Canada Revenue Agency (“CRA”) released its much
anticipated new Fundraising by Registered
Charities Guidance: CG-013 (the “New Guidance”) on April 20, 2012, which updates and replaces CRA’s earlier Guidance
(CPS-028): Fundraising by Registered Charities (“CPS-028”) that was
released on June 11, 2009. While the New Guidance represents a significant improvement over CPS-028, as it is much more readable and practical, the New Guidance is still a complex
document that will require careful reading.
CRA has advised that the New Guidance does not represent a
new policy position of CRA, but rather provides information on the current
treatment of fundraising under the Income Tax Act (“ITA”) and the common
law. As such, the New Guidance will have a significant impact on current CRA
audits, not just future audits. As well, the New Guidance applies to both
receipted and non-receipted fundraising.
The New Guidance is intended to provide general advice for
charities to follow and is based on the legal principle, established by case
law, that fundraising must be seen as a necessary means-to-an-end for a
charitable purpose, rather than an end-in-itself. In this regard, it is
possible for a charity to engage in fundraising activities, provided that the
fundraising is ancillary and incidental to the primary purpose of achieving the
In addition to complying with the New Guidance, charities
must continue to meet all other requirements of the ITA, including the 3.5%
disbursement quota. The fundraising ratio referenced in the New Guidance (which
remains the same as in CPS-028) results from data that is included in a
charity’s T3010 which is made available to the public on CRA’s website. As such,
it will be important for the board to review and approve the charity’s T3010
before it is filed with CRA, given that the information contained in it can
later be scrutinized by donors, and the press, as well as members of the public.
B. WHAT IS FUNDRAISING?
The New Guidance explains that, as a general rule,
fundraising is any activity that includes a solicitation of present or future
donations of cash or gifts in kind, or the sale of goods or services to raise
funds, whether explicit or implied. Fundraising may include a single action,
such as an advertisement, or a series of related actions, such as a capital
campaign and includes direct activities, such as face-to-face canvassing, or
indirect/related activities, such as researching and developing fundraising
strategies and plans.
Fundraising activities can be carried out by either the
registered charity or by another party acting on the charity’s behalf, but does
not include seeking grants, gifts, contributions or other funding from
governments or other registered charities, or recruiting volunteers to carry
out the general operations of the charity, or related business activities. This means that not only are the costs associated with such requests not
included in the fundraising expenses, but the resulting income from government
and other charities is also not included in the income with regards to the
fundraising ratio explained below.
1. Examples of Fundraising Activities
a) The Sale of Goods or Services
sale of goods or services by a charity is always fundraising, unless the
provision of the good or service serves the charity’s beneficiaries, directly
furthers a charitable purpose and is sold on a cost-recovery basis, or if it is
a related business. For example, a youth group selling chocolate bars at a
local shopping mall to support a trip that it is planning would be considered
to be fundraising.
b) Donor Stewardship
stewardship occurs when a charity invests resources in relationships with past
donors to solicit further donations. For example, an arts charity inviting only
people who have given gifts above a certain amount to a private reception with
the artists after a performance would be considered to be fundraising.
c) Membership Programs
charities that are member-based, CRA considers membership programs to be
fundraising where members receive material benefits beyond the simple right to
vote and/or receive a newsletter.
d) Cause-related Marketing/Social Marketing Ventures
marketing or social marketing ventures are activities where a charity works in
collaboration with a non-charitable partner to sell goods and/or services. Most
often, the expenses incurred related to the venture are paid by the
non-charitable partner and the charity contributes its logo or other form of
example, CRA would consider a charity creating a page on its website describing
a partnership where a percentage of the sales of a restaurant on a certain day
will be given to the charity and telling people how to participate to be
e) Planning or Researching for Fundraising Activities
considers planning or researching a fundraising campaign by a charity to be a
fundraising activity. For example, a charity acquiring data on the demographics
of a city in order to target those most likely to give as part of preparing for
a door-to-door canvassing campaign, would be considered to be fundraising.
f) Donor Recognition
recognition is the cost of gifts or acknowledgements to thank donors. The costs
of gifts or other acknowledgements must be reported as fundraising expenses,
unless they are of nominal value. Nominal value is a per-donor cost to the
charity of the lesser of $75 or 10% of the donation. For nominal donor
recognition gifts, the expenses must be reported as administrative.
