On June 20, 2011, CRA released Guidance CG-004, Using
an Intermediary to Carry out a Charity's Activities within Canada (the
“Guidance”). The Guidance was previously referenced in the June 2011 Charity Law Update. The Guidance will assist charities and applicants for charitable status who are
intending on conducting charitable activities through an intermediary within
Canada, such as a non-profit organization or a for-profit partner. As previously
indicated in our June 2011 Charity Law Update, an individual or “non-qualified
is referred to as an intermediary by CRA for definitional purposes in the
Guidance. While the Guidance contains relatively few changes from CRA’s
previous guidance, CG-002, Guidance for Canadian Registered Charities
Carrying Out Activities Outside Canada (“Foreign Activities Guidance), the
Guidance clarifies that the principles discussed in the Foreign Activities
Guidance concerning operating outside Canada apply equally within Canada.
This Charity Law Bulletin summarizes the new
information or clarifications contained in the Guidance, together with a brief
review of the information already set out in the Foreign Activities Guidance.
For commentary concerning the previously released Foreign Activities Guidance,
see Charity Law Bulletin No. 219 CRA’s Revised Guidance for Canadian
Registered Charities Carrying Out Activities Outside Canada.
B. new information contained in the guidance
1. Factors CRA will Consider in Determining if a
Charity is Acting as a Conduit
Although concerns over whether or not a
charity is acting as a conduit typically arise in instances where the charity is
working with an organization outside Canada, the Guidance contextualizes the
definition of “conduit” for domestic situations as well, although both
definitions are substantially similar. In this regard, the Foreign Activities
Guidance defines a conduit as a “a registered charity that receives donations
from Canadians, issues tax-deductible receipts, and funnels money without
direction or control to an organization to which a Canadian taxpayer could not
make a gift and acquire tax relief.” The Guidance defines conduit in a slightly
different manner as, “an organization that accepts donations for which it
typically issues tax-deductible receipts and then funnels the money, without
maintaining direction and control, to a non-qualified donee.”
As an example, the Guidance provides a hypothetical situation
wherein a registered charity agrees to accept donations on behalf of a
non-profit organization, issues a receipt and then forwards the donations to
the non-profit organization without having direction and control over the
donations and no say in how the proceeds are to be used. Although the Guidance
does not say as much, the situation described would likely place that charity’s
registered status at risk as the charity would not be maintaining direction and
control over the funds.
In addition, the Guidance provides criteria which CRA
states they will look at in determining whether or not a charity is conducting
itself as a conduit. In this regard, the criteria are listed as follows:
• Does the charity have any evidence that it exercises ongoing
direction and control over the use of all of its resources?
• Does the charity keep adequate books and records at a Canadian
address it has on file with the CRA?
• Does the charity receive goods and services of proportionate
value for any money or other resources it sends to a non-qualified donee?
• Does the charity need permission from a non-qualified donee to
undertake activities, or approval of how to carry out those activities?
Lastly, the Guidance provides recognition for the situation
in which a charity needs to provide funds to a head body or umbrella
organization (presumably in Canada, but it could also be outside of Canada)
that would not be eligible to be a qualified donee under Canadian law. In this
regard, the Guidance states that a charity and its head body might create a
written agreement that creates the “appearance” that the head body or umbrella
organization is acting as an intermediary to the charity, although it is not necessarily
clear what CRA means in this regard.
2. Transference or Construction of Capital Property
The Foreign Activities Guidance
recognized the complexities involved with a charity operating abroad in
co-operation with other organizations to purchase or construct capital
property. As such, the Foreign Activities Guidance acknowledges the fact that some
countries do not permit foreign ownership of real property, and provides best
practices concerning how a charity might purchase or construct capital property
in a foreign country.
However, given that the Guidance is
intended to provide assistance in complying with CRA’s administrative guidelines
within Canada, the Guidance provides a more restrictive approach to the
transference and construction of capital property. In this regard, the Guidance
If a charity intends to build or buy
capital property in partnership with an intermediary, the charity must retain
ownership of its share of this property. In exceptional cases where it is
impossible for the charity to retain ownership of its share of the property,
the charity should consult with the CRA to consider the available options
In addition, the Guidance also confirms that a charity in
Canada cannot transfer any kind of property to a non-qualified donee if it
knows, or ought to know, that the property will be used either for non-charitable
purposes or circumvention of the Income Tax Act.
3. Reporting Expenditures on Activities Carried Out
The Guidance confirms that all funds
expended on the charity’s own activities, whether it is through the charity’s
own staff or through an intermediary, will go towards meeting the charity’s
disbursement quota. In this regard, that Guidance states that the following
could be reported as charitable expenditures on the charity’s T3010:
• the costs of goods transferred to an intermediary to provide
eligible beneficiaries with charitable relief;
• payments for buying goods and services to provide eligible
beneficiaries with charitable relief;
• purchase or maintenance of facilities, equipment, and other
items used directly in the charity's charitable activities;
• fees, licences, and memberships that are necessary to deliver
the charity's charitable activities; and
• salaries paid to those that directly provide charitable relief
to eligible beneficiaries.
However, the Guidance also points out
that it is important when a charity is working jointly with other
organizations, it must be able to account for all charitable and other
expenditures the intermediary has spent on its behalf.
C. Unchanged aspects of the foreign activities guidance
The remainder of the Guidance is little
changed from the Foreign Activities Guidance. As such, the variety of
relationships described in the Foreign Activities Guidance through which a
charity can carry out its own activities with an intermediary are also
described in the Guidance.
In this regard, the Guidance sets out
different types of acceptable intermediary relationships, including agents,
joint venture participants, co-operative participants and contracts, but CRA does
not recommend one type of relationship over another. What is unique to the
Guidance is that the examples from the previous Foreign Activities Guidance
have now been made specific to intermediary relationships within Canada.
In addition, when transferring resources
to an intermediary, the Guidance confirms that whether the transfer is being
made to an intermediary inside or outside Canada, a charity must direct and
control the use of its resources to meet the “own activities” test. CRA
recommends that a charity enter into a written agreement with any intermediary
that it works with, and confirms the elements that should be contained therein.
Although no consultation process was used
by CRA with the charitable sector prior to releasing the Guidance, as was done
with the Foreign Activities Guidance, considering that the guidance documents
are substantially similar to one another, this comes as no surprise. As such, charities,
even if they do not conduct any activities outside Canada, should review the
Guidance to ensure that they are able to comply with the Income Tax Act (Canada)
and CRA’s administrative policies.