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- Essential Charity Law Update:
- What Every Fundraiser Needs to Know
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- DQ is prescribed amount that registered charities must disburse each
year in order to maintain charitable registration
- Purposes of DQ
- Curtail fundraising costs
- Limit excessive capital accumulation
- Ensure significant resources devoted to charitable purposes and
activities
- DQ introduced in 1976
- Significant reforms in 2004, whereby the DQ regime became significantly
more complex
- Federal Budget of 2010 reformed and simplified the DQ regime
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- Pre-2010 Budget DQ Rules
- All registered charities required to expend on own charitable activities
or on distribution to qualified donees the an amount equal to:
- 80% of donations receipted in previous year
- 80% of gifts from other registered charities (100% for private
foundations)
- 3.5% of value of property not used in charitable activities of
administration (for amounts over $25,000)
- Failure to meet DQ is grounds for revocation
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- Exceptions to 80% charitable expenditure rule
- Enduring property
- Endowments subject to 10 year hold (“10 Year Gifts”)
- Bequests
- Proceeds of life insurance
- RRSPs, RRIFs and TFSAs
- Specified gifts – certain inter charity transfers
- Optional Capital Gains Pool Reduction
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- Pre-2010 Budget DQ Rules – Problems and Issues
- Administrative Difficulties
- Arbitrary Expenditure Requirements
- Not sensitive to operational needs of charities
- Not sensitive to prevailing market conditions
- Ongoing time and expense spent on compliance
- Complicated and Hard to Understand
- Enduring Property Rules
- Capital Gains Pool Concept
- 80% DQ Requirements
- Hard to Characterize Expenses
- Administration
- Charitable Activities
- Fundraising
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- Budget 2010 DQ Reform
- 80% charitable expenditure requirement
- 3.5% disbursement requirement
- Remains – for amounts in excess of $100,000 for charitable
organizations and for amounts in excess of $25,000 for charitable
foundations
- Concepts of enduring property, specified gift and capital gains pool
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- Budget 2010 DQ Reform – Anti Avoidance Provisions
- Non-Arm’s Length Inter-Charity Gifts
- For non-arms-length inter-charity gifts –recipient charity must expend
100% of the gift in the year or in the following year
- Possible penalty of 110% of amount of gift not expended and/or possible
revocation of registered charity status
- Can be avoided is gift is declared to be a “designated gift”
- If a “designated gift”, it cannot count toward satisfying DQ
requirements of transferor charity
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- Anti-Avoidance Transaction
- Where a registered charity entered into a transaction (which may
include an inter-charity gift) where it “may reasonably be considered
that a purpose of the transaction was to avoid or unduly delay the
expenditure of amounts on charitable activities
- Applies regardless of whether the two charities are at arm’s length
- 110% penalty – if inter-charity transfer, both charities are jointly
and severally, or solitarily liable for the penalty
- Both charities risk revocation
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- Implications
- Easing of administrative burden
- Simplification of DO calculation
- No need to disburse 80% of receipted gifts or gifts from arm’s length
charities
- No need to track receipted and non-receipted gifts
- Only need to comply with 3.5% DO
- Lessens need for restrictive endowment conditions to meet enduring
property definition (i.e., no need for 10 Year Gifts)
- New Endowments
- Review of Agreements
- Flexibility Available
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- Administration of existing endowments and 10 year gifts
- Careful Consideration of Issues
- Not just a Tax Issue
- Trust and Charity law Issues Relevant
- Review of all Relevant Documentation
- With DQ Reform, more focus on
compliance with CRA’s Fundraising Guidance
- Released June 11, 2009 - Regulates fundraising practices and fundraising
costs
- CRA is expected to release a revised Fundraising Guidance in early 2012
- Fundraising issues increasingly important to public and has become media
focus
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- On June 11, 2009, CRA introduced Guidance (CPS-028): Fundraising by
Registered Charities
- The charitable sector was asked to provide feedback on this Guidance and
as a result CRA has recognized the need to make the Guidance more
practical
- CRA’s review of the Guidance has resulted in a new draft Fundraising
Guidance
- However, the revised Guidance is not yet available for distribution
