On November 30, 2022, the Canada Revenue Agency (“CRA”) released a draft guidance on how it would enforce the recent amendments to the Income Tax Act (Canada) that now permit charities to provide grants directly to non-qualified donees. CRA encouraged the public to provide feedback on the draft guidance. Miller Thomson’s Social Impact Group made the submission, reproduced below. We will continue to monitor the development of CRA’s guidance and will provide a summary to our readers of the final version once released.
By E-Mail
<Guidancefeedback-Retroactionsurleslignesdirectrices@cra-arc.gc.ca>
Charities Directorate
Canada Revenue Agency
Ottawa ON K1A 0L5
Attention: Policy, Planning, and Legislation DivisionDear Sirs/Mesdames:
Re: Draft Guidance on Registered Charities Making Grants to Non-Qualified Donees
We are lawyers with Miller Thomson LLP’s Social Impact Group.
Miller Thomson’s Social Impact Group is the largest national team of lawyers in Canada dedicated to helping charities, non-profit organizations and social enterprises with their legal needs. Miller Thomson LLP is a full-service national law firm with close to 550 lawyers serving clients across 10 offices in five provinces.
Our lawyers have been studying the qualifying disbursements rules and watching their evolution with great interest. We work with hundreds of organizations of all sizes carrying out activities both in Canada and abroad, in program areas as diverse as international development and Indigenous reconciliation. Our lawyers have written, spoken, and commented extensively on the qualifying disbursements rules, from their origins in Bill S-216 to their first draft in the Budget Implementation Act, 2022, No. 1 to their current form in the Income Tax Act (Canada) (the “Act”). We are pleased to provide the following comments in response to the Draft Guidance released on November 30, 2022.
Executive Summary
We have three main concerns with, and several suggestions for improving, the Guidance:
- Anti-Directed Giving Rule (Guidance, ss. 72-76). The Guidance suggests that charities must only accept unrestricted gifts containing no more than preferences for programs that will be conducted by non-qualified donees. Otherwise, the charity may be seen as a “conduit” for the non-qualified donee and may face revocation under paragraph 168(1)(f) of the Act. This Guidance upends decades of established practice, under which it is acceptable, appropriate, and legal for donors to make gifts that are restricted to being used in particular charitable programs. To enable continued fundraising by charities and to resolve the CRA’s conduit concerns, we recommend that the Guidance clarify that the anti-directed giving rule will not be engaged where a gift is made to a charity that will in turn be gifted as a qualifying disbursement that meets the requirements in the Act.
We also encourage the CRA to revise its example at s. 76 of the Guidance and provide alternative ways that charities can comply with the anti-directed giving rule other than displaying the necessary disclaimers at the top of a charity’s donation webpage. Possible alternatives include providing a drop-down menu of limited charitable programs on which the online gift could be spent or not giving online donors an open-ended option to say how their gift should be used.
- Grant Threshold Amounts (Guidance, s. 5.1). The Guidance identifies grants “up to $5,000” as being low-risk, grants “between $5,000-$25,000’ as posing a moderate risk, and grants “above $25,000” as being high-risk. These current dollar thresholds do not reflect grantmaking in 2023 and we suggest that the Guidance should increase them to “up to $25,000”, “between $25,000-$250,000”, and “above $250,000”, respectively. Additionally, the Guidance should clarify that, when determining which risk category a grant falls into, the charity should consider its size and sophistication as a funder, the nature of the grantee, and other relevant factors. For example, a $100,000 grant may be low-risk in one scenario but high-risk in another. In general, the Guidance should refer more broadly to materiality as a factor that a charity can consider when deciding which accountability tools to adopt.
- Acceptable Grantmaking Purpose. Thousands of charities have a sole grantmaking purpose that restricts them to making grants to qualified donees only. Whether in the Guidance or elsewhere, the CRA should say what it expects these charities need to do to enable them to make qualifying disbursements to non-qualified donees. One option would be for the CRA to offer the following corporate purpose as a model purpose: To receive and maintain a fund or funds and to apply all or part of the principal and income, to advance such purposes are as recognized as charitable at law exclusively by making qualifying disbursements as defined in subsection 149.1 of the Income Tax Act (Canada). In our view, adopting this model purpose would be sufficient; the charity need not adopt any additional charitable purposes at law in order to meet the qualifying disbursement rules. This would also reflect the spirit of Bill S-216 as was the government’s intention when it introduced these changes. This approach makes the most sense and imposes less of a regulatory burden on both the charity (which only needs to adopt the model purpose) and the CRA (which only needs to verify that the model purpose has been adopted).
