By: Adam Aptowitzer
Canadian charities proudly participate in important work around the world. Until now, the law requires that registered charities meet the ‘own activities’ test. On a practical level this means that they need to maintain control and direction over their funds and resources, and perhaps even more difficult, they need to keep records showing this control and direction. In our experience, as the CRA can always make the argument that there is insufficient control, charities had a difficult time meeting this test.
The control and direction tests also meant that Canadian charities were always the ‘odd duckling’ in international partnerships. Invariably Canadians were smaller contributors to projects, but demanded a level of control that was not only annoying relative to the amount contributed, but also incongruous with the requirements from other rich countries.
On the other hand, Canadians forego tax revenue whenever a dollar is donated to charity, so the government has an interest in ensuring that the funds are only spent on purposes that it approves. Hence, CRA resources were focused on ensuring that Canadian charities could prove where the funds were going.
The situation for Canadian charities has been very difficult for a long time and suggestions have been made many times for its change. The recent Senate report “Catalyst for Change” recommended:
That the Government of Canada direct the Canada Revenue Agency to revise Guidance CG-002 “Canadian registered charities carrying out activities outside Canada.” The revised guidance should demonstrate a shift in focus from “direction and control” to careful monitoring through the implementation of an “expenditure responsibility test.”[1]
Following the Senate Report Senator Omidvar proposed the expenditure responsibility test to replace the (now former) control and direction test. While that bill (S-222) died when the previous election was called, Senator Omidvar re-proposed the idea in what became bill S-216.
Budget 2020 proposes to adopt the measures of Bill S-216. The measures are below. Basically, they will allow the Canadian charity to distribute funds to a foreign organization where the charity is reasonably sure that the funds will be used in fulfillment of the charity’s purposes, that agreements to that place are in effect and that reporting is in place to confirm that.
Fortunately, many charities already engage in a review of their foreign partner before committing to a relationship with them and require extensive reporting to ensure that their funds are properly used. So, there is no reason to completely reinvent a charity’s practices. The main difference is that the charity can now rely on the foreign organization’s own commitment to fulfilling the project rather than imposing the Canadian charity’s presence to ensure control and direction.
Below is the excerpt from the Budget. It is important to note that right now, this is all we have for direction. The government has not provided the proposed technical changes to the Act (this does happen from time to time, but is unusual), which leaves a number of unanswered questions. Charities should not be implementing any changes based on this announcement and must wait until the actual legal changes are made official. (You can bet that we will be following the issue closely and will let you know!).
Charitable Partnerships
Under the Income Tax Act, registered charities are limited to devoting their resources to charitable activities they carry on themselves or providing gifts to qualified donees. Where charities conduct activities through an intermediary organization (other than a qualified donee), they must maintain sufficient control and direction over the activity such that it can be considered their own.
Budget 2022 proposes a number of changes to improve the operation of these rules, allowing charities to make qualified disbursements to organizations that are not qualified donees, provided that they meet certain accountability requirements under the Income Tax Act. Additional measures designed to ensure compliance by charities with these new rules are forthcoming.
Accountability Requirements
Budget 2022 proposes to allow charities to make qualifying disbursements to organizations that are not qualified donees, provided that these disbursements are in furtherance of the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.
In addition, in order to be considered a qualifying disbursement, charities will be required to meet certain mandatory accountability requirements defined in the Income Tax Act that are designed to ensure that their resources will be used for charitable purposes, including:
- Conducting a pre-grant inquiry sufficient to provide reasonable assurances that the charity’s resources will be used for the purposes set out in the written agreement. This will include a review of the identity, past history, practices, activities and areas of expertise of the grantee.
- Having a written agreement between the charity and the grantee, including:
- the terms and conditions of the funding provided;
- a description of the charitable activities that the recipient will undertake;
- a requirement that any funds not used for the purposes for which they were granted be returned to the charity; and
- a requirement that records relating to the use of the charity’s resources be maintained and accessible for a minimum of six years following the end of the relevant taxation year.
- Monitoring the grantee, which would include receiving periodic reports on the use of the charity’s resources, at least annually (e.g., details on the use of the funds, compliance with the terms of the grant, and progress made toward the purposes of the grant) and taking remedial action as required.
- Receiving full and detailed final reports from the grantee, including outlining the results achieved with the charity’s resources, detailing how the funds were spent, and providing sufficient documentary evidence to demonstrate that funds were used for the purposes for which they were granted. The charity would also be required to demonstrate that these final reports and supporting documentation were reviewed and approved by the charity.
- Publicly disclosing on its annual information return information relating to grants above $5,000.
Books and Records
To ensure that the CRA is able to verify that charitable resources have been applied to the purposes for which they have been granted, Budget 2022 proposes to require charities to, upon request by the CRA, take all reasonable steps to obtain receipts, invoices, or other documentary evidence from grantees to demonstrate amounts were spent appropriately.
Directed donations
Modifications to the current framework could increase the risk of a charity acting as a conduit for donations to other organizations. To address this issue, Budget 2022 proposes to extend an existing provision in the Income Tax Act, which currently applies to registered Canadian amateur athletic associations and registered journalism organizations, to registered charities. This rule would prohibit registered charities from accepting gifts, the granting of which was expressly or implicitly conditional on making a gift to a person other than a qualified donee.
[1] Drache Aptowitzer lawyers provided direct testimony on these provisions to the Senate committee, which was quoted in the report. Adam Aptowitzer was quoted as follows:
“I would suggest that there’s probably a range of options for control and direction, depending on nature of the activity undertaken by the charity. Under further thought, we may say that the nature of the control necessary on the distribution of alms for the poor in some part of the world is different from the nature of the control and direction we would expect or (sic) a large multinational organization, engaging in some other activity elsewhere in the world”.
And our firm had an important role in explaining to the committee what was then the proposed test. The report states as follows:
For many witnesses, adopting an “expenditure responsibility test” offers the best way forward. In essence, an expenditure responsibility test is a means of ensuring that charities are held accountable for how funds are spent. As we explained to the committee, the test would not reduce oversight, but would free charities from having to “prove a fiction,” namely that the activities being reported were their own.