The New Guidance states that the following
conduct is prohibited and is grounds for revocation of a registered charity’s
status, imposition of sanctions or other compliance actions, or denial of
1. Fundraising that is a Purpose of the Charity
Registered charities cannot have
fundraising as a collateral purpose. Where fundraising is a focus of the
organization, being more than ancillary and incidental, it may be a collateral
non-charitable purpose in and of itself. The New Guidance defines “ancillary
and incidental” to mean subordinate or secondary to, and supporting of, the
charity’s purposes, and of relatively modest size.
2. Fundraising with a More than Incidental Private
Fundraising cannot result in an
unacceptable or undue private benefit. A private benefit is any benefit
provided to a person or organization that is not a charitable beneficiary, or a
benefit to a charitable beneficiary that exceeds the bounds of charity. For
example, non-arm’s length fundraising contracts without proof of fair market
value would be considered to be providing a more than incidental private
benefit. As a general rule, incidental private benefits are acceptable where it
is necessary, reasonable, and proportionate to the public benefit achieved.
3. Fundraising that is Illegal or Contrary to
Illegal fundraising includes anything
that is criminally fraudulent, violates federal or provincial statutes
governing charitable fundraising, charitable gaming, the use of charitable
property, or consumer protection, or facilitates terrorism. Illegal fundraising
also includes fundraising that is associated with illegal conduct, such as an
abusive gifting tax shelter scheme.
Fundraising that is contrary to public
policy includes failure to comply with legislation or some equally compelling public
pronouncement evidencing public policy (eg. misleading solicitations that are
contrary to consumer protection, i.e. Competition Act); or results in
harm to public interest (eg. contract agreements between charities and third
party fundraisers where there is misrepresentation to the public about whether
donations go to charitable purposes or to pay for fundraising). For example, failing
to disclose that 70% or more of funds raised are going to third party
fundraising would be considered to be contrary to public policy.
4. Fundraising that is Deceptive
The charity should ensure that all
representations made by it, and those acting on its behalf, are truthful,
accurate, complete and timely. The charity must not misrepresent which charity
will receive the donations, the geographic area in which the charity operates
and the amount/type of work it undertakes, whether they have hired third-party
fundraisers and how those fundraisers are compensated, and the percentage of
funds raised by third parties that will go to charitable work. The charity must
comply with the federal Competition Act (e.g., telemarketing) and any applicable
provincial consumer protection legislation.
A charity selling goods or services on a
regular basis or undertaking regular fundraising activities will have to ensure
that it is only carrying on a related business. A related business is operated
substantially (90%) by volunteers, or linked and subordinate to a charity’s
purposes. For example, a charity that is registered to protect the environment and
operates a coffee shop that is run entirely by paid staff would likely be considered
to be engaging in an unrelated business because the activity would not be linked
to its charitable purpose.
D. ALLOCATING FUNDRAISING EXPENDITURES
Registered charities must report
fundraising expenditures (all costs related to any fundraising activity) on
their annual T3010. Where some fundraising activities include content that is
not related to fundraising, some of these costs may be able to be allocated to
charitable activities, management or administrative activities, or political
activities. However, the onus is on the charity to explain and justify the
1. 100% Allocation to Fundraising
Where 90% or more (“exclusively” or
“almost exclusively”) of the activity is devoted to fundraising, a charity will
have to allocate all of the costs to fundraising. The remaining content is considered
to be ancillary and incidental to fundraising. To determine if an activity is
exclusively (or almost exclusively) undertaken to fundraise, the fundraising
content must be separated from the other content and proportions for each must
be assessed. Also to be assessed are the resources devoted to each type of content
and the prominence of the fundraising content in the activity.
The following activities are considered by
CRA to be 100% fundraising expenditures:
· Activities involving participant-selection or
audience targeting on their ability to give;
· Activities related to gaming (lotteries and
· Dissemination of information and activities that
raise awareness about the charity;
· Infomercials and telemarketing;
· Branding or charity promotion through
cause-related or social marketing;
· Activities that involve sports with participants
being encouraged or expected to raise pledges; and
· Golf tournament and gala dinner fundraising.
2. No Allocation of Costs to Fundraising
Where it can be demonstrated that an
activity would have been undertaken without the fundraising component, then
100% of the costs may be allocated to the applicable expenditure (eg.
charitable, administrative, or political activity). To demonstrate this, the
charity must be able to satisfy the “substantially all” test. When completing
this test, a charity must separate fundraising content from other content. If
substantially all (90% or more) of the activity advances an objective (or
objectives) other than fundraising, then the costs may be allocated to the
applicable content, with the fundraising being considered to be ancillary and
incidental to the other activity or activities.
