Can a Registered Canadian Charity Give Money to Another Organization That Is Not Another Canadian Charity?
Canadian charities can now provide qualifying grants to non-qualified donees.
Most organizations in Canada not registered as charities under Canada’s Income Tax Act (1985) (the act) are not captured by the definition of a qualified donee under the act. Historically, a Canadian charity could not give money to an organization that was not a qualified donee except where the charity could demonstrate direction and control over the funds it provided within the context of an intermediary relationship.
However, Bill C-19 was passed in 2022, which, among other things, allowed charities to provide money to non-qualified donees by way of a grant. This drastic change to the act recognizes the significant value non-qualified donees bring to the charitable sector of Canada and internationally. Instead of continuing to mandate a hierarchal relationship where charities control non-qualified donees, they can now work side by side through the use of grants.
There is a wide array of conditions that must be satisfied in order to keep the CRA happy with any grant arrangement.
First, the non-qualified donee who receives the grant (the grantee) must use the money in furtherance of one of the charity’s listed charitable purposes. This means a charity cannot provide a grant to a grantee whose activities would not fall into one of the four legally defined heads of charity. It would be insufficient for a charity to provide a grant to a grantee that advances education when the charity’s sole purpose was the relief of poverty. The charity must ensure the grantee exclusively applies the granted funds to charitable activities that further one of the charitable purposes of the charity itself.
Second, the charity must maintain sufficient books and records during the duration of the grant. These books and records must adequately demonstrate: the purpose for which the disbursement is made; and that the disbursement is exclusively applied by the grantee to charitable activities in furtherance of a charitable purpose of the charity. The CRA recommends a charity maintain documentation that shows: the grant’s purpose; the grantee exclusively applied the resources to that purpose; and that the charity applied due diligence to meet this requirement when making the grant.
Third, the charity must ensure the grant passes the public benefit test and does not confer an unacceptable private benefit. The act mandates that the activities of a charity must: provide a tangible benefit that is conferred directly or indirectly; and that such benefit is directed to the public or a sufficient section of the public. The benefit a charity confers must achieve a universal good not harmful to the public and not one that seeks a private advantage. A charity must ensure a grant does not benefit a person, entity or organization and instead serves the general public. However, it is permissible for a grant to provide a public benefit where it is incidental to achieving a charitable purpose because it is necessary, reasonable and proportionate to the resulting public benefit. Charities should be especially mindful of conferring unacceptable public benefits when granting: resources susceptible to non-charitable use; to individuals; and to for-profit organizations. Further, it is imperative a grant is not made to an individual or group engaged in or supporting terrorist activities.
What degree of due diligence is required by a charity before making a grant to a grantee?
In CRA Guidance CG-032 at Section 3.2.1, the CRA has shared a risk assessment table to assist charities in determining the overall risk level of a grant. There are three levels of risk: low, moderate and high. Based on the charities assessment of the grant’s risk, there is a corresponding level of due diligence recommended by the CRA. For example, a low-risk grant may only require email records and meeting minutes, along with a simple ledger and supporting documentation; whereas, a high-risk grant may require a formal agreement between the charity and the grantee, as well as detailed reports and sophisticated accounting tools.
Some factors suggested to be reviewed when assessing the risk factors of a grant include: the experience levels of both the charity and the grantee in working with such arrangements; the level of concern with the funds having an unacceptable private benefit; and whether the grant will be used internationally, and if so, the socio-economic condition of the country where the grantee will be operating.
Why is this important?
Simply put, the new granting regime is a cheaper and more efficient framework that will assist the charitable sector as a whole with furthering charitable purposes.
Historically, the only way a charity could provide funds to a non-qualified donee was by entering into a relationship where the charity maintained direction and control over the funds. This meant charities must enter into formal written agreements with non-qualified donees and implement rigorous accounting tools to ensure funds were used to further the charity’s charitable purpose. One such mechanism was the ability for the charity to pull the funds at any time.
Intermediary arrangements created a hierarchical relationship where the charity had to control the non-qualified donee and continue to monitor and provide instructions over the term of the arrangement. With this new granting regime, the CRA’s focus has now transitioned from having a charity direct and control a non-qualified donee’s activities, to an approach that focuses on a charity ensuring a grantee maintains accountability and due diligence. With granting, the charitable activities remain those of the grantee, not the charity. A charity no longer has to provide ongoing instructions to the grantee and instead can collaborate.
The lawyers in Ross & McBride’s charities and not-for-profit law department can assist a charity with entering into a grant arrangement with a non-qualified donee, which includes a risk assessment of the grant and an opinion about the corresponding accountability tools suggested for compliance with the Income Tax Act.
This article was originally published by The Hamilton Spectator.
