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- Collateral purpose
Although common law [see: Vancouver Society of Immigrant and Visible Minority Women v M.N.R., [1999] 1 SCR 10, at paras. 154-159] requires that a registered charity has exclusively charitable purposes and the Act requires that a registered charity devote all its resources to charitable purposes and activities, a charity can use some of its resources for fundraising. However, when the total amount of resources devoted to fundraising exceeds the total amount of resources devoted to charitable activities, this is a strong indication that fundraising is a collateral purpose of the charity.
The courts [see: Vancouver Society of Immigrant and Visible Minority Women v MNR, [1999] 1 SCR 10, at paras. 152 and 154.] have determined that fundraising itself (whether done as a purpose or an activity) is not charitable. Consequently, fundraising activities are not normally treated as advancing the charitable purposes of a charity. When fundraising becomes an organization’s primary emphasis, the organization would not likely qualify for registration. However, a charity can have reasons for incurring higher fundraising costs for a particular event or in a particular year. We consider many factors during our review to determine whether fundraising costs are excessive. 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.”
CRA notes in its Guidance Fundraising by Registered Charities:
Resources devoted to fundraising are disproportionate to resources devoted to charitable activities
59. Where the resources devoted to fundraising exceed the resources devoted to charitable activities, this is a strong indicator that fundraising has become a collateral non-charitable purpose or that the charity is delivering a more than incidental private benefit. This may happen whether fundraising is done internally through staff or externally through a contractual arrangement.
60. Merely showing that the costs of fundraising are at reasonable or at market rates will not alleviate concerns. Regardless of the cost of fundraising, a registered charity must devote its resources to charitable activities. If a charity’s total resources devoted to fundraising exceed those devoted to charitable activities, it is unlikely that this legal requirement will be met.
61. If a charity makes substantial use of non-financial resources, such as volunteers, a purely financial analysis of its operations may not accurately represent the use of its resources for charitable activities. In such a case, a charity should document the use of its non-financial resources, so that it can show it is in compliance with the requirements of the Income Tax Act.
Example 1
A charity has a large number of volunteers who carry out its charitable activities on a day-to-day basis. The charity’s cash income is relatively low, and it uses most of this money for its fundraising, and management and administration.
The charity’s financial reporting on its Form T3010 will show relatively little spending on charitable programs. However, assuming the charity documents the use of its volunteers, such as by recording the number of volunteers helping the charity, how many hours they worked, and the activities they carried out, the charity will still likely be considered by the CRA to be devoting its resources appropriately.
Example 2
A charity has a large number of volunteers who only carry out fundraising activities. The charity’s cash income is relatively low, but it spends 100% of this money on its charitable activities.
The charity’s financial reporting on its Form T3010 will appear to show it is devoting its resources entirely to its charitable activities. However, an audit or other review by the CRA will likely show that the charity is devoting a disproportionate amount of its total resources to fundraising.
62. A charity should be able to demonstrate that its use of non-financial resources is reasonable and effective.
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.