Blumbergs Professional Corporation is involved with many charity applications each year. In this series, CRA Charity Application Graveyard, we aim to provide groups considering charitable status applications with insights into common issues the CRA encounters, based on our analysis of access to information documents, CRA letters, and the CRA’s Charities and Giving website. These reasons given in the Charity Application Graveyard are not presented in order of importance.
CRA identifies the following issue:
Fundraising- High income to expense ratio
A charity is allowed to raise funds as a way to support its charitable activities and purposes. However, fundraising itself is not a charitable activity and must be ancillary and incidental to (that is, secondary to) the organization’s charitable purposes. Therefore, these activities should take up only a minor proportion of a charity’s time and resources. An organization that mainly emphasizes fundraising activities will not qualify for charitable registration. For more information, go to canada.ca/charities-giving, select “Registering for charitable or other qualified donee status” then, “Policies and guidance” and see Guidance “Fundraising by registered charities, CG-013.”
The applicant stated that it is spending $[Insert dollar value] on fundraising, which it expects will generate [Insert dollar value] in revenue. Based on this information, we conclude that the applicant is using an excessive amount of resources for fundraising activities and that these activities have become a primary purpose. Since the applicant seems to be devoting a substantial amount of its resources to fundraising activities rather than fulfilling its charitable purposes, it does not qualify for charitable registration.
Here is the summary of CRA from its Guidance Fundraising by registered charities:
3. All charities registered under the Income Tax Act are required by law to devote their resources to exclusively charitable purposes and activities. Although a charity can use some of its resources for fundraising to support the charitable activities that further its charitable purposes, it is the CRA’s position that fundraising is not a charitable purpose in itself or a charitable activity that directly furthers a charitable purpose.
4. As a general rule, fundraising is any activity that includes a solicitation of present or future donations of cash or non-cash gifts, whether the solicitation is explicit or implied.
5. Fundraising by registered charities must be conducted within legal parameters. Fundraising is acceptable provided it is not:
- a purpose of the charity (a collateral, non-charitable purpose)
- delivering a more than incidental private benefit (a benefit that is not necessary, reasonable, or proportionate in relation to the resulting public benefit)
- illegal or contrary to public policy
- deceptive
- an unrelated business
6. When evaluating a charity’s fundraising activities, the CRA will consider a range of indicators and factors, including the following:
- resources devoted to fundraising relative to resources devoted to charitable programs
- fundraising without an identifiable use or need for the proceeds
- the charity’s fundraising expenses to fundraising revenue ratio
- inappropriate purchasing or staffing practices, including:
- purchases of fundraising merchandise or services that do not increase fundraising revenue
- paying more than fair market value for fundraising merchandise or services
- sole source or not-at-arm’s length contracts with suppliers or service providers
- activities where most of the gross revenues go to contracted non-charitable parties
- commission-based fundraiser remuneration or payment of fundraisers based on the amount or number of donations
- misrepresentations in fundraising solicitations or in disclosure about fundraising costs, revenues or practices
- fundraising initiatives or arrangements that are not well documented
- the size of the charity
- causes with limited appeal
- donor development programs
- involvement in gaming activities
7. Charities that engage in unacceptable fundraising cannot be registered under the Income Tax Act because they are not constituted and operated exclusively for charitable purposes and devoting their resources to charitable activities. A registered charity that engages in unacceptable fundraising is liable to sanctions or the revocation of its registration.
The concern that CRA has with high fundraising costs is similar but not necessarily the same as CRA Charity Application Graveyard – Reason #5 Unstated Purposes
Not everything is charitable, and sometimes, for some groups, depending on what they want to accomplish and what their sources of revenue are, it may not even be desirable to be a registered charity. One thing is clear – CRA spends a lot of time and resources reviewing charity applications, and unless your application meets all of the charity law requirements under the Income Tax Act and common law, they will not be able to register your organization as a charity.
If you require assistance with your charity application, you may be able to retain our law firm, and you can contact us here. It is best to contact us before establishing the entity and making an application to CRA, as this will minimize costs, changes and delays.