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 issues:
Unstated Purposes
We examined the applicant’s activities to determine whether it advances its stated purposes or whether it advances unstated, non-charitable purposes. According to the Supreme Court of Canada, Vancouver Society of Immigrant and Visible Minority Women v MNR, [1999] 1 SCR 10 at para 194., the question of whether an organization was established exclusively for charitable purposes cannot be determined by referring only to the purposes it was established for. It is also necessary to consider the organization’s current activities to see if it advances other unstated purposes. This means that in order to meet the legislative requirements for registration, it is not enough that an applicant be simply constituted exclusively for charitable purposes, but that it must also operate exclusively for charitable purpose
Although some of the activities the applicant carries on are charitable, such as [Describe activities], some of its other activities fall outside of what the law considers charitable. We believe the applicant operates for an unstated collateral purpose and that its activities are designed to advance that purpose, specifically [Insert purpose].We cannot grant charitable registration to an organization whose main purpose is [insert purpose], whether that purpose is collateral or not.
A stated purpose is a purpose set out in your governing documents. An unstated purpose, on the other hand, is a purpose that CRA perceives that the organization has that is not explicitly listed or stated in the purposes of the governing documents. If the unstated purpose is charitable, then that is not so serious. You can see, for example, CRA Charity Application Graveyard – Reason #4 “Purposes don’t reflect activities because with that problem #4, a change in the purpose in the organization’s governing documents could resolve the issue.
Unfortunately, the CRA is particularly concerned when the unstated purpose of the organization is a non-charitable purposes and in that case they sometimes refer to it as a unstated non-charitalbe purpose or a collateral non-charitable purpose. In that case, you are not eligible to be a registered charity if that is actually your real purpose. With collateral purposes, you need to be able to demonstrate to CRA that the facts are not as the CRA sees them.
Some examples of unstated charitable purposes would be the purpose of fundraising, administration, business activities, social activities, etc.
For example, in CRA’s Guidance Fundraising by Registered Charities, it gives the example when more money is spent on fundraising than charitable activities, it is an indication that perhaps the charity has a collateral non-charitable purpose:
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.
Another example, CRA notes in its guidance “What is a related business?”
3. Charity law, reinforced by provisions in the Income Tax Act, requires that charities have exclusively charitable purposes. Running a business cannot become a purpose in its own right—it must remain subordinated to the organization’s charitable purpose.
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.