3. Pro-Rated Allocation of Costs
In some cases a charity may be able to
pro-rate the allocation of costs of an activity between fundraising
expenditures and charitable, management or administrative, and political
activity expenditures. However, the charity must be able to establish that less than 90% of the total
content of the activity advances fundraising. If the fundraising expenditures account
for more than 90%, then all expenditures must be allocated to fundraising. To
determine if pro-rating is possible, the charity must again separate the
fundraising content from other content. The onus is on the charity to produce
the necessary accounting records to support the allocation.
The following are some examples of pro-rated
allocation of costs given by CRA:
1. A charity that provides performance therapy for
autistic children organizes an annual concert performance as part of its
charitable activities, but the tickets are priced so that the charity earns a
activity contains both charitable and fundraising content and thus the costs
should be allocated between the two, such as concert costs as a charitable expenditure
and the costs of advertising/invitations to fundraising.
2. A charity is registered to relieve poverty and
organizes a march on Parliament Hill to call for a change in the law regarding
Employment Insurance benefits and devotes about 20% of activity resources
calling for donations and on fundraising merchandise.
The march is a non-partisan
political activity that falls within the charity’s mandate and only uses the
allowable amount of the charity’s overall resources.
The activity contains both political
and fundraising content and thus 20% of the costs should be allocated to
fundraising and 80% to political expenditures.
E. EVALUATING A CHARITY’S FUNDRAISING
The following are examples of some of the
indicators that will generally be considered by CRA to be evidence of
unacceptable fundraising. Each of the factors below is explained in more detail
in the New Guidance and should be carefully studied, particularly with regards
to suggestions by CRA concerning disclosure (see Section G. Best Practices below).
1. Resources Devoted to Fundraising are
Disproportionate to Resources Devoted to Charitable Activities
Where resources devoted to fundraising
exceed the resources devoted to charitable activities, this is considered an
indicator that fundraising has become a collateral non-charitable purpose. A
charity’s resources may be offset by substantial use of non-financial
resources, such as volunteers. However, the use of volunteers in fundraising
must still be accounted for as fundraising resources.
2. Fundraising Without an Identifiable Use or Need
For the Proceeds
Registered charities can only raise
funds that are necessary to fulfil their mandates and must not fundraise simply
because the charity has the opportunity to raise additional funds. As well, the
charity must not misrepresent the financial need of the charity.
3. Inappropriate Purchasing or Staffing Practices
The New Guidance provides several
indicators of arrangements indicating a more than incidental private benefit,
and fundraising that is contrary to public policy and/or deceptive. For
example, paying more than fair market value for merchandise or services would
be considered to be inappropriate purchasing.
4. Fundraising Activities Where Most of the Gross
Revenues go to Contracted Third Parties
This may result in a more than an
incidental private benefit where a high percentage of fundraising proceeds go
to a non-charitable party or parties.
5. Commission-based Remuneration or Payment of
Fundraisers based on Amount or Number of Donations
This could result in a windfall profit
for the fundraiser if the charity provides remuneration for fundraising on the
basis of results rather than effort.
6. Misrepresentations in Fundraising Solicitations
or Disclosure about Fundraising Costs, Revenues or Practices
Misrepresentations may arise from a failure
to disclose information and may therefore create a false impression.
Misrepresentations may also result from a statement by a charity, or someone on
its behalf, that is inaccurate or deceptive.
7. Fundraising Initiatives or Arrangements that are
Not Well Documented
A charity must properly document its
fundraising activities to ensure that it can show that all legal obligations
are being met. The ITA requires charities to maintain proper books and records.
8. High Fundraising Expense Ratio
CRA advises that a charity’s fundraising
ratio can serve as a general self-assessment tool, although it is not
determinative on its own. The fundraising ratio is the ratio of fundraising
costs to fundraising revenue calculated on an annual basis. It is a global
calculation for a fiscal period. However, a high fundraising ratio for an
individual event may be an indicator of unacceptable fundraising.
Fundraising revenues include amounts
reported in the T3010 on line 4500 (receipted donations, regardless of whether
these amounts can be traced to fundraising activity) and line 4630 (all amounts
for which a tax receipt was not issued and that were generated as a direct
result of fundraising expenses). Fundraising expenditures include all amounts
reported on line 5020 as fundraising expenses in accordance with the Guidance.
The fundraising ratio will place a charity into one of
three categories, which remains unchanged from CPS-028:
· Under 35%: unlikely to generate questions or concerns by CRA.
· 35% and
above: CRA will examine the average ratio over recent years to determine if
there is a trend of high fundraising costs requiring a more detailed assessment
· Above 70%: this level will raise concerns with CRA. The charity must be able to provide an
explanation and rationale for this level of expenditure, otherwise it will be
The following chart (prepared by the author, not by CRA) helps
to show how a financial expenditure can be allocated in determining the
fundraising expense portion of the fundraising ratio.