Anti-directed giving rule should not be engaged if the gift meets the qualifying disbursements requirements
Sections 72 to 76 of the Guidance deal with the new anti-directed giving rule. As amended, the rule provides that a registered charity can have its charitable registration revoked if it “accepts a gift the granting of which was expressly or implicitly conditional on the charity… making a gift to another person, club, society, association or organization other than a qualified donee” (Act, paragraph 168(1)(f)).
Parliament originally introduced paragraph 168(1)(f) in the context of registered Canadian amateur athletics associations (RCAAA), to deal with concerns that RCAAAs had been found to be accepting gifts from parents to support their children’s participation in their athletic programs.[1] The rule, in other words, was targeted at inappropriate private benefit in a specific context.
The addition of registered charities to this rule is problematic because the provision is drafted very broadly and on its face could apply to a very wide range of gifts for legitimate charitable programs. Charities will need reasonable certainty over what will contravene paragraph 168(1)(f); it cannot be interpreted in an overbroad manner.
The Guidance states that, to avoid concerns over “conditional gifts”, charities should communicate to their donors that donors may only indicate program preferences, with ultimate authority for the use of the gift being retained by the charity, and that donors will not receive a refund if their gifts are not used as intended.
The Guidance also states, at section 76, that the rule is intended to prevent charities from acting as “conduits”, including in circumstances in which a Canadian charity exists solely as a fundraising arm of another organization in another country. The Guidance states “In these circumstances, the affiliate would make all decisions around the use of resources, and the Canadian charity would not be in a position to act independently.”
In our view, the approach in the Guidance neither provides clarity nor accords with longstanding gifting practices. The Guidance suggests that donors should be limited to making unrestricted gifts, with no more than precatory language expressing non-binding preferences for programs. However, it has long been accepted that donors can make gifts that are restricted to being used in particular charitable programs. So long as the program is charitable, the restricted gift is entirely appropriate and legal. In suggesting that the only way charities can avoid revocation under paragraph 168(1)(f) is to limit themselves to accepting precatory gifts, the Guidance upends decades of established practice and threatens to undermine charities’ ability to fundraise for their programs.
We recommend that the CRA clarify paragraph 168(1)(f) and deal with its “conduit” concerns by confirming that gifts that a charity accepts that will be used for programs carried out by a non-qualified donee will not contravene paragraph 168(1)(f) if the subsequent gift to the non-qualified donee meets the qualifying disbursements requirements. This approach ensures that gifts are used for the charity’s charitable purposes only and that the charity accepting the gifts can verify the proper use of the funds. This parallels the concept of “conduit” in the related context of working with intermediaries and maintaining direction and control.
This new approach would provide certainty and would be consistent with the spirit of Bill S-216, which was intended to make it easier for charities to work with non-qualified donees. The current approach in the Guidance undermines this enabling spirit by effectively preventing charities from fundraising for programs that will be funded through qualifying disbursements to non-qualified donees.
Further, we have concerns with the example that the CRA uses in s. 76 of the Guidance. The CRA says, in part:
Donors can support these grants by making a donation to the charity. For example, when donating online, the web page asks how the donor would prefer the charity use the donation. The donor can indicate its preference, which could include the name of the local food bank. At the top of that web page, the charity includes a message to its donors. The message says that a donor can ask that the donation go to a particular program, but that the charity has the ultimate authority to decide how to use the donation. The web page also says that if the charity does not use the donation for the donor’s preferred program, it will not return the donation to the donor.
Since the charity also uses third party websites to collect donations, it makes sure to use the same messaging on those pages also.
Although the message that this example uses meets the requirements under section 73, we are concerned that the display of this message “at the top of the web page” comes across as unnecessarily aggressive towards prospective donors and gives charities the wrong impression that they can only relieve the CRA’s conduit concerns by adopting this form of messaging. We suggest that the CRA change this example and provide alternatives suggestions for how charities could comply with the anti-directed giving rule. For instance, the charity in the example could provide donors with a drop-down menu of limited charitable programs on which the gift could be used. Alternatively, the charity could decide not to provide online donors with an open-ended option to indicate how their gift should be spent.
CRA should increase dollar amounts and apply a contextual approach
Section 5.1 of the Guidance describes how a charity should assess risk before making a qualifying disbursement to a non-qualified donee. This part of the Guidance sets out due diligence measures and accountability steps that the charity should take, depending on the risk level.
To illustrate risk levels, the Guidance uses, among other metrics, grant threshold amounts. It specifically identifies grants “up to $5,000” as being low-risk, grants “between $5,000-$25,000’ as posing a moderate risk, and grants “above $25,000” as being high-risk.
