Some registered charities funding projects outside of Canada, unfortunately, are not complying with the Canadian rules for such activities. Not complying with the rules can lead to revocation.
Generally speaking, a Canadian registered charity works with (and sends funds to) a non-qualified donee in two ways: (i) through its own activities under direction and control or (ii) through a grant to the grantee under the new qualifying disbursement rules. The qualifying disbursement rules came into effect in June 2022, and CRA is still grappling with how to apply these rules. CRA only recently (December 19, 2023) released its official guidance on the new rules. In most cases, we recommend against using the new rules at this point because they are untested and may be subject to change, and there are many outstanding practical questions about them. (You can also review our article on the new guidance).
In this note, we are only going to discuss direction and control. Sometimes, it is referred to as a structured arrangement.
None of the rules for direction and control is actually new. There have been five cases in the Federal Court of Appeal dealing with direction and control, and CRA has won all of them.
Below is a very basic summary of the rules for direction and control, which is what the Charity should be using each time it provides funds to a non-qualified donee. Non-qualified donees are organizations that are not qualified donees. Almost every non-profit or charity outside of Canada is a non-qualified donee.
The Charities Directorate of the Canada Revenue Agency has guidance on Canadian registered charities conducting foreign activities. The guidance is called CG-002 Canadian registered charities carrying out activities outside Canada and it is located at:
https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/guidance-002-canadian-registered-charities-carrying-activities-outside-canada.html
We have a whole directory of information dealing with direction and control. At the top of the directory are lots of useful articles on the topic.
Summary of Major Requirements for Direction and Control
Canadian charities are required to have mechanisms that ensure that the following measures of direction and control are in place when any resources are transferred from a Canadian charity to an intermediary (such as a foreign charity, NGO, or for-profit business):
1) Due Diligence – the intermediary must have the skill, knowledge, staff and equipment to carry out the charitable activities, and, in addition to such capacity, there must be a strong expectation that the intermediary will use the Canadian charity’s resources as agreed to.
2) Written Agreement – there must be a written agreement with the intermediary regarding the necessary elements required by the Charities Directorate guidance, and the terms of such agreement must be implemented or revised with mutual written consent as necessary.
3) Detailed Description of Distinct Activities – the written agreement must contain a clear, complete, and detailed description of the activity that the intermediary will conduct. Such activity must be a separate and distinct activity of the Canadian charity.
4) Monitoring and Supervision – there must be appropriate monitoring and supervision of the activity by the Canadian charity.
5) Ongoing Involvement – there must be ongoing communication between the Canadian charity and the intermediary and any significant changes to the detailed description of activities must be mutually agreed upon.
6) Separate Funds – the intermediary must arrange to keep the charity’s funds separate from its own, either by having a separate bank account or by segregating the funds on the accounting system of the intermediary.
7) Separate Books and Records – the intermediary must ensure that it keeps necessary books and records for the Canadian charity’s separate activities.
8) Periodic Payments – The Canadian charity must make periodic transfers of resources, based on demonstrated performance.
9) Books and Records in Canada – Copies of the books and records of the intermediary must be provided to the Canadian charity on a pre-determined basis or the Canadian charity must have access electronically to such books and records and the Canadian charity can make copies of such documents to be held at the office in Canada to meet the Canadian requirement that there needs to be adequate books and records in Canada. Books and records will include either original source documents or copies of such source documents.
Direction and control does not apply when the Canadian charity is providing resources to “qualified donees” under the Income Tax Act (Canada), which are generally Canadian registered charities, certain foreign universities that ordinarily have Canadian students and are listed with the CRA and the United Nations and its agencies.
The requirements of direction and control are in addition to any other requirements that may be imposed on the Canadian charity by its own corporate documents, corporate law, fiduciary and trust duties, foreign laws and donors or funders.
These are the basic rules for direction and control. However, it’s important to emphasize that not everything is charitable therefore, even if you have “direction and control” over the activity, it does not necessarily make it a charitable activity. For example, Canadian Charities are not allowed to directly or indirectly support a foreign military. They are not allowed to support terrorist organizations or groups involved with violence and terrorism. There are also specific rules relating to certain activities such as scholarships. You cannot do just anything that you want to do when it comes to scholarships. Historically, scholarships have been very limited and often chauvinistic and racist, only benefit a very narrow group of people, etc. CRA wants registered charities to operate at a higher level also taking into account public benefit and there it has some ideas about what is appropriate and inappropriate when it comes to scholarships.
It is very important to understand that because someone at a charity thinks that they have direction and control, that does not necessarily mean that they have direction and control. The measures of control mentioned above are either in place or not.
So if a charity says once that they have direction and control, or they say it 486 times, that does not mean they have direction and control.
If a charity says that they have had a charity lawyer review their systems and the charity lawyer is confident that they have direction and control, that also doesn’t mean that they have direction and control.
If a charity was audited by CRA last year and got through the audit relatively easily, that does not mean that they have direction and control. When the CRA audits the charity, it is not a forensic investigation into every transaction of the charity. The CRA takes a risk-based education approach, and some charities may not be focused on providing resources to non-qualified donees with direction and control, or the amount involved might be minuscule. CRA may not focus on that issue in an audit or prioritize it.
Unfortunately, there is probably more misinformation, out-of-date information, and highly politicized information about what is needed for direction and control on the Internet than easy-to-understand and actionable information on the topic.
I don’t expect members of the public to understand charity regulation and direction and control. However, if a charity is either spending a lot of money on projects outside of Canada or a large percentage of its work is outside of Canada, then yes, I do expect that the charity, including its staff and board, should understand direction and control.