in obstetrical clinics to disinfect their hands. In 1847, he proposed hand washing with chlorinated lime solutions at Vienna General Hospital’s First Obstetrical Clinic, where doctors’ wards had three times the mortality of midwives’ wards. The maternal mortality rate dropped from 18% to less than 2%, and he published a book of his findings, Etiology, Concept and Prophylaxis of Childbed Fever, in 1861.

Despite his research, Semmelweis’s observations conflicted with the established scientific and medical opinions of the time and his ideas were rejected by the medical community. He could offer no theoretical explanation for his findings of reduced mortality due to hand-washing, and some doctors were offended at the suggestion that they should wash their hands and mocked him for it. In 1865, the increasingly outspoken Semmelweis allegedly suffered a nervous breakdown and was committed to an asylum by his colleagues. In the asylum, he was beaten by the guards. He died 14 days later from a gangrenous wound on his right hand that may have been caused by the beating.

His findings earned widespread acceptance only years after his death, when Louis Pasteur confirmed the germ theory, giving Semmelweis’ observations a theoretical explanation, and Joseph Lister, acting on Pasteur’s research, practised and operated using hygienic methods, with great success.

What an incredible lesson.  People should not be mocked, shamed or shunned for critical thinking.  Instead, in my view, it is an essential attribute of good leadership.  One should not always accept the “preferred” or “norm” without applying critical thinking.  And if alternative views arise from such critical thinking, then a good leader should not be afraid to voice such views and apply them for the betterment of the people he or she leads.

Recently, Elon Musk posted a tweet about “critical thinking” and linked a short video to an example of a teacher applying critical thinking to a student’s belief.  The teacher did a masterful job applying critical thinking to the student’s belief and ultimately was successful in changing the student’s belief.  Elon Musk said “Critical thinking should be one of the first things taught to kids”. I agree.

In today’s society, and in many historical instances, critical thinking has been punished.  But its rewards can be truly transformational. Leaders, apply critical thinking to many issues you face.  I’m confident you’ll be rewarded handsomely for such an approach.

 

One Comment About Economics and Politics: Food Price Increases

 

Over the course of history, when many “average” persons of an economy are struggling to put food on the table and provide for their family, there are problems.  In Canada, we’re seeing that now since inflation has been a real problem for quite some time.  That’s what happens when a government recklessly pumps money into an economy that results in too much money chasing too few goods.  With interest rates being increased by the Bank of Canada – and other major countries around the world doing the same since they have had the same problems – the problem is compounded since many can’t afford to pay their variable rate mortgages, or mortgages that are coming up for renewal or increased rent.

Statistics Canada has a multitude of great data available to the public.  One of its recent interactive initiatives is an “Average Retail Food Prices Data Visualization Tool”.  It displays the average cost of certain food items in a specific geographic area of Canada and compares it to recent history.  When displayed in a fashion like that, it is very enlightening and will certainly confirm what is being felt by people at the grocery stores.

While I wouldn’t suggest people use Statistics Canada’s new tool for anything more than simple information, it should help policy makers to make positive policy decisions – not silly ones like threatening grocery store companies in Canada with a “windfall tax” or a federal cabinet Minister announcing that he’s “working the phones” to try to get foreign grocery companies to set up shop in Canada (yeah, that’s just what we need….grocery profits generated by Canadians repatriated to a non-Canadian owner) –  to help get a handle on continuous rising food costs.

 

Bonus Comment – Quote From Psychologist, Neuroscientist, Writer and Musician – Daniel Levitin – About Critical Thinking

 

“Critical thinking is not something you do once with an issue and then drop it.  It requires that we update our knowledge as new information comes in.  Time spent evaluating claims is not just time well spent.  It should be considered part of an implicit bargain we’ve all made.”

 

Yep, totally agree!  Leaders, are you always practicing good critical thinking?

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