The Guidance’s general risk-based approach is reminiscent of the similar and highly prescriptive “direction and control” framework—a framework that Bill S-216 and the new qualifying disbursements rules in the Act were intended to depart from—and is unfortunate. The CRA should abandon this risk-based approach.
If this general approach were to remain, we recommend that the CRA both revise and qualify the Guidance’s proposed grant threshold amounts to reflect both reality and how charitable funders operate.
First, the thresholds should be updated to $25,000 and $250,000. Any grant up to $25,000 is “low-risk”, any grant between $25,000 and $250,000 poses a “moderate risk”, and any grant over $250,000 is “high-risk”. These numbers are more reflective of grantmaking in 2023, particularly in light of rising costs worldwide, Canadians’ increased reliance on charitable services, and the increase in the disbursement quota. If the size and experience of the charity is relevant, the CRA could add a footnote clarifying that the thresholds may be lower if the funder is a smaller charity.
Second, the CRA should add a paragraph before the chart in s. 5.1 or elsewhere in the Guidance to confirm and illustrate that, when determining which risk category a grant falls into, the charity should consider its size and sophistication as a funder, the nature of the grantee, and other relevant factors. For example, a $100,000 grant may be low-risk in one scenario but high-risk in another. We prefer that the Guidance refer more broadly to materiality as a factor that a charity can consider when deciding which accountability tools to adopt (such as whether to collect all receipts).
As drafted, the Guidance does not make clear that the grant dollar amounts will not be treated as bright line tests by auditors. This, in our view, is a mistake and needs to be fixed. Treating any dollar threshold as definitive is not only inflexible but could also fail to resolve the CRA’s underlying concerns about risk: why should five $5,000 disbursements to five different non-qualified donees in a year be considered less risky and subject to fewer accountability tools than one $25,000 disbursement to one non-qualified donee?
CRA should say what kind of grantmaking purpose will be acceptable for making qualifying disbursements to non-qualified donees
Thousands of registered charities have a limited grantmaking corporate purpose (which we will call the “Grantmaking Purpose”) that is or is some variation of:
To receive and maintain a fund or funds and to apply all or part of the principal and income therefrom, from time to time, to qualified donees as defined in subsection 149.1 of the Income Tax Act (Canada)
Many charitable foundations have the Grantmaking Purpose as their only corporate purpose.
The Grantmaking Purpose is not a charitable purpose in the strict sense but it does allow the charity to support any entity that has any charitable purpose as recognized by CRA or that is otherwise a qualified donee.
Charities with the Grantmaking Purpose will want to take advantage of the new qualifying disbursement rules. Those rules state that a qualifying disbursement must further at least one of the charitable purposes of the charity.[2] These charities want to know if they have to amend the Grantmaking Purpose in order to make qualifying disbursements to non-qualified donees and, if so, how.
We propose that grantmaking charities adopt the following revised purpose (which we will call the “Revised Purpose”) if they wish to make qualifying disbursements to non-qualified donees:
To receive and maintain a fund or funds and to apply all or part of the principal and income, to advance such purposes are as recognized as charitable at law exclusively by making qualifying disbursements as defined in subsection 149.1 of the Income Tax Act (Canada).
If the CRA is of the view that the Revised Purpose or another corporate purpose is acceptable, it should say so explicitly and publicly. The clarification need not belong in the Guidance, specifically; however, we say without exaggeration that thousands of charities need input and guidance from CRA on this issue.
In our view, the Revised Purpose can stand alone without any additional charitable purpose. Specifically, a charity would not need to adopt one or more established or “active” charitable purposes at law (advancement of education, alleviation of poverty, etc.), on top of the Revised Purpose, in order to meet the qualifying disbursements rules. In our view, it does not make sense to require charities to identify and adopt a lengthy list of charitable purposes in order to take full advantage of the new qualifying disbursements rules. Nor does it make sense for the charity to adopt a new purpose each time it wishes to make a qualifying disbursement to a non-qualified donee in furtherance of a charitable purpose at law that is different from the charity’s existing purposes. A broad approach instead would make the most sense; it also imposes less of a regulatory burden on both charities and the CRA: charities only need to adopt the Revised Purpose and the CRA only needs to verify that the Revised Purpose has been adopted.
Concluding Remarks
We thank you for inviting us to provide our comments on the Draft Guidance. Should you have any questions about anything in this letter, we would be pleased to speak to you at your earliest opportunity.
Yours truly,
MILLER THOMSON LLP
[1] See Canada (Minister of National Revenue) v. Burns, 88 D.T.C. 6106 (F.C.A.); and Canada (Minister of National Revenue) v. McBurney, 85 D.T.C. 5433 (F.C.A.).
[2] Act, s. 149.1(1).
