II. Income of Charities

25.12. Section 23 (e) of the Income Tax Assessment Act exempts ‘the income of a religious, scientific, charitable or public educational institution’ from tax and section 23 (j) (ii) exempts a trust for charitable purposes. One major difference between section 23 (e) and section 78 (1) (a) is immediately apparent: the approved bodies listed in the latter section do not include religious institutions. The whole of the income of such institutions is exempt from income tax whatever its source or nature. These institutions are not infrequently associated with such activities as hospitals, bookshops, laundries and food processing, which have varying degrees of affinity with the essential aims of the institution and which may compete with ordinary trading firms not eligible for special tax treatment.

25.13. Income tax exemption for charities has attracted attention and comment in a number of other countries. In New Zealand, the Ross Committee recommended that the trading profits derived by charitable institutions should not, with some qualifications, be exempt from tax. It proposed that profits from trading and dividends from

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any company substantially owned should be assessable at normal rates; all other income, including normal investment income and rents from property, would remain exempt. A company substantially owned was defined as one in which the institution had an interest entitling it to 40 per cent or more of the company's income. However, these recommendations have not been adopted.

25.14. The Carter Commission in Canada came to the conclusion that charitable organisations should not be given a competitive advantage in business activity. It recommended that business income and income from non-portfolio investment should be assessed at the full rate of corporation tax, defining business income for this purpose as income flowing from any interest of 10 per cent or more in a business, and including the ownership of real property as a business. It seems, however, that as long as an institution has been established exclusively for charitable purposes and its funds used for such purposes, its total income continues to be exempt in Canada.

25.15. The Royal Commission in the United Kingdom appears to have been more concerned with limiting the application of the legal term ‘charity’ in relation to ‘other purposes beneficial to the community’ than with questioning the exemption from tax of the income of charitable institutions. As it is, a charity is exempt from tax in respect of the profits of a trade carried on by it provided the profits are applied solely to the purposes of the charity and either:

  • (a) the trade is exercised in the course of the actual carrying out of a primary purpose of the charity; or
  • (b) the work in connection with the trade is mainly carried on by the beneficiaries of the charity.

Any yearly interest or other annual payment forming part of the income of a charitable body is exempt: for this purpose, the profits of a trade paid over by trustees to a charity are regarded as an annual payment.

25.16. The United States law exempts the income of certain institutions from tax, except for that portion of the income known as ‘unrelated business income’. A trade or business is unrelated if the conduct of it is not substantially related to the exercise by the organisation of its essential charitable function. Unrelated income does not include: (i) the first $1,000 of business income; (ii) dividends, interest or annuities; (iii) royalties; and (iv) rents from real property.