A. INTRODUCTION
On June 30, 2009, CRA released its much
anticipated draft consultation paper entitled Consultation
on the Proposed Guidance on Activities Outside of Canada
for Canadian Registered Charities (“Proposed Guidance”).
The Proposed Guidance is intended to update and replace
the current CRA publication on foreign activities entitled
Registered Charities: Operating Outside Canada RC4106
(“Current Policy”).
In this regard, the Proposed Guidance constitutes a significant
improvement over the Current Policy by providing a more
practical guide for charities that operate outside of Canada.
It should be noted that CRA is accepting comments on the
Proposed Guidance until September 30, 2009.
This Charity Law Bulletin summarizes
the Proposed Guidance, and, where appropriate, compares
and contrasts it with the Current Policy. However, since
the content and organization of the Proposed Guidance is
significantly different from that of the Current Policy,
it is not possible to provide a comprehensive comparison
between the two documents. It is important to note at the
outset, however, that the Proposed Guidance is intended
to apply to all activities carried on through intermediaries
both outside and within Canada, notwithstanding that the
name of the Proposed Guidance would suggest otherwise.
B. SUMMARY OF GUIDANCE
The Proposed Guidance states that it
is intended to assist registered charities and applicants
for charitable registration who wish to carry on activities
outside of Canada comply with the requirements of the Income
Tax Act (“Act”). In this regard the Proposed Guidance
is organized to address a number of specific issues that
are of importance to charities with international operations.
The summary that follows generally reflects the sequencing
of those issues as set out in the Proposed Guidance.
1.
Local Laws
When a charity operates within Canada,
it must comply with Canadian laws, including the Act and
the common law. A charity that operates outside of Canada
may find itself operating in regions where the legal framework
and laws are very different. The Proposed Guidance reminds
the reader that the Act does not require registered charities
to comply with laws in foreign jurisdictions. However,
being a registered charity in Canada does not exempt a charity
from the laws in the jurisdiction in which they operate.
As such, CRA strongly recommends in the Proposed Guidance
that all charities make themselves aware of local laws before
operating abroad. Awareness of local laws will help make
sure that the public benefit provided by a charity’s activities
is not offset by the harm that may result to those carrying
on the activities, to the charity’s beneficiaries, or to
anyone else.
2.
Canada’s Anti-Terrorism Legislation
One of the most noticeable additions
in the Proposed Guidance when compared to the Current Policy
is a section on compliance with Canada’s anti-terrorism
legislation. It should be remembered the Current Policy
predates the September 11, 2001 terrorist attacks, and not
surprisingly does not mention anything about anti-terrorism
legislation. The Proposed Guidance reminds charities that
it is their responsibility to ensure that they do not operate
or associate with individuals or groups that support terrorist
activities and that failure to do so may result in the charity
losing its status under the Act. However, the Proposed Guidance
does not provide much detail on how to ensure compliance
with Canada’s anti-terrorism legislation, other than referring
the reader to another CRA publication entitled Charities
in the International Context.
The Proposed Guidance does not make any mention of the recent
CRA Anti-Terrorism Checklist that was posted by CRA in April,
2009.
3.
How Can a Charity Operate?
The Proposed Guidance explains the two
means available under the Act by which a registered charity
can pursue its charitable purposes.
1. The charity can
make gifts to qualified donees;
or
2. The charity can
carry out its own charitable activities, which in turn would
require that the charity must control all of its activities
and resources. (This latter application is referred to in
the Proposed Guidance as “its own activities test.”)
The Proposed Guidance points out that
the CRA defines a gift to a qualified donee as “a transfer
of money or any other property to a qualified donee.”
This definition reflects a relatively broad interpretation
by CRA regarding gifts to qualified donees, in that it does
not require the strict formalities of a gift to be present.
The Current Policy, acknowledges that
it “may not be practical for the charity to meet its ‘own
activities’ test by operating abroad using its own employees
or volunteers directly funded by that charity.”
In the Current Policy, CRA indicates that a charity is allowed
to work through other organizations if it “employs certain
structured arrangements that allow it to retain direction
and control over the use of its resources.”
In the Proposed Guidance, CRA’s language has become more
specific:
When working through
an intermediary, a charity must always direct and control
the use of its resources. A charity cannot simply act as
a passive funding body for an intermediary’s programs. A
charity that does not carry out its own activities, or direct
and control its resources, risks sanctions under the Act,
including the loss of its charitable status.
