On June 30, Canada Revenue Agency released a draft consultation paper entitled Consultation on the Proposed Guidance on Activities Outside of Canada for Canadian Registered Charities  (“Proposed Guidance”), which is intended to update and replace the publication on foreign activities entitled Registered Charities: Operating Outside Canada RC4106 (“Current Policy”).

The Proposed Guidance constitutes a significant improvement over the Current Policy by providing a more practical guide for charities that operate outside of Canada. Also, the Proposed Guidance is intended to apply to all activities carried on through intermediaries both outside and within Canada. CRA is accepting comments on the Proposed Guidance until September 30, 2009. 

The Proposed Guidance explains that a registered charity can pursue its charitable purposes by either (1) making gifts to qualified donees; or (2) carrying out its own charitable activities. When a charity cannot carry out an activity with its own staff, it may use an intermediary. The Proposed Guidance explains the different types of intermediary relationships that are acceptable to CRA:

Agents

CRA warns charities that they “must always be able to show that the agent is carrying on the charity’s own charitable work.”

Joint Venture Participants

A charity can work with non-qualified donees as long as the charity can demonstrate its control over the activities is proportionate to the resources it is providing.

Co-operative Participants

A co-operative participant is “an organization that a charity collaborates with to achieve a common, charitable purpose. It is not meant to create or imply a special legal status between the organizations.”

Contractors

Before contracting out the work, charities should have a clear idea of what the project is that the charity is attempting to carry out and how long it will take to complete from beginning to end. 

The key component of the Proposed Guidance is the requirement that a charity must meet the “own activities test.” This test is defined as follows:

Whether a charity works through its staff or through intermediaries, the Act requires a charity to devote all of its resources to charitable activities carried on by the organization itself. (Proposed Guidance, note 1 at para. 48)

The Proposed Guidance provides some indicators that CRA considers when determining whether an arrangement with an intermediary is acceptable. They are divided into six “measures of control”:

Written Agreements

Although there is no formal requirement for written agreements, CRA views them as an effective way to help meet the “own activities test.” 

Description of Activities

A statement of activities is required to show that the charity is able to give “a clear, complete and detailed description of that activity.” 

Monitoring and Supervision

One way a charity can demonstrate it controls the use of its resources and meets the “own activities test” is to have an “ongoing relationship with its intermediary through regular monitoring and supervision.”

Ongoing Instruction

The charity should be providing ongoing instructions to the intermediary to demonstrate that it continues to control the activities. 

Periodic Transfers

Charities should retain the right to discontinue the transfer of funds and to have unused funds returned if the charity is not satisfied with the reporting, progress or outcome of an activity. 

Separate Activities and Funds

A charity must be able to distinguish between its activities and those of its intermediary when carrying on activities through an intermediary.

Agreements will generally need fewer of these measures of control when the resources (because of their nature) can only be used for charitable purposes, which is consistent with the longstanding informal “charitable goods policy.” The Proposed Guidance also points out that not all of CIDA-funded activities will be considered to be charitable, and recommends contacting the Charities Directorate when uncertain regarding CIDA-funded projects. 

Recordkeeping requirements

Charities must keep adequate books and records in Canada, in either English or French, failing which the charity could be subject to sanctions under the Act, including the loss of charitable status. However, CRA acknowledges that in some situations, i.e. war, famine, natural disasters, it may be difficult or impossible to obtain the required records. In these situations, the charity must demonstrate that it made all reasonable efforts to obtain the necessary records. The Proposed Guidance also explains the requirements for books and records with regards to agency, contracts for services and joint venture arrangements. 

The disbursement quota is not affected by whether the charity is carrying on its own activities or not, and applies to charitable organizations operating outside of Canada in the same way that it applies to those operating in Canada. CRA notes that calculating the disbursement quota could be difficult when working jointly or in partnership with another organization. 

Appendices cover specifics

The Proposed Guidance concludes with a number of appendices which provide more detailed guidance in particular situations.

Appendix A - Applications for Charitable Registration to Provide Disaster Relief acknowledges the timely nature of disaster relief. Priority is typically assigned to these files.

Appendix B - Capacity Building reflects a broad, practical understanding of capacity building that allows charities to help communities deal with root causes of problems.

Appendix C - Additional Guidelines for Joint Ventures lists some factors that will be considered when determining whether or not a charity meets the “own activities test” when working through joint ventures.

In situations where a charity may wish to transfer real or capital property to a non-qualified donee, which is prohibited under the Act, an exception to the general rule with regards to development projects is discussed in Appendix D - Transferring Property to a Non-Qualified Donee. 

Appendix E - Checklist of the Elements of a Written Agreement, provides a checklist for charities to use to ensure that their agreements contain the “minimum elements necessary” for compliance with the Act. 

The Proposed Guidance is significantly improvemed over the Current Policy. It better reflects developments in the world in which charities operate. It also clarifies much previously ambiguous wording. One of the most noticeable additions in the Proposed Guidance is a section on compliance with Canada’s anti-terrorism legislation, which is not addressed in the Current Policy.

The Proposed Guidance still has challenging aspects, such as the burdensome requirement that an intermediary produce receipts, invoices and vouchers at the end of a charitable program, particularly when the charitable program involves utilization of contractors. Despite these few deficiencies, the Proposed Guidance is a welcome improvement over the Current Policy and as such should be carefully studied by charities and their advisors. 

The authors would like to thank Jason Todoroff, Student-at-Law, for assisting in the preparation of this bulletin.

Terrance S. Carter, B.A., LL.B., Trade-Mark Agent, is the managing partner with Carters Professional Corporation and Counsel to Fasken Martineau DuMoulin LLP on charitable matters. Contact him at 519-942-0001, 1-877-942-0001, tcarter@carters.ca. 

Karen J. Cooper, B.Soc.Sci., LL.B., LL.L., TEP, is a partner with Carters Professional Corporation. Contact her at 519-942-0001, 1-877-942-0001, kcooper@carters.ca.