Fundraising by Charities – CRA does not mean Business
By C.Yvonne Chenier, Q.C.
The CRA has not changed its position on fundraising by charities. The new and improved Fundraising by Registered Charities Guidance, CG-013 issued by the CRA on April 20, 2012, is still their last word on the subject. However, some charities still need to be reminded that not everything they do with a view to making money is acceptable.
Charities that are reviewing their fundraising practices should refer to a specific section in this guidance entitled “When is fundraising not acceptable?”. The guidance then answers the question in the positive by clarifying that fundraising is acceptable unless it is described in a delineated list. It states:
“Fundraising by registered charities must be conducted within legal parameters. Fundraising is acceptable unless it:
— is a purpose of the charity (a collateral non-charitable purpose);
— delivers a more than incidental private benefit (a benefit that is not necessary, reasonable, or proportionate in relation to the resulting public benefit);
— is illegal or contrary to public policy;
— is deceptive; or
— is an unrelated business.
Charities that engage in unacceptable fundraising cannot be registered under the Income Tax Act because they are not constituted and operated exclusively for charitable purposes, or they are not devoting their resources to charitable purposes and activities.”
We have written about some of these of these prohibitions in previous newsletters, as they should be understood by all charities that want to stay in the CRA Charity Directorates’ good books. However questions that arise as charities think ask about getting on the “social enterprise” bandwagon relate to what exactly is the prohibition against fundraising activities from “an unrelated business”. Under the Income Tax Act, a private foundation cannot carry on any business activities so the comments below are only relevant to those charities that are not private foundations.
Do not carry on an unrelated business
There seems to be a misconception out there that if a charity exists for a good cause then anything it does to make a profit is acceptable as long as all of the profits are plowed back into the charity for that good cause. Some do not even consider this fundraising, just a good practice and a way to “fund” their charitable causes, a difference in their minds. Be warned – just because someone has a good business idea that will generate profits for a good cause does not allow the charity to carry on this business. The CRA clearly states in the guidance that “Business activities that registered charities may carry on are restricted, even if all the proceeds are used for charitable programs”. Calling it “social enterprise” does not make it work any better. Nothing can be further from the truth and these kinds of charities are inviting trouble. Many of them cannot believe that what they are doing is wrong until a CRA auditor tells them so, and by then it may be too late. The more seasoned charities seek advice and find a way to incorporate the good business idea into their structure in a way that follows the rules in the particular Provinces where they are operating.
Carry on a related business
There are examples of charities that have carried on profitable business activities for many years. Hospitals that have gift shops, university book stores and museums running cafeterias for their visitors come quickly to mind. These are considered permitted businesses for charities to operate by the CRA because they are related businesses. The guidance is clear on this and states as follows:
” If a charity wants to sell goods or services on a regular basis, or undertakes regular fundraising activities such as social, entertainment, or sporting events, it must ensure it is only carrying on a related business. A related business is one that is:
· operated substantially by volunteers; or
· linked and subordinate to a charity’s purposes.”
Linked means a direct connection such as the book store business to the university’s charitable purpose. Subordinate means that the business is subservient to a charitable purpose like the cafeteria selling refreshments to the museum’s patrons. Note that the business activity must be both linked and subordinate to be acceptable or else it would be considered an unrelated business and prohibited for the purposes of fundraising. The guidance gives a good example of this duality as follows:
A charity is registered to protect the environment by preserving a particular piece of environmentally sensitive wetland. To help fundraise, the charity decides to open a small coffee shop in a nearby city. The coffee shop will be run entirely by paid staff, and will only receive a minor portion of the charity’s attention and resources.
The guidance points out that this coffee shop business is likely to be subordinate, but not linked to the charity’s purposes so this business activity is likely an unrelated business and a form of unacceptable fundraising.
Proceed with Caution
Anything a charity is doing to earn money should be reviewed keeping this example in mind. Until the laws, regulations and guidance catch up with todays’ reality of charities actively looking for new and improved ways to fund their cause, charities should be on guard to keep their commercial fundraising activities in line. Those who have great business ideas and want to incorporate it in their structure should tread carefully.