In a previous article, we wrote about the key highlights of the Canada Revenue Agency’s Guidance CG-032 Registered charities making grants to non-qualified donees, its final administrative guidance on qualifying disbursements in respect of grantees (non-qualified donees) (the “Guidance”). The Guidance sets out how registered charities can make grants to non-qualified donees in alignment with the CRA’s interpretation of the rules for qualifying disbursements under the Income Tax Act (Canada) (the “Act”). The Guidance differs significantly from the previous draft guidance and should be read carefully.
Generally, registered charities are limited in how they may operate and use their resources under the Act. Under the new qualifying disbursements regime, the CRA considers registered charities to be permitted to spend their resources in one of two ways: either 1) on their own charitable activities; or 2) by making qualifying disbursements, either through gifts to qualified donees or grants to non-qualified donees. The Guidance is written to assist registered charities in understanding what the CRA expects from them when making grants to non-qualified donees in accordance with the Act.
HISTORY
Previously, charities were only permitted to spend resources in the following ways:
- on their own charitable activities; and
- on gifts to qualified donees.
Therefore, a charity could only work with a non-qualified donee by engaging the non-qualified donee as an intermediary to help the charity carry out its “own activities.” Demonstrating that an activity carried out by a non-qualified donee was a charity’s own activity required the charity to maintain direction and control over its resources and to be able to intervene in all decisions of the intermediary. In addition to a detailed written agreement, this included the onerous requirements, instructions on activities, monitoring and supervision, regular reporting, periodic transfers of funds based on demonstrated performance, separately tracked funds, and retention of receipts, invoices, and records.
The direction and control requirements often present challenges for charities. These rules are inconsistent with approaches of other jurisdictions, such as the United States and United Kingdom, making it difficult for Canadian charities to operate as part of an international network of affiliated charities. The rules arguably create a colonial, paternalistic model, which is often not suitable when working internationally or with Indigenous or other marginalized groups. Canadian charities are put in a position where they must educate project partners as to the nature of their relationship and the project partner stands in a position of subordination with respect to the use of the Canadian charity’s resources. This increases compliance risk to the Canadian charity, and also consumes time and resources that could otherwise be used directly in the charitable project.
Because of these challenges, professionals in the charitable sector pushed for reform in favor of a system that ensured financial accountability, but did not include the “own activities” requirement or direction and control. In response, the new qualifying disbursements rules were introduced.
While the intermediary regime may still continue be the most logical way for a charity to operate in certain circumstances, the new qualifying disbursements rules allow a greater flexibility for charities seeking to work with or support non-qualified donees. The CRA suggests that a charity should consider at the outset of a relationship with a non-qualified donee whether it will work with the non-qualified donee by providing a grant pursuant to the qualifying disbursement rules or by engaging the non-qualified donee as its intermediary. To be fully informed, prior to deciding which method to use in working with non-qualified donees, a charity should review the CRA’s administrative guidance applicable to both methods. It is important to keep in mind that charities are not stuck in the decision regarding which rule to use, as CRA recognizes that a relationship may evolve and the charity can convert its relationship with a non-qualified donee from an intermediary to a grantee relationship.
THE NEW GUIDANCE
The grant-making requirements can be found at subsection 149.1(1) of the Act:
qualifying disbursement means a disbursement by a charity, by way of a gift or by otherwise making resources available,
(a) […] to a qualified donee, or
(b) to a grantee organization, if
-
- (i) the disbursement is in furtherance of a charitable purpose (determined without reference to the definition charitable purposes in [subsection 149.1(1) of the Income Tax Act]) of the charity,
- (ii) the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and
- (iii) the charity maintains documentation sufficient to demonstrate
- (A) the purpose for which the disbursement is made, and
- (B) that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity […].
