Canadian Charities Operating Overseas
Adam Aptowitzer, May 31, 2006
Overseas operation is fundamental to the operation of many charities, especially religious charities, and so it is important for these charities to have a good understanding of the law regarding carrying out charitable activities overseas. Given that the government subsidizes registered charities to the extent that it gives tax credits for the amount donated, it should not be surprising that the CRA attempts to exert as much control over funds spent overseas as funds spent domestically. In the past, the CRA has insisted on onerous documentation requirements for funds spent overseas although this requirement was disputed by many in the sector. The Federal Court of Appeal recently weighed in on the debate in the case of Bayit Lepletot v. MNR .
The primary lesson to learn from Bayit Lepletot is that Canadian charities must be scrupulous about keeping records when operating overseas. Assuming the overseas work falls within the charity’s objects the Bayit rule manifests itself in different ways depending on whether the charity conducts its overseas operations 1) on its own 2) through an agent or 3) through a joint venture with another charity.
Where the charity is fulfilling its objects by acting alone in a foreign country its bookkeeping requirements are fairly easy to satisfy as it controls every dollar that is spent. That is, there would not seem to be a problem accounting for resources in situations where the charity owns a building overseas, conducts its operations in that building, and hires its own staff to do so, without the involvement of any other parties. On the other hand, charities must be on their guard when distributing items which can be used for purposes other than for strictly charitable uses (although this is beyond the scope of this article).
In cases where a charity partners with another group (either a charity or not) it must ensure that its contributions is controlled so that it is only going for purposes that fulfill its charitable objects, no more and no less. One way to do this is to retain an agent in the foreign country who can act on behalf of the charity. Generally, these agreements should be written and should require constant communication from the foreign agent to the charity so that it is clear where funds are being spent. It should also include minutes of the charity’s meetings authorizing the release of funds.
In Bayit Lepletot the charity ostensibly operated by way of agency agreement. There, the Court held that the charity must have enough documentation to allow the CRA to ensure that funds are being spent in accordance with the Charity’s objects. The CRA’s policy on the documents required when operating overseas with an agent is broad (some would say overly so), so it would be in the charity’s best interests to ensure that there is as much documentation as possible. For example, before money is transferred, the agent should transmit a written request for funds and the reason the funds are required, the Canadian charity should consider the request and record its approval in its minutes. All documents regarding the transfer of funds should be kept (i.e. bank documents, cheques, records of exchange rates, and the date the funds were received). The agent should then meticulously record the payment of funds to whom and their purpose (always ensuring that the money goes toward fulfilling the charity’s objects) and transmit copies of these records (as well as receipts) back to the charity. It would also be wise for the agent to give a periodic report to ensure that the charity’s assets are still being used for their original charitable purpose. Given the CRA’s seeming distrust of charities it would probably even be beneficial for the charity to take pictures of its work to evidence the work it does.
Charities can also operate overseas through a joint venture. The definition of a joint venture is somewhat more nebulous than that of an agency relationship. In a joint venture two or more groups contribute resources toward the fulfillment of a particular object. For example, a Canadian charity may contribute funds and an African organization may contribute a building and staff towards running an orphanage in Africa. In cases such as these the CRA will likely look to see that the Canadian charity has control over the project proportionate to the amount of resources it contributes. (Of course, it will also look to see that funds are being spent towards charitable purposes). While the Bayit Lepletot case did not deal with joint ventures specifically, the principle of meticulous record keeping would seem to apply here as well and the prudent course of action would be to document as much control over the spending of funds as possible. Given the different arrangements a joint venture can take on, it would be best to call our firm if your organization conducts overseas operations by way of a joint venture, or if you have any other questions.