People often think that when you are a registered charity, such as a charitable organization, public foundation, or private foundation, it is easy to donate to another registered charity.
We all know that moving money from a registered charity to a non-qualified donee–such as a nonprofit or a foreign charity–is not simple; however, some believe that moving money from a registered charity to another registered charity is simple.
Of course, there are instances where gifting from a registered charity to another registered charity is simple; however, these instances can make it difficult for some to recognize factors that make gifting from one registered charity to another complex, problematic, or costly.
In this note, we are going to discuss “designated gifts”, a special anti-avoidance rule in the Income Tax Act (Canada) that you need to be aware of if you are running a charity and wish to make a gift to another registered charity.
As discussed in an earlier blog, an arm’s length relationship exists among persons (or corporate entities) that are operating independently of each other, or are unrelated. In contrast, a non-arm’s-length relationship will be found where persons are “acting in concert without separate interests or who are related.”
So let us say you have a registered charity, the “Maria Foundation”. Maria has 3 daughters on her foundation. Additionally, one of the daughters, Danielle, has established her own private foundation. These two foundations may be considered non-arm’s length from each other, and therefore, there are complexities that Maria and Danielle ought to consider.
If the charities are non-arm’s length, they will need to determine at the time of making any gifts whether the gift, or a portion of the gift, will be a “designated gift”.
If a gift is not designated, then the recipient registered charity (Danielle’s charity) must spend 100% of the gift on its own charitable activities (includes direction and control and PPDDAs), gifts to qualified donees, or grant to grantees that are at arm’s length in the fiscal period when the gift is made, or in the next fiscal period. Otherwise, the recipient registered charity may be subject to a penalty of 110% of the amount it failed to spend, or revocation by CRA of its registered charity status.
Consider a scenario where Danielle’s foundation’s typical annual spending is around $500,000 (from its own funds), and the Maria Foundation gifts Danielle’s foundation $10,000. In this scenario, the $10,000 gift may make little difference.
On the other hand, consider a scenario where Danielle’s foundation’s typical annual spending remains around $500,000, but the Maria Foundation gifts $50,000,000 to Danielle’s foundation. If the designated gift rules are not applied, Danielle’s foundation may need to spend $50,000,000 in the next year, which can cause problems for Danielle’s foundation and may not have been the Maria Foundation’s intent.
However, if the Maria Foundation makes a designated gift to Danielle’s foundation (by reporting it as such on its T1236 Qualified Donees Worksheet/Amounts Provided to Other Organizations of the T3010 Registered Charity Information Return), Danielle’s foundation will not be required to spend the $50,000,000 in the fiscal year it is received the gift, or the next fiscal year. However, it is important to note that a designated gift will not count towards the Maria Foundation’s disbursement quota.
However, the entire amount of a gift does not need to be a designated gift. For example, if the Maria Foundation intends on making a gift of $100,000 to Danielle’s foundation, the Maria Foundation can designate $50,000 of the gift and leave $50,000 undesignated. This would result in the designated gift of $50,000 not counting towards the Maria Foundation’s disbursement quota, but it would give Danielle’s foundation greater flexibility with respect to the timing of its disbursements. The remaining $50,000 undesignated gift would count towards Danielle’s foundation’s disbursement quota, and Danielle’s foundation would be required to spend the $50,000 in the fiscal period it was received or in the next fiscal period.
In addition to the designated gifts, there are many other factors that should be considered. A sample of questions one should consider include: What are your legal purposes? Is the gift for an inappropriate purpose? Is the gift part of a conduit, directed donation, or flow-through? Have you lended your registration?
We have encouraged CRA to provide guidance on the topic of gifts to qualified donees with little success. Unfortunately, this leaves many charities not understanding the complexity of this “simple” matter.
We offer several courses that may be beneficial for charities seeking to understand legal compliance, particularly in the context of designated gifts:
- Fundamentals of Running a Private or Public Foundation in Canada — A 7-hour course on how to run a private or public foundation in Canada.
- Making gifts to qualified donees: Discussing a seemingly simple proposition —If your registered charity has a qualified donee clause then this course may be for you.