The CRA provides a recommended step-by-step process for grant-making in the Guidance. Where a registered charity’s process for grant-making aligns with these recommended steps, the CRA will consider the grant-making to comply with the Act. The CRA recommends that registered charities follow the step-by-step process below for making grants to non-qualified donees:
1. ESTABLISH HOW THE GRANT ACTIVITY FURTHERS THE CHARITY’S CHARITABLE PURPOSES
The Guidance provides that the grant activity must further a charitable purpose of the charity. Accordingly, a charity would need to amend its purposes if it wants to make a grant for a purpose that is not stated in its governing documents. In addition, the charity cannot make a grant if it does not have a stated common law charitable purpose within one of the four categories of charity (relieving poverty, advancing education, advancing religion and other purposes beneficial to the community). This would be the case for a foundation that only has a purpose to make gifts to other qualified donees.
The CRA has changed its administrative practice over the years as it applies to drafting acceptable charitable purposes. Charities interested in making grants to non-qualified donees should consult with legal counsel to ensure their current purposes permit the granting making activity they intend to pursue.
The activity the grant is used to support also needs to be charitable in itself. As such, it must align with public policy for granting activities inside and outside of Canada, it must meet the public benefit test and must not confer an unacceptable private benefit, and it must not be in support of terrorist activities.
2. ASSESS THE GRANT’S RISK LEVEL – LOW, MEDIUM, OR HIGH
The CRA recommends that the registered charity conduct a risk level assessment for each grant it is considering providing to a non-qualified donee based on a non-exhaustive list of factors. The factors include the charity’s experience level, the grantee’s experience level, the purposes and governing documents of the grantee organization, the governing structure of the grantee organization, the grantee’s regulation and oversight, private benefit concerns, the grant activity, the grant amount, the nature of the resources granted, and the duration of the grant. The CRA suggests that the charity conduct a reassessment wherever significant changes in the grant conditions occur. The suggested factors mean that the charity should be able to demonstrate it has ample knowledge of the activities, governance and inner working of the proposed grantee. Charities are expected to obtain this information by carrying out appropriate due diligence on each potential grantee organization.
3. DETERMINE HOW MUCH DUE DILIGENCE THE CHARITY NEEDS TO APPLY BASED ON THE RISK LEVEL
The CRA recommends that the registered charity use various accountability tools to assist it with meeting the requirements of the Act. Depending on the grant’s risk level – low, medium, or high – the registered charity’s use of the accountability tools will be limited (for low risk grants), moderate (for medium risk grants), or extensive (for high risk grants). The recommended accountability tools are: (1) research and review of the grantee, (2) description of the grant activity, (3) written agreement, (4) reporting plan, (5) transfer schedule, and (6) separate tracking of the funds by the grantee (such as by using a separate ledger). The CRA notes that this is not an exhaustive list and that the suitability of each tool will depend on the nature of each grant. The Guidance is intended to help charities determine which accountability tools they should consider using, and the extent of that use, with respect to each grant to a non-qualified donee.
4. APPLY THE ACCOUNTABILITY TOOLS IN COLLABORATION WITH THE GRANTEE
The CRA recommends that the charity work with the non-qualified donee when applying the accountability tools.
As mentioned above, the accountability requirements the charity will need to implement will depend on whether the grant’s risk is low, medium or high.
For grants that are low risk, the charity can have a limited review, a simple description of the grant activity and agreement, a simple written final report, and a simple ledger for separately tracked funds. For grants that are high risk, the charity should have an extensive review, a detailed written description of the grant activity and a formal written agreement with comprehensive terms, a detailed written final report, and detailed recordkeeping for the separately tracked funds.
5. DOCUMENT THE CHARITY’S DUE DILIGENCE OVER THE GRANT’S DURATION
Under the Act, a charity is required to keep adequate books and records in Canada, containing enough information to allow the CRA to determine whether the charity is operating in compliance with the Act.
With respect to grants to non-qualified donees, a charity’s books and records must allow the CRA to assess whether the charity’s grants meet the accountability requirements. The charity has some knowledge of the grantee’s use of resources and that the charity required the grantee to provide information that demonstrates the grantee continues to use the grant’s resources for the purposes and activities set out in the grant terms.