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- CRA’s Fundraising Ratio – remains the same in the revised Guidance
- Under 35% - unlikely to generate questions or concerns by CRA
- 35% to 70% - 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 of expenditures
- Above 70% - will raise concerns with CRA and the charity must be able to
provide an explanation and rationale for this level of expenditure –
otherwise, not acceptable
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- CRA’s Fundraising Guidance includes seven best practice indicators:
- Prudent planning processes
- Appropriate procurement processes
- Good staffing processes
- Ongoing management and supervision of fundraising practice
- Adequate evaluation practices
- Use made of volunteer time and volunteered services or resources
- Disclosure of fundraising costs, revenues and practices
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- Fundraising Guidance also sets out eight indicators that could cause the
CRA to conduct a further review of a charity's fundraising activities:
- Sole source fundraising contracts without proof of fmv
- Non-arm’s length fundraising contracts without proof of fmv
- Fundraising initiatives or arrangements that are not well-documented
- Fundraising merchandise purchases that are not at arm’s length, not at
fmv, or not purchased to increase fundraising revenue
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- Technical Interpretations on Non-Profit Organizations (NPOs)
- To qualify as an NPO, an organization must meet all 4 criteria under
paragraph 149(1)(l) of the Income Tax Act throughout any taxation year
- Not be a charity
- Be organized exclusively for social welfare, civic improvement,
pleasure, recreation or any other purpose except profit
- Be operated exclusively for social welfare, civic improvement,
pleasure, recreation or any other purpose except profit
- Not distribute or otherwise make available for the personal benefit of
a member any of its income
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- Technical Interpretation Concerning Claim to Charitable Donation by
Spouse of Deceased Person
- October 26, 2010, CRA released a technical interpretation, which
confirmed that the spouse of a deceased person can claim a tax credit
for a charitable donation made by his or her deceased spouse’s will in
the year that the spouse died, provided that:
- A spousal or common law relationship existed at the time of death
- The donation qualifies as a gift under the Income Tax Act
- The donation is made in accordance with the terms of the deceased’s
Will
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- Other Technical Interpretations Relevant to Charities and Gifts
- CRA #2010-038401 - Whether a charity can issue T2202A Tuition, Education
and Textbook Amount Certificates
- CRA #2011-0405881E5 - Gifts to a public body performing a function of
government in Canada eligible for receipt, public body must retain
discretion regarding how funds are spent – cannot be a conduit
- CRA #2009-033887 - split-receipted ecological gift of a servitude
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- Oloya v. R 2011 TCC 308
- Appeal by a taxpayer from reassessments in respect of donation receipts
that he and his wife claimed to charity of which he was the founder
- Taxpayer found to operate charity with best of intentions but
insufficient attention was paid to the form and content of donation
receipts issued to donors
- Numerous tax credits were improperly claimed
- Claimed charitable receipts for gifts of services – impermissible as a
gift must be a transfer of property and a supply of services not a
transfer of property
- Gifts and receipts not properly documented, resulting in disallowance
of claim for charitable credits
- Highlights importance of knowing and following charitable receipting
rules
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- Innovative Gifting Inc. (IGI) v. House of Good Shepherd et al. [2010]
O.J. 2210
- Ontario Superior Court of Justice released on May 18, 2010
- A fundraiser (IGI) charged exorbitant commissions and misrepresented
legality of fundraising activities
- Arrangement was that if shares and non-cash gifted, 40% commission to
be paid, but if cash gifted, then commission would be 90%
- Court ordered fundraiser to pay back commissions received from four
charities
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- Tax preparer found guilty of fraud in charitable donations scheme
- (http://www.cra-
arc.gc.ca/nwsrm/cnvctns /on/on110617-eng.html)
- On June 8, 2011, CRA announced that Eric Armah who plead guilty in the
Ontario Court of Justice in Brampton on April 29, 2011, for one count
of fraud over $5,000 for setting up false charitable donation claims
has been sentenced to three years imprisonment
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Notes
