Recommendations of the Chief Electoral Officer of Canada to the House of Commons Standing Committee on Procedure and House Affairs Respecting Specific Issues of Political Financing
3. Tax Receipts for Pre-Election Contributions
Summary of Section
- discusses the current rules respecting the income tax receipting of political contributions, including:
- – the interaction of the Canada Elections Act and the Income Tax Act;
- – the specific rules, and limitations thereof, respecting the income tax receipting of contributions to registered parties, registered associations, candidates and leadership contestants.
- – the interaction of the Canada Elections Act and the Income Tax Act;
- that the ability of newly registered parties and candidates to issue tax receipts for contributions be expanded to permit tax receipts to be issued for contributions made to the registered party or the candidate from the period from the drop of the writ in the election in which the party achieved registered status or the candidate was confirmed.
It will further:
- make an observation that the current income tax rules respecting contributions to leadership contestants may have the unexpected effect of delaying the reporting of leadership contributions, and suggests that if that observation is proven correct consideration be given to two alternative amendments which might address that fact.
Interaction Between the Income Tax Act and the Canada Elections Act
The income tax credit for political contributions was introduced in 1974 with amendments to both the Canada Elections Act and the Income Tax Act (S.C. 1973–74, c. 51). The ability to claim income tax credits for political contributions and the amount that can be claimed therefore was instituted through (what is now) section 127 of the Income Tax Act. That statute, however, uses the Canada Elections Act as the source of the definitions of the types of political contribution for which the income tax credit can be claimed.
127(3) There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year in respect of the total of all amounts each of which is a monetary contribution referred to in the Canada Elections Act made by a taxpayer in the year to a registered party, a provincial division of a registered party, a registered association or a candidate, as those terms are defined in the Act,
(a) when that total does not exceed $400, 75% of that total,
(b) when that total exceeds $400 and does not exceed $750, $300 plus 50% of the amount by which that total exceeds $400, and
(c) when that total exceeds $750, the lesser of
- $650, and
- $475 plus 33⅓% of the amount by which the total exceeds $750,
if payment of each monetary contribution that is included in that total is evidenced by filing with the Minister a receipt, signed by the agent authorized under that Act to accept that monetary contribution, that contains prescribed information.Footnote 5
Thus, while the Income Tax Act provides for the income tax credit, it is the Canada Elections Act which is determinative of the meaning of the component elements necessary to determine the application of that credit – what constitutes a monetary contribution, a registered party, a registered association, a candidate, and who is permitted to accept contributions.Footnote 6
The income tax credit is available only with respect to contributions of money (cash or negotiable instrumentFootnote 7).Footnote 8 Non-monetary contributions of goods or services are not eligible for income tax credits. And as currently provided under the Income Tax Act, and with one exception respecting leadership contestants, income tax credits are available only for monetary contributions given to registered parties, registered associations and candidates. In each case, tax credits are available only for contributions after the particular entity in question attains registered status (in the case of parties and electoral district associationsFootnote 9) or the status of a candidate.Footnote 10
A taxpayer, of course, retains the discretion to actually claim a credit on his or her income tax return for an otherwise eligible political contribution.
As a general principle, the Canada Elections Act does not control the uses to which a registered party or registered association may put its funds. And, as a corollary to that principle, there is no restriction on the types of things to which registered parties and registered associations may put contributions that are eligible for an income tax credit. (Nor is there any way that a party or a registered association can know whether any particular eligible contribution has actually been claimed by a taxpayer on his or her tax return.)
With respect to tax-receipted contributions to candidates, the requirements of the Canada Elections Act respecting the disposal of a candidate's surplus will operate to ensure that tax-credited contributions, as is the case with all contributions, must be either expended on the election campaign or transferred to the candidate's registered party, registered association or, in the case of candidates without political affiliation, the Receiver General.
In the case of parties, only contributions to registered parties are eligible for the income tax credit. As registered party status can only be obtained by running at least one candidate in a general or by-election, contributions given to that party prior to that time are not eligible for income tax credits.Footnote 11 In other words, contributions given to eligible parties (i.e. parties which have applied for registered status and which have been found to meet all of the administrative requirements under the Act) are not eligible for the income tax credit. However, as a party, once registered, retains that status between general elections, contributions made to a registered party between elections remain eligible for income tax credit as long as the party does not voluntarily deregister itself or is involuntarily deregistered by the Chief Electoral Officer or a judge for some failing as specified in the statute.Footnote 12
Registered Electoral District Associations
As in the case of a registered party, contributions to a registered electoral district association, whether given during or outside of an election period, are also tax receiptable. However, unlike a registered party, the association's authority to issue tax receipts respecting its contributions does not start automatically on its securing registered status.
