Charitable food banks have been in the news lately. In Europe, the Government of France passed laws to stop supermarkets from throwing away food and instead making them donate it to charities and food banks. In California, where there is a sales tax on disposable diapers, a proposed bill to eliminate the sales tax to help needy families was vetoed by Governor Jerry Brown. The Calgary Food Bank lamented that the families they serve were in need of diapers but the cash that the food bank received could not be used to purchase diapers. The reason given? The Calgary Food Bank said that their charitable objects/purposes only allowed them to use their cash donations to purchase food, not diapers. This has raised an important issue.
Kudos to the Calgary Food Bank – legal name Calgary Inter – Faith Food Bank Society – one of Canada’s A+ top rated charities, for drawing attention to the fact that charities need to stick to their knitting. What happens to a charity if it decides all of a sudden to not stick to what it is was created to do, but to do something different, such as changing from giving away food to buying and giving away diapers? This is something that charities grapple with around the boardroom table. There are some consequences to those who do take the plunge and make the change. This is what Canada Revenue Agency Charities Directorate says about changing a charity’s purpose:
Changing a charity’s purposes
A registered charity must be established for charitable purposes (sometimes referred to as ‘objects’). If a charity introduces purposes that do not qualify as charitable, it is placing its registered status in jeopardy.
By consulting with the Charities Directorate before making changes, a charity can avoid the need to further amend its purposes. The charity should provide both its proposed purpose(s) and a detailed statement of activities for our review. The statement of activities should fully describe in detail how the charity intends to accomplish its new purpose(s).
After the charity has legally changed its purposes, it should provide the Charities Directorate with the applicable documentation as identified below:
Charities that are incorporated
Provide a copy of the amended incorporation documents (for example, supplementary letters patent, articles of amendment, or special resolution) bearing the seal, stamp, or signature of the incorporating authority.
Charities established by a constitution
Provide an amended constitution with the signatures of two directors and the effective date.
Charities established by a trust document
We recommend that a charity get legal advice before making any changes to a trust document to ensure that changes can be made and that they are legally valid.
There are charities who have suffered from what is sometimes referred to “mission creep” where what the charity was originally legally set up to do and approved to do by Canada Revenue Agency, is not actually what the charity is doing today. These charities are at the edge of a cliff and subject to the whim of any CRA Auditor that visits their premises, reviews their activities and compares it to their actual charitable purposes that had been approved by CRA. The risk of revocation of charitable status is high.
So what are the options for directors of a charity sitting around the boardroom table pondering a decision to tweak or change their purposes? Those charities contemplating a change might consider taking any of the following action.
- Make the decision to change the charity’s purposes and go ahead with the change without telling anyone or taking any legal steps to amend the legal objects/ purpose of the charity. This is not an option because these kinds of organizations would fall into those who have been described above as suffering from mission creep with the edge of the cliff consequences.
- Send in proposed changes that the charity wants to make to the Canada Revenue Agency Charities Directorate for pre-approval before any actual steps are taken to make the changes. This would happen before any legal changes are made to the legal objects/purposes and before any actual changes in the actual activities of the charity. Unfortunately this step takes almost as long as getting a charitable registration from CRA in the first place. Charities who want to change their purposes may be in limbo for months or years before they are confident that they can carry on with their new purposes and activities.
- Make the decision and go ahead and make the legal changes to the objects/purposes of the charity and then send the changes into CRA indicating that the changes have been made. This step is a gutsy one and should only be undertaken with advice that the new purposes and activities of the charity are in fact charitable.
Each of these approaches has a different outcome and different time period. Each carries their own risk. Just like any business or individual taxpayer dealing with matters that involve the CRA, each charity board has to weigh their own appetite for risk and decide, as the saying goes, if it is better to ask for permission than forgiveness. A food bank charity created to distribute food, but contemplating making a change to allow them to not only purchase food with their cash donation but also diapers to give away, has to make this decision if it wants to do anything besides stick to its knitting. It may be just as easy to find another charity that already has legal objects/purposes to buy and give away diapers to those in need.
As for the diaper issue, it is interesting to know that across Canada there is GST of 5% on children’s diapers but no tax at all on adult incontinence products (adult diapers). So does this mean that wealthy old people pay no tax on what they need but poor people with young children do pay tax on what they need for their children? For those charities dealing with diapers for needy families and their children, this could become a hot political issue. Oh wait! Charities are not supposed to become involved in “hot political issues”, so that would be a non-starter. Someone else will have to take up this cause. Any takers?