Why are taxpayers paying for orphanages?

There is growing awareness that orphanages are bad for children and harmful to their development.

We are, however, witnessing shifts in policy to end the institutionalisation of children and bring children home to families. Some countries, notably Rwanda, have already started to reform their care systems and systematically close orphanages in favour of family-based care. A process of gradually closing residential care facilities is also under way in Cambodia, and Kenya has recently publicly announced that it is developing plans to deinstitutionalise residential care facilities and bring children home from orphanages. Haiti has made significant strides to strengthen its national care system in favour of families and reduce the institutionalisation of children with financial assistance from the EU and the support of organisations such as Lumos.

Despite these positive developments, which are only a few examples of a global trend, we still have a long way to go to end the era of child institutionalisation. For this to happen, change requires a global response that needs to take place in the Global North as well as the Global South.

Reforming tax systems to help children

While many countries in the Global North have seen an end to the use of orphanages within their own borders, donors continue to support orphanages in the Global South as a response to poverty and family breakdown.

Many countries in the Global North offer tax incentives to individuals and corporations who donate to charities, including those operating residential care institutions or funding the institutional care of children abroad. Charities based in jurisdictions such as Canada, the US, the UK, and a number of EU countries, among others, can register to be accredited by the relevant national tax authority. Such registration usually allows the charity to issue donation receipts to individual and corporate donors who make gifts in a particular calendar year. Governments in turn reimburse individuals and corporations for a percentage of their charitable donations.

In Canada, for example, a donor receives a non-refundable tax credit which can be applied to reduce the amount of tax owed in a given year. In fact, Canada has charitable tax credit rates for both the federal government as well as the provinces and territories. There is also an incentive to donate because a higher rate is applied for donations above $200 CAD. A donation of $2,000 CAD would result in approximately $762 in tax savings in the Province of Ontario and approximately $1,024 in the Province of Quebec (check out the Government’s tax credit calculator here).

According to Montreal-based tax lawyer John J. Lennard, “the notion of charity should only include those activities that positively promote human development and this is simply not the case when it comes to orphanages.” He contends that “the Canadian taxpayer should not be subsidising orphanages by reimbursing individuals and corporations for their often good but ill-guided intentions”.  

The problem lies in what fiscal policy-makers and tax authorities consider as “charitable”. The operation or support of foreign orphanages may be considered as charitable under national tax legislation without recognition of the harms that orphanages can do to children. Charities supporting orphanages are also tax exempt since they are deemed to be engaged in charitable activities. But support for orphanages neither furthers the relief of poverty nor brings benefits to communities. Orphanages are not a sustainable response to poverty and contribute to the undermining of families and communities.  

Unfortunately, charities, donors, fiscal policy makers, and tax authorities may be unaware of, and perhaps unintentionally reinforcing, the harmful effects of orphanages on children in the Global South. The good intentions of donors could also be making the matter worse by contributing to the proliferation of residential care facilities and the unnecessary institutionalisation of children rather than supporting family-based care which an increasing number of developing countries such as Kenya have set as a priority.

It is important to recognise that orphanages in a number of countries are established on a commercial for-profit model precisely to attract foreign donations. Children are recruited into these institutions for the sole purpose of attracting donations and exploiting children to that end. These institutions can also be sites of child trafficking. Conditions need to be placed on support for orphanages so that taxpayers money is not used to inadvertently support trafficking.

Changes in taxation policy could play a critical role in redirecting funding away from orphanages and trafficking enterprises by acting as a guide to personal decision-making by donors. This will help ensure that taxpayer money is used to support the Sustainable Development Goals and that children globally are protected and can enjoy their rights, including the right to family.

The problem is that the changing realities around orphanages may not at the present time be reflected in a tax authority’s view of the purposes and activities that are considered charitable under that jurisdiction’s tax laws. In that sense, there is a lag between current child protection best practices, which overwhelmingly favour family-based care over institutionalisation, and the charitable behaviour that is incentivised by a country’s tax system.

The power of tax incentives should not be underestimated: benefits that incentivise donations to organisations that support orphanages, as opposed to those that support families, reinforce the continued separation of children and violation of their rights.

Incentivise families, not orphanages

Regulatory bodies in the Global North have a key governance role to play in ensuring that the aid sector protects and upholds children’s rights through appropriate policy and regulatory frameworks. Through the current taxation incentives in a number of countries, the violation of children’s rights may be inadvertently encouraged, legitimised and reinforced. While this is not the intention of such policies, procedures must be put in place in national taxation policies to promote child protection, safe practices, and sustainable development.       

The current sea of change in care system policies and the way we see orphanages has consequences for the way we give, and the types of giving that should be incentivised. The views of tax authorities need to evolve so that any unintentional deleterious effects of a country’s tax incentive system may be minimised. As taxpayers, we should demand that we are not paying to harm or traffic children. This can be achieved by redefining what a tax authority deems as charitable. Taxpayers in the Global North should not be paying for an outdated system of care in a number of countries in the Global South.