The Proposed Guidance then refers the
reader to three Federal Court of Appeal Decisions
in which various organizations lost their charitable status
for failing to maintain control of activities carried out
on its behalf and over the use of its resources.
4.
Intermediaries
When a charity cannot carry out an activity
with its own staff (although not stated in the Proposed
Guidance, the reference to staff would presumably include
volunteers as well), a charity is permitted to use an intermediary
to carry out its activities. The Proposed Guidance states
that the charity should be able to document that, “it has
reasonable assurance that the intermediary, by virtue of
its reputation, expertise, capacity, or experience, can
carry out the tasks required by the charity.”
The Proposed Guidance then goes on to explain the different
types of intermediary relationships that are acceptable
to CRA.
a)
Agents
In this regard the Proposed Guidance
states that a registered charity can carry on its own charitable
activities through the use of agents. In the Current Policy,
CRA explains that a charity must consider the risks associated
with an agency and an implied agency relationship before
embarking upon this type of arrangement. It is also noted
that CRA recommends in the Current Policy that charities
should carefully structure these arrangements to reduce
possible liability associated with an agency relationship.
Unfortunately, this warning about the significant liability
associated with utilizing an agent as an intermediary is
absent in the Proposed Guidance. Instead, CRA simply warns
charities in the Proposed Guidance that they “must always
be able to show that the agent is carrying on the charity’s
own charitable work.”
b)
Joint Venture Participants
The Proposed Guidance then explains
that a charity can also carry on its activities jointly
with other organizations or individuals. This can occur
through joint ventures where the joint venture participants
pool their resources in order to accomplish their goal in
accordance with the terms of a joint venture agreement.
As a joint venture participant, a charity can work with
non-qualified donees as long as the charity is exercising
control over the activities proportionate to the resources
it is providing and it can demonstrate this fact. In the
Current Policy, an example is given of a church that provides
25% of the funding for a project . CRA’s position in the
Current Policy is that the church should be entitled to
25% representation on the board and to have approximately
25% of the voting strength or decision-making power in the
venture. In the Proposed Guidance, a similar example is
given, but CRA’s tone is again more prescribed. In the example
given in the Proposed Guidance, the church provides 40%
of the resources and has 40% of the decision-making power,
but CRA warns that because it only has 40% of the decision
making power, it could be outvoted and see its resources
used for non-charitable purposes. The Proposed Guidance
states that the Canadian church should therefore ensure
that the joint venture arrangement includes a provision
that allows it to discontinue supplying resources to the
joint venture.
c)
Co-operative Participants
The Proposed Guidance explains that
charities can be considered co-operative participants in
situations where the charity works side by side with another
organization to achieve a particular goal, but the organizations
do not pool their resources or carry out the project as
a joint venture. In the Current Policy, CRA refers to co-operative
participants as “co-operative partnerships.” This terminology
is not used in the Proposed Guidance, which is likely a
good idea, since the relationship described is that of a
co-operative undertaking as opposed to a legal partnership,
which the common law defines as an activity carried out
in common with a view to a profit. CRA defines a co-operative
participant as “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.”
In these kinds of situations, each organization might be
responsible for a certain aspect of the project. CRA does
warn charities, though, that they must direct and control
their own activities and use of its resources. It must not
give funds to non-qualified donee organizations even if
those organizations are working on the project in concert
with them.
d)
Contractors
In the Current Policy and the Proposed
Guidance, CRA permits charities to contract work out to
an organization or individual in another country to provide
goods and services to achieve the charitable purpose of
the charity. CRA advises charities that 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. This is necessary to ensure that precise instructions
are given to the contractor.
5.
The “Own Activities Test”
The key component of the Proposed Guidance
is the requirement that a charity must meet the “own activities
test.” This test is defined in the Proposed Guidance 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… This requirement
is referred to as the ‘own activities’ test.
The Proposed Guidance reminds readers
that charities cannot act as mere passive funding bodies
for a non-qualified donee. If a charity takes on this role,
then CRA will consider that the charity is acting as a passive
conduit, which is a violation of the Act and would jeopardize
the charity’s status.
CRA further states that “[T]he surest and safest way to
control and direct its resources is for a charity to use
its staff to carry out its activities.”
