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:
Use of resources
Subsection 149.1(1)(a) of the Income Tax Act requires that a charitable organization devote all of its resources to charitable activities carried on by the organization itself. Thus, as a matter of Canadian law, an organization granted status as a registered charity can use its resources (such as funds, personnel, and property) whether inside or outside Canada in two ways only:
- on its own activities through its own staff and volunteers, or through an intermediary if it exercises direction and control
- on making qualifying disbursements through gifts to qualified donees or grants to non qualified donees (grantees: A grantee includes a person, club, society, association or organization or prescribed entity, but does not include a qualified donee.)
Generally, qualified donees are other registered Canadian charities, registered Canadian amateur athletic associations, and Canadian municipalities. For a list of qualified donees, go to canada.ca/charities-giving, and select “List of charities and other qualified donees.”
When a charity makes a grant to a non-qualified donee (grantee), the charity must meet certain accountability requirements, which are to:
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ensure that its resources are exclusively applied to charitable activities that further a charitable purpose of the charity; and
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maintain sufficient documentation in its books and records to show this, including the purpose for which the grant is made.
Here is a longer version of the CRA concern over “use of resources”.
The Act (Subsection 149.1(l)(a) of the Act) requires that a charitable organization devote all of its resources to charitable activities. Activities are considered charitable when they are carried on to further a charitable purpose. Thus, as a matter of Canadian law, an organization granted status as a registered charity can use its resources (such as funds, personnel, and property) whether inside or outside Canada in two ways only:
- on its own activities through its own staff and volunteers, or through an intermediary if it exercises direction and control (Those that are carried out by the charity itself.)
- on making qualifying disbursements through gifts to qualified donees or grants to non qualified donees (grantees) (A grantee includes a person, club, society, association or organization or prescribed entity, but does not include a qualified donee.)
Generally, qualified donees are other registered Canadian charities, registered Canadian amateur athletic associations, and Canadian municipalities. For a list of qualified donees, go to canada.ca/charities-giving, and select “List of charities and other qualified donees.”
When a charity makes a grant to a non-qualified donee, the charity must meet certain accountability requirements, which are to:
- ensure that its resources are exclusively applied to charitable activities that further a charitable purpose of the charity; and
- maintain sufficient documentation in its books and records to show this, including the purpose for which the grant is made.
A charity is responsible toshow it meets the above legislative requirements. Here are examples of how it can do this:
- conduct and document a due diligence review of the grantee
- together with the grantee, develop a clear, complete, and detailed description of the grant activity, ideally in writing
- enter into a written agreement, and implement its terms, where feasible
- monitor the grant activity, including obtaining written reports from the grantee
- make periodic transfers of resources to the grantee, based on demonstrated performance, and withhold future transfers if necessary and appropriate under the circumstances of the grant, and
- have the grantee track the charity’s resources separately in its books and records, where feasible
The measures a charity uses to meet these requirements should reflect the risk associated with the grant. If the grant is higher risk due, for example, to the significant value of resources the charity will transfer, the measures set out in the grant agreement should reflect this. All of the charity’s accountability measures should be clearly documented in its books and records.
When a charity intends to work with a non-qualified donee, it should consider at the outset whether it will do this through a grant to a grantee, or by carrying on its own activities with the non-qualified donee acting as an intermediary. This decision rests with the charity. The charity can determine what is most appropriate in the circumstances. A charity’s books and records must clearly show which approach it has taken.
A common granting arrangement might include pooled granting. This occurs when a charity, together with qualified or non-qualified donees, pools resources to support the program of a grantee. In these situations, a charity should incorporate all of the above measures, including a written agreement if feasible, and ensure the grant is well documented. In pooled granting contexts, the CRA will focus on due diligence, written documentation, periodic transfers (if appropriate), and a final written report.
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.