Before a registered association is authorized to give tax receipts, the leader of its registered party must first notify the registered association in writing that its agents are authorized to issue receipts. For this reason, a registered party retains the discretion to determine which of its registered associations will be able to issue tax receipts.Footnote 13
Following the coming into force of S.C. 2003, c. 19 (Bill C-24), it is now clear that a registered association that is not authorized to issue tax receipts cannot pass contributions it has received on its own behalf on to its registered party for tax receipting by the party and ultimate return to the association. The effect of Bill C-24 and the terms of section 127 of the Income Tax Act make it clear that tax receipts can be issued by the registered party only for contributions made to the party and that tax receipts for contributions made to a registered association can only be given by the association to which the contribution was given. This clarifies any ambiguity that may have existed prior to Bill C-24. Thus, a decision of a leader of a registered party not to authorize the agents of a registered association to issue tax receipts has the effect of making all contributions to the registered association ineligible for the income tax credit.
In the case of candidates, subsection 127(3) provides for income tax credits only for contributions made to a candidate as that term is defined in the Canada Elections Act.
The Canada Elections Act defines a candidate as:
"a person whose nomination as a candidate at an election has been confirmed under subsection 71(1) [i.e. by a returning officer during the election period] and who, or whose official agent, has not complied with sections 451 to 463 and 471 to 475 in respect of that election." (s. 2)
Thus, only contributions made to a candidate after his or her confirmation by a returning officer during an election are eligible for the income tax credit. Contributions made before that time are not eligible. This is so notwithstanding the retroactive imposition of "candidate" status upon such confirmed persons by sections 82 and 365 of the Act respecting the various financial obligations of the Act respecting candidates. The reason for this is because both of those sections do not deem the person to be a candidate retroactively for all purposes, including the Income Tax Act. The retroactive status of candidate deemed by sections 82 and 365 operate only with respect to the financial obligations of Part 18 of the Act and the obligations of a candidate to have an official agent and an auditor as set out in sections 83 to 88 and 90.Footnote 14 It is the definition of "candidate" in section 2 of the Act that specifies when a person becomes a candidate for the purposes of the income tax credit.
Some candidates may elect to have pre-election contributions intended for the candidate's campaign run through the candidate's registered electoral district association (or even registered party) in order that they be eligible for the income tax credit respecting contributions to registered associations. A number of factors may make this a less than perfect alternative to being able to directly credit contributions to the candidate. First, not all candidates have a registered electoral district association (or registered party). Second, once contributed to the association the funds become the property of the association or party, which retains the discretion as to when and if those contributions may be transferred to the candidate. Third, registered electoral district associations and registered parties cannot transfer funds to a candidate prior to the candidate being confirmed as such by a returning officer during an election (s. 404.2(2.1)(b)).
Notwithstanding that a person remains a candidate under section 2 of the Canada Elections Act until such time as the administrative obligations under sections 451 to 463 and 471 to 475 have been met, the Canada Revenue Agency (CRA) has determined that a candidate's official agent can only issue income tax receipts for those contributions which were already in the process of being delivered on or before polling day and which were received no later than 30 days after polling day. As outlined in CRA's Information Circular IC-75-2R7 (para. 8):
"Official agents can only issue such receipts for monetary contributions received in a certain period. This is the period that starts with the day on which the candidate's nomination has been confirmed by the returning officer, and ends on the day that is 30 days after polling day. Contributions received after polling day must have been in transit on polling day."Footnote 15
Contributions to nomination contestants are not eligible for income tax credit.
Contributions made directly to a leadership contestant are not tax receiptable. However, a contributor may make a contribution to the contestant's registered party (which would be receiptable as a contribution to the party) and direct that the contribution be transferred to the leadership contestant. The party is not required to comply with that request and retains the discretion to transfer all or part of the contribution to the identified contestant as it deems appropriate. In any event, regardless of whether any or all of the contribution is actually transferred to the contestant, the entire contribution is deemed by subsection 404.3(4) of the Act to be treated as a contribution to the leadership contestant and as such will count toward that contributor's contribution caps respecting leadership contestants (rather than the contributor's cap respecting contributions to the party).
The issue of tax receipts for pre-election contributions either by candidates or registered parties was touched on in three earlier reports made to the Speaker of the House: the 1996 Strengthening the Foundation, the 2001 Modernizing the Electoral Process and the 2005 Completing the Cycle of Electoral Reform.
