A. INTRODUCTION
As most readers will know, the Charities Directorate of the
Canada Revenue Agency released its Guidance on Canadian Registered Charities
Carrying Out Activities Outside Canada on July 8, 2010. It reaffirmed that
a Canadian registered charity can only use its resources in two ways: 1) on
gifts to qualified donees, which are primarily but not exclusively registered charities
and 2) on its own activities. A general commentary was provided on the Guidance
in a previous Charity Law Bulletin The focus of this Bulletin is on how the Guidance treats transfers of funds
from Canadian charities to their head bodies outside the country.
B. CHARITIES CONDUCTING OWN ACTIVITIES
Unlike the relatively passive transfer of gifts to
qualified donees, a registered charity must be an active and controlling
participant in programs or projects that directly achieve a charitable purpose
of the charity. There are two ways to achieve this: 1) by using its own
volunteers, staff, or directors which it directly controls; or 2) through an
intermediary, which it must also control with respect to the expenditure of
charitable resources, although day-to-day operating decisions may be delegated.
A charity cannot merely be a conduit to funnel money to an organization that is
not a qualified donee. Instead it must demonstrate control over the use of its
resources, so that the carrying out of that activity by the intermediary
amounts to the charity carrying on its own activities itself rather than the
funding of programs of the intermediary.
C. MEASURES OF CONTROL
CRA recommends that charities adopt the following types of
measures to direct and control the use of a charity’s resources, with the
number and nature of the measures to correspond to the circumstances of the
activity (e.g. amount of resources, complexity, location, nature of resources,
capacity and experience of intermediary):
a) Create a written agreement, and implement its
terms and provisions.
b) Communicate a clear, complete, and detailed
description of the activity to the intermediary.
c) Monitor and supervise the activity.
d) Provide clear, complete, and detailed
instructions to the intermediary on an ongoing basis.
e) Make periodic transfers of resources, based on
demonstrated performance.
D. TRANSFERS TO HEAD BODIES OUTSIDE CANADA
In Appendix C to the Guidance, CRA addresses the situation
of Canadian charities being part of or “offshoots” of a larger organization
located outside of Canada that may require payments from the Canadian charities,
such as tithes, memberships, royalties or other similar transfers. On the one
hand, CRA acknowledges that “having the head body act as an intermediary for a
charity is often not practical, since the nature of the relationship may
prevent the charity from instructing its head body in how to use the money.” On
the other hand, the Guidance warns that the charities must adhere to the same
principles with respect to direction and control of their resources and cannot
simply send gifts to their head office.
The Guidance recognizes that head bodies outside Canada may
provide charities with goods and services, such as training, accounting,
literature, polices, communications and use of intellectual property. However,
it cautions charities to be sure that “they are receiving goods and services
equivalent in value to the amounts they are sending.” CRA also accepts that
charities usually benefit from resources received from their head body and if
the amount transferred is small (i.e. $5,000.00 or 5% of the charity’s annual
expenses) no further evidence of benefit will be required. Therefore, should
the amount of funds transferred exceed the threshold amount, the charity would
have to be sure that the goods and services received reflect the value of the
funds transferred. A contract should also be signed but it would not need to
contain all of the measures of control required when the charity engages an
intermediary to carry on activities on behalf of the charity.
Appendix C of the Guidance does not address the common
situation of funds being transferred to a head body from its international
members for the purpose of undertaking a charitable project, such as
development work. The advantage of this type of project is that economies of
scale can be achieved and the funds can be directed to those most in need rather than
having multiple small projects undertaken by the various national bodies. In
situations like this, it would appear that the measures of control provided for
in the Guidance are required.
E. CONCLUSION
The CRA Guidance recognizes that the
nature of the relationship between the Canadian charity and its head body does
not fit neatly into the usual requirements for direction and control. Being hierarchical
in nature, head bodies are not accustomed to receiving “direction” from and
being “controlled” by members of the international body. CRA’s acceptance that
the Canadian charity generally receives benefits from the head body in terms of
goods and services is also welcome. Many Canadian charities, however, will
find that the safe harbour amount of $5,000.00 sent in exchange for goods and
services from the head body to be quite low and does not address the situation
of funds transferred to the head body for charitable programs.