F. FACTORS THAT MAY INFLUENCE CRA’S EVALUATION OF A CHARITY’S FUNDRAISING
CRA recognizes that the charitable sector
is very diverse and fundraising efforts will vary between organizations. CRA
will look at a number of factors to evaluate a charity’s fundraising activity
that involves high fundraising costs. Examples of relevant case-specific
factors include the following:
1. Small Charities
The size of the charity may have an impact on fundraising
efficiency. For charities with revenues under $100,000, CRA will consider
whether the fundraising costs are reasonable given the profile of the community
the charity serves or with which it works.
2. Causes with Limited Appeal
Charities that advance causes with limited appeal, such
as those conducting research into the prevention and cure of a relatively
unknown disease, may encounter particular fundraising challenges and may
experience increased fundraising costs for such causes.
3. Donor Development Programs
Donor development programs may mean that fundraising
activities could result in financial returns only being realized in future
years, representing more of a long-term investment. Donor development costs may
decline over time as the charity, and its fundraising activities or donor base,
become more established. If they do not, a charity must be able to justify the
4. Gaming Activities
Gaming activities, such as lotteries or bingos, are under
provincial jurisdiction. Notwithstanding this, charities must still track their
gaming activities as fundraising expenses. Provincial and territorial legislation
governing gaming activities commonly considers cost to revenue ratios of 70% or
higher to be acceptable. Therefore, while the costs and revenues of these
gaming activities may result in a relatively high fundraising ratio, CRA has
stated that it will generally be prepared to accept the higher ratios
associated with these gaming activities, provided that they comply with the
applicable provincial or territorial regulations as well as the ITA (eg. carrying
on an unrelated business).
CRA advises that adopting the best practices, as outlined in
the New Guidance and summarized below, may reduce the risk of CRA finding that
a charity is engaging in unacceptable fundraising. The New Guidance describes
the following best practices in more detail and, as such, should be carefully
1. Prudent Planning Processes
Costs should be reasonable and proportionate to the type
and scope of activity in order to further the charitable purpose(s).
2. Adequate Evaluation Processes
The charity`s fundraising performance should be evaluated
against the New Guidance and the charity should consider developing its own
criteria to gauge achievements against external standards.
3. Appropriate Procurement and Staffing Processes
A charity should pay no more than fair market value for
goods, services, salaries, and other compensation. It is a good practice to
solicit bids from 3 or more potential suppliers before choosing one.
4. Managing Risks Associated with Hiring Contracted
(Third Party) Fundraisers
A charity should be able to demonstrate that
fair market value was determined and have full disclosure so the public is not
5. Ongoing Management and Supervision of
A charity should ensure that all conduct
meets the charity’s legal and regulatory obligations and exercise adequate
control over the scope of fundraising.
6. Keeping Complete and Detailed Records Relating
to Fundraising Activities
Detailed records may include minutes of
board or committee meetings where decisions on fundraising are made, or records
of research to determine costs. The charity should document all processes
undertaken before entering into contracts and have written copies of
7. Providing Disclosure about Fundraising Costs,
Revenues, Practices, and Arrangements
CRA recommends that charities provide truthful
and accurate, accessible and timely public disclosure of all fundraising costs,
revenues, practices and arrangements, so that members of the public and donors
are not deceived or misled. CRA gives an example of including such information
on the charity’s website or in its annual report.
8. Maintaining a Reserve Fund Policy and Ensuring
that Fundraising is for an Identified Use or Need
The size of a justifiable reserve fund will
depend on a charity’s particular situation. Some factors to consider include: the
charity’s typical annual expenditures; its size; long-term plans; donor base; projected
revenue; current and projected economic conditions; contingencies; and known
risks being faced. Although nothing is said in the New Guidance concerning what
happens when a charity embarks on an endowment program, presumably if the
endowment program can be justified as part of the charity’s reserve fund
policy, it should be acceptable. This may need to be clarified, though, by CRA
in the future.
Although the New Guidance is a longer
document than the earlier CPS-028, it is a much better organized resource
tool and eliminates a lot of the confusion that had been experienced with CPS-028 concerning allocation of fundraising expenses. However, the improvements to the
New Guidance will likely create an expectation by CRA that charities should now
be able to understand and comply with the New Guidance. This is reflected in
the fact that the New Guidance uses more directive language of “should” as
opposed to previous permissive language of “may” in many places within the New
Guidance. As such, charities will want to carefully study and ensure compliance
with the New Guidance on a go forward basis.