As noted above, a party cannot issue income tax receipts for contributions made to it prior to its securing registered party status in an election. Similarly, a candidate cannot issue income tax receipts respecting contributions given to the candidate prior to the candidate having been confirmed in that status during an election by the returning officer. The 1996 report Strengthening the Foundation recommended that a slight extension to this authority to authorize a party or a candidate to issue income tax receipts for contributions received by the party or the candidate from the time of the drop of the writ in which the party achieved registered party status or the candidate was confirmed as such by a returning officer.Footnote 16
The 1996 recommendation respecting the availability of income tax credits for parties and candidates was revised in the 2001 report (respecting parties) and the 2005 report (respecting candidates).
The 2001 report Modernizing the Electoral Process noted, in the discussion respecting recommendation 3.1.2, that the continuing status of a party as a registered party between elections creates advantages in the context of the income tax credit for parties that were registered in earlier elections over those eligible parties that are later registered in a current election. As a party, once registered, maintains that status between general elections, registered parties may continue to receive, and tax receipt, contributions received between those elections. This gives them an advantage over a party which complies with the administrative requirements of the Canada Elections Act and secures eligible party status but is unable to secure registered party status until the next general election is called. This advantage is discussed in more detail in recommendation 3.1.2 of the earlier Modernizing the Electoral Process. In view of this inequality, that report recommended that a party that achieves registered party status should be allowed to issue tax receipts for contributions received by that party either from the time that its application for registration was accepted by the Chief Electoral Officer, or from the time of the last general election, whichever is later.
The inequality noted in the 2001 report was alleviated to some degree by the reforms to the Canada Elections Act (S.C. 2004, c. 24) that permit an eligible party to achieve registered status by running at least one candidate in a general or by-election. However, the inequity remains where no by-elections are called between general elections to permit an eligible party to seek registered party status or where the by-election is called in a district where the eligible party has no true intention of running a candidate and would be required to do so only for the purposes of securing registered status.
Again, any extension of the income tax credit respecting contributions to parties should be accompanied by a corollary obligation to report the contributions receipted.
The income tax receipting of pre-election contributions by candidates was addressed in the 2005 report Completing the Cycle of Reform. That report recommended that this be addressed by providing for a pre-writ confirmation process through the Chief Electoral Officer for candidates under which a person would be able to register as a candidate in advance of the calling of an election for an electoral district. Confirmation as a candidate prior to the drop of a writ would automatically make all contributions to the confirmed candidate eligible for the income tax credit.
In its subsequent 2006 report Improving the Integrity of the Electoral Process: Recommendations for Legislative Change, the Committee endorsed the concept of allowing advance registration of candidates but rejected the corollary recommendation that that confirmation be carried out through the office of the Chief Electoral Officer. Advance registration is only feasible if carried out through the Chief Electoral Officer as returning officers do not operate continuing offices between elections.
In light of the increased ability of parties to seek registered party status, and in the interest of relative ease of record keeping and application, in the case of newly registered parties and candidates the Committee may wish to consider expanding the ability of these entities to provide income tax receipts to include contributions given to the party or the candidate from the period of the drop of the writ in the election in which the party secured registered party status or the candidate was confirmed.
Observation of Potential Effect of Indirect Tax Credit for Leadership Contestants
There have been only a few leadership contests regulated under the Canada Elections Act since the introduction of the current leadership contest controls on January 1, 2004.Footnote 17 Of those contests, only the current ongoing contest of the Liberal Party of Canada concerned a parliamentary party. For that reason, analysis of the operation of the indirect income tax credit system respecting leadership contests is problematic at this time. However, as a preliminary observation based primarily on the current experience with the Liberal Party leadership contest, it may be that one effect of the funding of leadership contestants primarily through the medium of the registered party in order to secure the tax credit is to delay the availability of contribution information such that it is not available at the time of the statement of contributions that accompanies the registration of a contestant under section 435.06. (This may be principally due to the fact that the party has not yet processed and passed directed contributions on to the contestant at the time of the registration report.) Where directed contributions are not transferred by the party to a contestant until after the contestant's registration with Elections Canada, these contributions are not required to be reported until the first report on contributions four weeks before the selection date of the contest.
If future events confirm this observation is correct, and the current scheme for the interim reporting of contributions is retained, then consideration may be given at that time to amending section 435.31 to require an additional report on contributions to come at some earlier time following the filing of the contestant's registration with the Chief Electoral Officer.
Alternatively, consideration could be given to making contributions made to leadership contestants after they are registered as such with the Chief Electoral Officer tax receiptable. This would reduce the need for such contributions to pass through the registered party, ensure that the full amount of the contribution is provided to the leadership contestant for whom the contributions are intended, reduce the potential influence of a registered party respecting leadership contestants which results from its control over directed contributions received by the party, and potentially lead to faster and more accurate returns by contestants. Such an amendment would be consistent with the general prohibition in section 404.3 (which is aimed at ensuring neutrality) against a registered party or registered electoral district association from providing money to a leadership or nomination contestant. (As noted above, the current section 404.3 contains an exception for directed contributions to a leadership contestant.)