The balance of the Proposed Guidance is focused in defining
how a charity can meet the “own activities test.”
6.
Control and Direction of
Resources
The Current Policy provides some guidelines
for charities regarding structured arrangements with intermediaries.
These guidelines are described as factors that CRA would
consider when determining whether the arrangements are acceptable.
They are broken up into three categories: general guidelines,
additional guidelines for joint ventures, and written agreements.
In the Proposed Guidance, however, the guidelines of the
Current Policy are replaced by six “measures of control,”
which are more detailed than the guidelines published in
the Current Policy. The six measures of control are:
a)
written agreements;
b)
description of activities;
c)
monitoring and supervision;
d)
ongoing instruction;
e)
periodic transfers;
f)
separate activities and funds.
CRA states that agreements will generally
need fewer of these measures of control when the resources
(because of their nature) can only be used for charitable
purposes and there is a reasonable expectation that the
intermediary to whom the resources have been transferred
will use them only for charitable purposes. This statement
represents CRA’s current position on the longstanding informally
recognized “charitable goods policy,” i.e. goods that inherently
can only be used for a charitable purpose or purposes would
not necessarily require a written agreement. At the other
end of the spectrum, if the charity is transferring money
to an intermediary, whose status and activities are uncertain,
it will need as many of the above mentioned control measures
as possible.
a)
Written Agreements
Although there is no formal requirement
in the Proposed Guidance or under the Act for a written
agreement, CRA recommends that a charity have one with each
of its intermediaries. CRA views good written agreements
as an effective way to help meet the “own activities test.”
In Appendix E of the Proposed Guidance, a checklist is included
to help charities create an effective written document for
the purposes of meeting the “own activities test.” The checklist
is an expanded, but similar, version of the Written Agreements
Guidelines that is contained in the Current Policy. In both
documents, CRA emphasizes the importance of utilizing written
agreements. In the Proposed Guidance, however, CRA states
that there are times when the complications of a full formal
written agreement may outweigh the benefits of an agreement.
In this regard CRA gives an example of where money is being
spent on a one-time activity of about $1,000 or less, and
indicates that other forms of communication may instead
be used to satisfy the “own activities test” in such circumstances.
These include faxed written instructions, copies of bank
transfers, minutes of meetings, receipts and invoices, and
written reports. If the transfer is to be repeated on an
ongoing basis, CRA recommends that a written agreement be
used. CRA further reminds the reader that simply entering
into an agreement is not sufficient to prove that the charity
meets the “own activities test.” The charity must actually
show that it has “a real ongoing, active relationship with
its intermediary whereby it directs and controls the use
of its resources by that intermediary.”
b)
Description of Activities
The Proposed Guidance then explains
that a statement of activities is required to show that
the charity is able to give “a clear, complete, and detailed
description of that activity.”
In this regard, the Proposed Guidance lists what the description
should demonstrate, which list is reproduced in its entirety
below:
-
exactly what the activity
involves, its purpose, and the charitable benefit it provides;
-
who benefits from the activity;
-
the precise location(s) where
the activity is carried on;
-
a comprehensive budget for
the activity, including payment schedules;
-
the expected start-up and
completion dates for the activity, as well as other pertinent
timelines;
-
a description of the deliverables,
milestones, and performance benchmarks that are measured
and reported;
-
how the charity monitors
the activity, the use of its resources, and those who carry
on the activity; and
-
the mechanisms that allow
the charity to modify the nature or scope of the activity,
including discontinuance of the activity if the charity
so decides.
c)
Monitoring and Supervision
The Proposed Guidance explains that
one way that 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.”
However, the Proposed Guidance offers no details concerning
what is meant in this regard, other than providing an example
in which a charity is using an agent to build a school in
South America. In the example the agent sends monthly progress
reports and photographs, receipts and vouchers, and one
of the charity’s staff also visits the site quarterly. More
detail, such as a list of factors or a general checklist,
would have been of assistance here.
d)
Ongoing Instruction
It is important that the charity and
its intermediary are clear on what activity is to be undertaken
at the outset, usually through a detailed description of
the activity before it is commenced. Further, according
to the Proposed Guidance, the charity should be providing
ongoing instructions to the intermediary. CRA states in
the Proposed Guidance that records of any ongoing instructions
and minutes of meeting are some of the ways to show that
a charity has given ongoing direction to the intermediary
and continues to control the activities. CRA cautions, however,
that arranging to have a director/trustee, volunteer, or
employee work for both groups may not be enough to show
that the charity is maintaining control over the use of
its resources by the intermediary.
