A recent Ottawa Citizen article, “Renfrew hospital quietly transferring $9.6 million to not-for-profit sparks investigation” it discusses transfers of funds from a charity to a non-profit and discusses various concerns about the arrangement. The article raises a number of questions, but because of the lack of transparency in the non-profit and charity sector generally and the seeming unwillingness of certain people to provide answers, we may never really know what has happened.
The article notes:
In it, Boudreau said Renfrew Health was established in 2014 “as a corporate vehicle to separate non-hospital activities from the hospital and the hospital’s foundation and to explore opportunities to further enhance healthcare in our catchment area.” It was set up jointly by the boards of the hospital and the foundation, she said, “guided by expert advice received from counsel. With great success it has filled the gaps between supports to the community and limitations on what the hospital itself could provide.” To support activities of Renfrew Health – which have helped recruit physicians to the community among other things – she said part of the operating surplus of the hospital was transferred to the not-for-profit “in years when this was possible.
It would be interesting to know exactly what the “expert advice” was and whether it contemplated charity rules relating to registered charities dealing with non-qualified donees because there are appropriate and inappropriate reasons for a charity to transfer funds to a non-profit and also how it is done makes a difference.
The article continues:
“This practice was fully audited every year – in the financial statements of both organizations – and no concerns were ever raised by our independent auditors or the government authorities that received the audited statements every year,” she said.
Many large groups, when they get scrutiny and criticisms of their actions say, ‘But the auditors did not tell us it was wrong.’ There is not enough information here to know a number of different things about legal compliance, but there are certainly many questions that can be asked of the hospital and non-profit. Accountants are trained to look at hundreds of different items relating to GAAP, but most of the legal requirements for registered charities are not part of an audit by accountants. If you want to know whether you are operating according to CRA charity requirements, you need to have someone knowledgeable about charity law review what you are doing. So, unfortunately, I see non-profits and charities spending tens of thousands on audit fees every single year and not understanding the limitations on the role of the auditors and how all that annual effort does not give the charity much confidence that its operations are actually appropriate.
The article also notes:
Boudreau has characterized the creation of Renfrew Health as an innovative solution to supporting health care in the community. Until earlier this month, she was among the listed directors of Renfrew Health, according to federal not-for-profit documents.
There is no question that a non-profit organization can be an innovative way to tackle issues relating to health care, but it is very important to realize what the charity and NPO can do together and what they cannot do and the rules relating to that relationship.
It is not clear what has happened here, and it does not sound like some people are prepared to speak to the journalist, so it may not be clear for a while.
The article raises potentially another issue when it discusses what I think is the non-profit’s business activities:
Among those, it says the “multimillion-dollar business” had funds to recruit new physicians to the community and fill vacancies and helped enable clinics to bring specialists to the community. It also says the creation of Renfrew Health allowed the hospital board and foundation to focus on their own mandates such as hospital services, programs and fundraising and protected the hospital from downturns related to rental space and lost revenue.
I am not sure what the word ‘business’ refers to. Is it the operations with the funds from the charity, or is it money gained through rentals, etc.? If Renfrew Health is carrying on a lucrative business, then that may violate the rules for non-profits that are not registered charities. In fact, charities can carry on very profitable businesses as long as they are related businesses, but non-profits cannot.
In general, and not relating to this situation for which I don’t have all the information, an NPO can be useful in many ways, for example, for collecting corporate funds that don’t require receipts and using those funds to help bring staff to underserved communities. The NPO can take in money from governments and occasional crowdfunding fundraising. However, an NPO cannot be used to take excess cash off the hands of a registered charity with a surplus because a registered charity is not allowed to make gifts to a non-qualified donee. An NPO can be hired by a Canadian charity to do certain specific charitable work, but as we discuss below, there are specific legal requirements that need to be in place and this article does not discuss whether they were in place.
An important lesson from this article is that if there are problems or perceived problems with a charity or non-profit or a charity having a relationship with a non-profit, it is more likely that a concerned group of citizens will be able to raise the issues compared to the likelihood that a regulator like CRA will find the issues or a funder will notice them. We have 86,000 charities in Canada and CRA has limited resources. Most funders (government, foundation, businesses) know little about due diligence and funding non-profits and charities. We need far more transparency or trust in the non-profit and charity sectors is going to continue to decline.
This is one of the key reasons that I support transparency. It allows those close to the charity to see what is going on and raise issues when there are problems. Transparency for me is not mainly about every citizen of Canada having easy access to material on any registered charity – it is first and foremost about staff, board members and other stakeholders having access to important information. Unfortunately, often, important stakeholders are denied that information and problems can get worse and worse, and often, there are very limited avenues for accountability.
A reminder that for many decades, Canadian charities could transfer funds to non-qualified donees such as non-profits, for-profits, foreign charities, etc., but they needed to have an appropriate charitable purpose and direction and control. More recently, a second system for providing funds to non-qualified donees was introduced.
So now, generally speaking, a Canadian registered charity can work 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 grant to grante 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. We recommend in most cases against using the new rules at this point because they are untested and may be subject to change. (You can also review our article on the new guidance).
Direction and control or grant to grantee rules do not apply when a Canadian charity is providing resources to “qualified donees” under the Income Tax Act (Canada), which are generally Canadian registered charities, municipalities, certain foreign universities that ordinarily have Canadian students and are listed with the CRA and the United Nations and its agencies, etc.
When a non-profit and registered charity have a close relationship it is important to maintain sufficient separation between the two entities and also make sure that both the registered charity and non-profit are complying with their respective requirements. Hopefully there will be more written about this topic so that we can understand more about the details of what happened.