A grant agreement is an important accountability tool. The Agreement can include provisions that:
- confirm that the funds must be used for charitable activities that further the charity’s purpose;
- describe the grant activity, location, and start and end date;
- provide for monitoring and reporting rights, both in a final report and on an ongoing basis;
- provide the charity with inspection rights;
- ensure the record keeping is sufficient to verify charitable use;
- provide for periodic transfers and the ability of the charity to withhold funds should the non-qualified donee misuse funds; and
- provide that unused funds at the end of the program will be returned to the charity.
The charity should ensure that it receives all necessary supporting documents from the grantee.
The CRA recommends keeping books and records linked to the accountability tools suitable for the particular grant arrangement.
Finally, a charity that disburses more than $5,000 to a non-qualified donee in a year must disclose on Form T1441:
- the name of each grantee;
- the purpose of each grant;
- whether the grant was in cash or non-cash;
- the amount granted to each grantee; and
- the country in which activities were conducted (if outside Canada).
Charities that do not keep adequate books and records could face CRA compliance measures, such as sanctions, or in the most severe cases, revocation of registration.
OTHER CONSIDERATIONS
In the Guidance, the CRA highlights other considerations a registered charity will want to consider before making grants to non-qualified donees, namely pertaining to the following: (1) limits, (2) directed gifts and acting as a conduit (the anti-directed giving rule), (3) reporting grants, (4) disaster or emergency relief, (5) pooled grants, (6) charitable goods, (7) real property, (8) anti-terrorism, and (9) grants inside and outside of Canada. In each instance, a charity must consider the specific comments CRA sets out in the Guidance and consult legal counsel if the charity has questions.
We discuss the CRA’s comments on the anti-directed giving rule in particular below.
The anti-directed giving rule prohibits a charity from accepting or soliciting a gift on the explicit or implicit condition that the charity will subsequently gift it to a specific non-qualified donee. Any violation of this rule may result in the charity losing it charitable status. In the Guidance, the CRA provides the following examples of an explicitly conditional gift and an implicitly condition gift:
Explicitly conditional gift: A donor indicates that the registered charity must use a gift to grant money to a specific non-qualified donee and that the funds must be returned to the donor if this is not done.
Implicitly conditional gift: A charity includes a non-qualified donee’s name in its own name, purposes, or other formal documents, potentially making any funds received from a donor implicitly conditional on the charity granting it to the named non-qualified donee.
To avoid violating this rule, the CRA provides that the charity should maintain direction and control over how its resources are used and clearly communicate this to donors, such as by including a message on its website and in any communications with donors providing that the charity ultimately decides how the donation will be used and that the donation will not be returned if the charity does not use it according to a donor’s preferences. It should be noted that the Guidance does not have the force of law, and the wording of the anti-directed giving rule under the Act is much broader than how the CRA has interpreted it in the Guidance.
The CRA clarifies in the Guidance that the anti-directed giving rule does not prohibit a charity from using a donation to carry on its own activities through a non-qualified donee intermediary, so long as the charity exercises direction and control over the intermediary’s use of the charity’s resources. If a charity is concerned that a gift may be explicitly or implicitly conditional on working with a non-qualified donee on a project, the less risky approach may be to engage the non-qualified donee as an intermediary, rather than providing a grant to the non-qualified donee.
CONCLUDING REMARKS
Where, in the CRA’s view, a registered charity does not meet the requirements of the Act, depending on the degree of that non-compliance, the registered charity could risk its charitable registration or be subject to various compliance measures under the Act. This means that registered charities should be careful in how they operate.
Not every step in the suggested grant-making process in the Guidance will need to be applied to the same degree in every instance of grant-making to a non-qualified donee. In addition, the Guidance clarifies that a registered charity does not need to follow the CRA’s granting recommendations, as long as the registered charity can show in its books and records that it has used other measures to meet the accountability requirements. Nevertheless, it is recommended that each step of the CRA’s suggested process be considered, to the necessary degree, in each instance of grant-making. In all cases, we recommend the registered charity document its grant-making processes diligently. Many questions remain regarding how CRA will administer these new rules in practice. We encourage charities to seek legal advice if they have specific questions after reviewing the Guidance in detail.
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