e)
Periodic Transfers
There is only one small paragraph dealing
with this measure in the Proposed Guidance. It states that
a charity 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. The paragraph states that when a charity
has unused money transferred back to it by the intermediary,
this will help show that the charity is maintaining control
over its own resources.
f)
Separate Activities and Funds
The Proposed Guidance points out the
importance of a charity being able to distinguish between
its activities and those of its intermediary when carrying
on activities through an intermediary: “A charity cannot
simply pay the expenses an intermediary incurs to carry
on the intermediary’s own activity. Doing so draws into
question whether the activity is that of the charity.”
CRA also confirms the position in the Current Policy that
for certain types of arrangements, such as agency relationships,
the charity’s funds should be segregated.
7.
Funding From CIDA and Other
Government Programs
Some charities undertake projects that
receive funding from the Canadian International Development
Agency (CIDA). The Proposed Guidance points out, however,
that not all of CIDA funded activities will be considered
to be charitable. The participating charity must, therefore,
ensure that the project meets its own charitable purposes.
In this regard, CRA recommends contacting the Charities
Directorate in situations of uncertainty regarding CIDA-funded
projects. This section in the Proposed Guidance is very
similar to that of the Current Policy.
8.
Keeping Books and Records
in Canada
The Proposed Guidance reminds charities
that they 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. As well, the books and records
must allow CRA to verify that charitable funds are either
being spent on its own activities or are being gifted to
a qualified donee. However, CRA does acknowledge 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.
Even after doing so, the charity must still show “when,
how, and in what amounts funds were transferred to staff
or intermediaries.”
The Proposed Guidance then goes on to
explain what the requirements are for books and records
with regards to agency, contracts for services and joint
venture arrangements.
a)
Agents
The Proposed Guidance points out that
where a charity is carrying on its own activities through
an agent, the agent is required to keep the funds, property,
books and records of the charity apart from those of the
agent. The agent’s records should include progress reports
and documentation of funds received and expenditures made
on behalf of the charity.
If local laws prohibit the transfer
of source documentation to Canada, copies should be forwarded
regularly to the charity and the original documentation
should be available for inspection at the place the books
and records are kept. Upon completion of each activity,
the charity should obtain a final comprehensive report detailing
all the work that has been done on its behalf, along with
supporting documentary evidence, such as invoices and receipts,
as well as photographs and other documenting media.
b)
Contractors
The Proposed Guidance explains that
charities should obtain regular financial and progress reports
from their contractors. These reports should include a description
of the funds received from the charity and the expenses
that the contractor has incurred in carrying out an activity.
When the project is completed, the charity should obtain
a, “final comprehensive report” with supporting documentary
evidence, such as invoices, photographs and receipts. However,
with a contractual relationship, one wonders why it should
be necessary to require the contractor to produce copies
of invoices and receipts after the completion of the project,
since such a requirement is not a regular part of a contractual
relationship.
c)
Joint Ventures
With regards to joint ventures, the
Proposed Guidance explains that the charity must ensure
that it regularly receives full and complete updates on
all financial information relating to the entire venture.
The charity needs to show how its contribution ties in with
the overall project and how its resources have been devoted
to its charitable objects. There is a noticeable absence
of any guidelines with books and records for agreements
surrounding co-operative participants in the Proposed Guidance.
9.
Foreign Activities and a
Charity’s Disbursement Quota
The Proposed Guidance confirms that
the disbursement quota is not affected by whether the charity
is carrying on its own activities or not. The disbursement
quota applies to charitable organizations operating outside
of Canada in the same way that it applies to those operating
in Canada. However, CRA does mention that calculating the
disbursement quota could be difficult when working jointly
or in partnership with another organization and states that
“[O]ne acceptable approach is to adjust the charity’s contribution
downwards to reflect the overhead costs of the project or
program as a whole.”
An example given by CRAis a situation where the Canadian
charity contributes to a project that spends 90% of its
funds on charitable work and 10% on overhead and administration.
CRA’s position is that the Canadian charity can apply 90%
of its contribution towards meeting its disbursement quota
obligation.
10.
