On June 11, 2009, the Charities Directorate of the Canada Revenue Agency (“CRA”) released its much anticipated Guidance (CPS-028): Fundraising by Registered Charities (the “Guidance”), that applies to fundraising activities by registered charities. The Guidance, which includes 23 pages of additional information that elaborates on the Guidance (the “Additional Information”), replaces CRA’s previous policy on fundraising (CPS-001), entitled Applicants that are Established to Hold Periodic Fundraisers.
Readers will recall that CRA had released an earlier draft version of the Guidance that was entitled Consultation on Proposed Policy on Fundraising by Registered Charities as well as a draft earlier version of the Additional Information that was entitled Background information for Proposed Policy on Fundraising by Registered Charities in March and June of 2008, respectively, (collectively the “Proposed Policy”) in order to consult with the charitable sector on their contents before releasing them in final form.
The Guidance has now been in refinement for over a year, and given the importance of fundraising to the charitable sector, its release has been closely followed by most stakeholders in the sector. However, while the Guidance represents a significant improvement over the Proposed Policy, it will likely prove to be challenging for most charities to comply with.
The following are some of the key features of the Guidance.
Fundraising in the charitable context
At the outset, the Guidance explains that if a fundraising activity is appended to another activity that is directed at achieving a charitable purpose, the charity may, under certain specified situations, allocate the costs between fundraising and charitable expenditures.
The Guidance goes on to explain, however, that in addition to having to comply with the terms of the Guidance, charities must also meet all other requirements of the Income Tax Act, such as its annual disbursement quota. While this fact is not a change in the position of CRA, it was not previously expressly stated in the Proposed Policy, which might otherwise have led to potential confusion between the need to comply with statutory disbursement quota requirements and fundraising expenditure requirements in the Proposed Policy.
Definition of fundraising
The Guidance explains that as a general rule, fundraising constitutes any activity, either carried out by the charity or by another party acting on the charity’s behalf. However, the Guidance makes it clear that the definition of fundraising does not include requests for funding from governments or from other registered charities.
Prohibited fundraising conduct
The Guidance outlines four types of prohibited conduct related to fundraising. They include fundraising that (A) is illegal or contrary to public policy; (B) is a main or independent purpose of the charity; (C) results in more than an incidental or proportionate private benefit to individuals or corporations; and (D) is misleading or deceptive.
Allocation of fundraising expenditures
A registered charity must report all fundraising expenditures in its T3010A annual information return (as well as T3010B for year ends after January 1, 2009). However, an activity does not have to be included as a fundraising expenditure if it can be demonstrated that “the activity would have been undertaken whether or not it included a solicitation of support.”
There are two methods by which this can be demonstrated: (1) the “Substantially All Test”, which means that a charity does not have to report any of the costs of the activity as fundraising expenditures; or (2) the “Four Part Test”, which allows the charity to allocate a portion of the costs as non-fundraising expenditures and the other portion as fundraising expenditures. However, charities will likely find some of the intricate aspects of the “Four Part Test” to be unusually complex.
Evaluation of fundraising activities
The previous rigidity and arbitrariness of using five fixed-percentage ranges as an initial determination tool was a major subject of criticism of the Proposed Policy when it was released in 2008, whereas the Guidance establishes a far more flexible approach. In this regard, the Guidance introduces a revised series of fundraising ratios as follows.
Guidance’s Categorization of Fundraising Ratios
Ratio of costs to revenue over fiscal period | CRA Approach |
Under 35% | Unlikely to generate questions or concerns. |
35% and above | The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is that there will be concerns and a need for a more detailed assessment of expenditures. |
Above 70% | This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is in compliance; otherwise, it will not be acceptable. |
In addition, the Guidance sets out a number of factors that are to be considered in the evaluation of fundraising activities, as well as a series of “best practices” and “areas of concern” that can be considered by CRA.
Areas of continuing concern
While the Guidance constitutes a noticeable improvement over the Proposed Policy, charities should be aware that many of the concerns about the Proposed Policy that were raised during the public consultation phase continue to be found within the Guidance. The following are some of those concerns:
· The simplified language and reduced length of the Guidance should mean that the Guidance would be easier to read and understand. However, since the substantive concepts remain largely unchanged from the Proposed Policy, the Guidance constitutes a complex document to work with and could prove difficult for charities to fully understand and implement.
· The more flexible and open-ended approach to evaluating fundraising activity is certainly an improvement over the Proposed Policy. However, many of the factors and criteria in the Guidance continue to be open to subjective interpretation. As such, there will likely be variations and inconsistencies in the interpretation of the Guidance by charities and their professional advisors, as well as by CRA auditors when a charity is subject to an audit by the Charities Directorate.
· Although the “best practices” and “areas of concern” are not necessarily requirements that have to be followed by a charity, some of those factors may prove challenging for charities to comply with. Specifically, the Guidance emphasizes the importance of public disclosure and transparency regarding the cost of fundraising activities. While there is no disagreement that transparency in and disclosure of fundraising costs is important, the extent of the expectation placed on charities by the Guidance may result in some charities having difficulty in attracting donors when it is necessary for the charity to disclose the estimated fundraising costs and revenues of its annual budget when asking for a donation from a prospective donor.
· Due to the time delays that often occur in fundraising campaigns from the time donations are requested to when donations are received, it would have been preferable if CRA had used a rolling average (e.g. over several years) as the basis for evaluation instead of a single fiscal year.
Concluding comments
While the Guidance is clearly a marked improvement over the earlier Proposed Policy, it will most likely prove to be a challenging document for charities to work with, and as a result it may take the charitable sector some time to fully comprehend its implications.
Given that the Guidance is not intended to constitute a new policy but rather only a clarification of CRA’s position on fundraising, the Guidance will not only apply to audits in future years but also to audits of past years. As such, it is important that all registered charities which depend on fundraising, together with their staff and board members, become familiar with the content of the Guidance.
The ability of a charity to retain its charitable status in the future may very well depend on whether it can show that it has made reasonable efforts in meeting the requirements of the Guidance.
