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If you did your taxes this week, and hovered over the “charitable donations” line, you may have been distracted by the real-world charitable-donations scandal unfolding before the parliamentary ethics committee.

It involves the WE Charity, an international-assistance cause structured as an interlinked group of charity, foundation and real-estate entities founded by brothers Craig and Marc Kielburger; it is accused of being misleading as to how some of its donations are used. And it involves the Liberal government, which last year faced conflict-of-interest accusations after it attempted to give the charity, with a history of ties to Prime Minister Justin Trudeau’s family, a large untendered contract to deliver pandemic grants to students.

In reality, it’s a scandal 25 years in the making. While the merits of the specific accusations remain to be tested, the factors behind them were made possible by a series of changes to the laws that govern that line on your tax return.

In the 1990s, Canada’s charities were facing down financial pressures. But it was popular in the nineties, as governments cut funding and scaled back their roles, to believe there was a “third sector” of philanthropy waiting in the wings, if only donors could be encouraged.

Starting in 1996, in more than 20 budget changes over the next decades, Ottawa and the provinces made it more profitable for wealthy individuals to give to charity by allowing tax credits on large gifts of stocks and other securities, land, buildings and art; by increasing the size of claimable gifts from 20 per cent to 75 per cent of income (100 per cent at death); by raising total tax credits to more than 50 per cent of donations in some provinces; and in 2006, by eliminating capital-gains taxes on things given as tax-credited gifts to charity.

Rather than creating a third sector, these rules turned charities more into tax-financed bodies. The largest source of charity funding remains government grants. The second is individual donations – which in large part are diversions of tax dollars away from government.

A typical middle-class Canadian’s tax-receipted donation of $1,000 effectively shifts $400 in tax revenues out of Ottawa’s coffers and into a charity’s. But the tax-dollar share of a wealthy person’s donation often exceeds 50 per cent, even more if you include capital-gains diversions. It’s possible for well-off people to divert 100 per cent of their lifetime taxes away from Ottawa and into charities of their choice.

A new type of charity emerged to take advantage of these big donations. Most Canadians continue to give to the same old causes: About four in 10 tax-receipted donations go to churches and temples; next is hospitals and other medical organizations. The big growth sector since the 1990s, according to data gathered by the philanthropy-sector organization Imagine Canada, is “international” charities (WE is an example). This sector attracts unusually large average donations, taking advantage of the post-1996 breaks. Such donors often want something in return – a plaque on a building, an experience for them or their children, maybe something named after them.

The late 2000s also saw the government-encouraged rise of “social enterprises,” which combine tax-funded philanthropy with commercial activities, sometimes for profit. The mixture of funding sources and motives vary and are not well regulated. Some donors complain they don’t know if their gift is going to a charity itself or to its less-philanthropic foundation or social-enterprise arms. Nevertheless, in 2019, the Senate recommended it be made easier for charities to move money back and forth to non-charity organizations.

Charities have taken over some traditional government functions – food banks are an example. That’s partly because their volunteers tend to have better links to the communities they serve. But it’s also because their non-unionized, often unpaid work forces are cheaper and more flexible than public employees; to some, this justifies their largely public-sector funding. But their relationship with the government is haphazard.

After 25 years, we ought to rethink this system. Organizations such as the Mowat Centre have made the case that we should replace this scattershot approach with a “one-stop shop” governments can use to draw upon, fund and monitor charities.

The Imagine Canada data show the great majority of Canadians would make the same charitable donations they currently do even if there were no tax breaks. (The rising popularity of online crowdfunding, with no tax advantage, illustrates this.)

Rather than losing several billions of tax dollars a year to a poorly regulated spray of credits to a collection of 85,000 organizations of various merits, we should consider funding charities from government directly, through a process that’s public, transparent and arm’s-length. It would make legitimate charities stronger, and less vulnerable to scandal.

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