Return to source of Footnote 5 For a maximum deduction of $650 respecting total contributions of $1,275 or more.
Return to source of Footnote 6 Subsection 404.4(1) of the Canada Elections Act requires that all forms of contributions in excess of $20 must be receipted. This is a separate and distinct receipting requirement from that required for tax credits under the Income Tax Act. The obligation to receipt contributions under subsection 404.4(1) applies only to contributions in excess of $20 but applies to all forms of such contributions to all political entities regulated by the Act (other than for third parties).
Return to source of Footnote 7 Subsection 127(4.1) of the Income Tax Act.
Return to source of Footnote 8 In addition, section 477 of the Canada Elections Act directs that candidates and their official agents shall use the forms prescribed by Elections Canada for official receipts to contributions for the purpose of subsection 127(3) of the Income Tax Act. (Registered parties and registered associations may use any form of receipt provided that it contains the information prescribed under the Income Tax Act.)
Reference should also be made to the full section 127 of the Income Tax Act for a complete canvass of the rules respecting contributions to political entities. The discussion in this report only canvasses those aspects of the scheme particularly relevant to the points in the report.
Return to source of Footnote 9 Registered associations are subject to an additional limitation, which will be discussed below.
Return to source of Footnote 10 Where a contribution is both required to be receipted under section 404.1 of the Canada Elections Act and eligible for income tax credit under the Income Tax Act, the responsible financial agent may issue either two separate receipts – one for each purpose, each meeting the requirements of the relevant elections or tax Act whose purpose they are to serve, or the agent may issue a single receipt that meets the requirements of both.
Return to source of Footnote 11 At the same time, such contributions are not subject to the contributions rules of the Canada Elections Act respecting eligibility, caps and disclosure as those rules do not apply to contributions to parties that are not registered parties.
Return to source of Footnote 12 Registered parties can be deregistered under the Act as a result of failing to run at least one candidate in a general election (s. 385), or as a result of either its own voluntary request for deregistration or of its involuntary deregistration by the Chief Electoral Officer under sections 385.1, 386, 387 or 388 for failing to meet one of the administrative requirements of the Act.
In addition, an organization, which is registered as a political party but which ceases to meet the criteria for political party status under the Act, can also be the subject of an application by the Commissioner of Canada Elections to a judge for deregistration under section 521.1.
Return to source of Footnote 13 The party leader cannot pick which of the association's individual agents are authorized to issue tax receipts. An authorization once given is for all of the agents of the association. Subsection 127(3) of the Income Tax Act grants the authority to issue tax receipts to the agents who are authorized under the Canada Elections Act to accept contributions – which in the case of a registered electoral district association are the association's financial agent and any other electoral district agents appointed by the association under subsection 403.09(1). (The association itself can exclude the authority to accept contributions from the appointment of an electoral district agent under s. 403.09(1), which will also indirectly restrict such a limited agent from issuing tax receipts.)
- For the purposes of sections 83 to 88 and 90, a candidate is deemed to have been a candidate from the time he or she accepts a contribution or incurs an electoral campaign expense referred to in section 406.
- For the purposes of this Part [Part 18], a candidate is deemed to have been a candidate from the time he or she accepts a contribution or incurs an electoral campaign expense referred to in section 406.
Return to source of Footnote 15 This interpretation appears to be related to the obligation in subsection 478(2) on candidates and their official agents to return their unused income tax receipt forms within a month after polling day.
478(2) A candidate and his or her official agent shall return any unused forms referred to in section 477 within a month after polling day.
Return to source of Footnote 16 The report noted that:
"The Income Tax Act allows registered political parties to issue official tax receipts only for contributions received after their registration according to the class="italic">Canada Elections Act takes effect, which is the day after they have sponsored candidates in at least 50 electoral districts. [Now reduced to at least one electoral district – S.C. 2004, c. 24.] Similarly, candidates can only issue official receipts for contributions received after their nomination papers have been accepted by the returning officer. Thus, the current legal framework restricts the ability of both candidates and parties to raise sufficient campaign funds in the first weeks of a campaign."
It then recommended (recommendation 103) that:
"provision be made for the retroactive issuance of receipts for contributions to a registered party, local association, or candidate during the election period prior to the official registration or nomination, as the case may be."
Return to source of Footnote 17 Two contests for the Green Party of Canada (2004 and 2006), one for the Libertarian Party of Canada (2005) and the current contest for the leadership of the Liberal Party of Canada.