Appendices
The Proposed Policy contains several
important Appendices. Each one deals with a different specific
situation.
Appendix
A - Applications for Charitable Registration to Provide
Disaster Relief
The first appendix deals with the situation
of a group attempting to organize and register in the wake
of a disaster in order to provide disaster relief. CRA acknowledges
the timely nature of the work the organization is attempting
to do and priority is typically assigned to these files.
CRA, warns, however, that before the organization can be
registered, they must still meet the same requirements as
all other groups seeking to receive charitable status. CRA
encourages groups that wish to help in international disaster
situations to consider working with well-established, experienced
relief organizations, instead of attempting to start a new
charity and having to deal with all the difficulties associated
with the registration process. This statement is good advice.
Many well-intentioned people inadvertently get in the way
of disaster relief. The immediate aftermath of a disaster
is not the time to start learning about and dealing with
the complexities of creating a new charitable organization
to operate in the international context.
Appendix
B - Capacity Building.
Appendix B deals with the situation
in which a charity is helping a community to develop the
abilities and resources necessary for the community to become
more self-sufficient. CRA states that charities may need
to help with these problems “in a holistic fashion, rather
than simply dealing with one of a community’s problems in
isolation. For example, a charity trying to relieve poverty
with micro-loans might discover that the residents of a
particular community require improved health care, and to
learn basic business skills, before they can benefit from
the micro-loans.”
This approach reflects a practical understanding by CRA
of the broad extent and application of capacity building
that allows charities to help communities in dealing with
the larger underlying root causes of many of the problems
that communities in the developing world are confronted
with.
Appendix
C - Additional guidelines for joint ventures
The Proposed Guidance lists some factors
that will be considered when determining whether or not
a charity meets the “own activities test” when working through
joint ventures. These factors are the same as the additional
guidelines for joint ventures contained in the Current Policy.
They are reproduced below for ease of reference:
·
the presence of members of the Canadian charity
on the governing body of the joint venture;
·
the presence in the field of members of the
Canadian charity;
·
joint control by the Canadian charity over
the hiring and firing of personnel involved in the venture;
·
joint ownership by the Canadian charity of
foreign assets and property;
·
input by the Canadian charity into the venture’s
initiation and follow-through, including the charity’s ability
to direct or modify the venture and to establish deadlines
or other performance benchmarks;
·
signature of Canadian charity on loans, contracts,
and other agreements arising from the venture;
·
review and approval of the venture’s budget
by the Canadian charity, availability of an independent
audit of the venture and the option to discontinue funding;
·
authorship of such things as procedures manuals,
training guides, standards of conduct, etc., by the Canadian
charity; and
·
on-site identification of the venture as being
the work, at least in part, of the Canadian charity.
Appendix
D - Transferring Property to a Non-Qualified Donee
In some situations, a charity may wish
to transfer real or capital property to a non-qualified
donee. The difficulty many charities may encounter is that
the Act prohibits gifting of money or resources to non-qualified
donees.
In the Proposed Guidance, CRA acknowledges
that in some countries, foreign ownership of real property
is not allowed. In these situations, a title-holding arrangement
with a local charity or governmental body could be used
as long as the arrangement restricts the use of the property
to the exclusively charitable purposes of the charity. However,
CRA does not explain what such an arrangement would include.
Another exception to the general rule prohibiting transfer
of assets is with regards to development projects. CRA recognizes
that charities may have no interest in operating the facilities
after their construction. The Proposed Guidance gives an
example of a charity building a school in a foreign country,
the potential problem identified in this situation is that
buildings can be used for a variety of purposes. The government
may decide to use it as a military training base. The Proposed
Guidance explains the onus on charities in this context:
“Charities should make
all reasonable efforts to make sure any facilities constructed
as part of development work are not misused. Depending on
the circumstances, it may be possible to turn the property
over to a government body, municipality, or non-profit organization
established to provide benefits to the community at large.”
Appendix E - Checklist of the Elements
of a Written Agreement
Appendix E is a checklist that CRA has
developed charities to use in helping make sure that the
agreements they enter into contain the “minimum elements
necessary” for compliance with the Act. CRA reminds the
reader that the relationship between the charity and intermediaries
will be judged not only on their agreements, but also on
the charity’s ability to “show that they direct and control
their activities through active, ongoing, sustained relationships.”
