Charities do millions of transactions every year. When is a transaction with, for example, an individual or for-profit corporation appropriate, and when is it an undue benefit?
CRA recently, in a revocation letter, had a very good summary of the topic, and I have reproduced it below:
Legislation and jurisprudence
In order to satisfy the definition of a charitable organization pursuant to subsection 149.1 (1) of the Act, charitable organization is, amongst other criteria, defined as, .. an organization [ … ] no part of the income of which is payable to, or otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settler thereof.”
A registered charity must be established and operated for the purpose of delivering a charitable benefit to the public or a sufficient segment thereof. The public benefit requirement prevents a charity from conferring an unacceptable private benefit in the course of pursuing charitable purposes.
At common law, a private benefit means a benefit provided to a person or organization that is not a charitable beneficiary, or a charitable beneficiary where a benefit goes beyond what is considered to be charitable. Private benefits can be conferred on a charity’s staff, directors, trustees, members, and/or volunteers while they are carrying out activities that support the charity, or to third parties who provide the charity with goods or services. Where it can be fairly considered that the eligibility of a recipient relates solely to the relationship of the recipient to the organization, any resulting benefit will not be acceptable. [Personal benefit is also sometimes used instead of benefit in the common law private benefit context; See CRA Guidance product CG-019, Mow to draft purposes for charitable registration.]
Providing a private benefit is unacceptable unless it is incidental to accomplishing a charitable purpose. A private benefit will usually be incidental where it is necessary, reasonable, and proportionate to the resulting public benefit. For more information, see CRA Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.
(i) Necessary – Necessary means legitimately and justifiably resulting from:
(a) an action taken to achieve a charitable purpose; or
(b) a necessary step, a consequence, or a by-product of an action taken to achieve a charitable purpose; or
(c) the operation of a related business as defined in paragraph 149 .1 (1) of the Act.
and
(ii) Reasonable – Reasonable means related to the charitable need and no more than is needed to achieve the purpose, and fairly and rationally assessed and distributed.
and
(iii) Proportionate – Proportionate means the private benefit cannot be a substantial part of a purpose or activity, or be a non-charitable end in itself. The private benefit must be secondary and the public benefit must be predominant and more significant.
The public benefit cannot be too speculative, indirect or remote, as compared to a more direct·
private benefit, particularly when a direct benefit is to private persons, entities, or businesses.
Examples of unacceptable (not incidental) private benefit might include:
- paying excessive salaries/remuneration;
- paying for expenses, or providing benefits that are not justified or needed to perform required duties;
- providing excessive per diems;
- unjustified/unnecessary or excessive payments for services, facilities, supplies, or equipment;
- promoting the work, talent, services, or businesses of certain persons or entities, without justification.
Typically, private benefits that are unacceptable under the common law will also be undue under subsection 188.1 (5) of the Act (Undue benefits are sanctioned under subsection J 88.1(4) of the Act.) An undue benefit means a benefit provided by a registered charity, a registered Canadian amateur athletic association (RCAAA), or a third party at the direction, or with the consent, of a charity or RCAAA that would otherwise have had a right to that amount. An undue benefit includes a disbursement by way of a gift or the amount of any part of the income, rights, property or resources of the charity or RCAAA that is paid, payable, assigned or otherwise made available for the personal benefit of any person who:
(a) is a proprietor, member, shareholder, trustee or settlor of the charity or RCAAA;
(b) has contributed or otherwise paid into the charity or RCAAA more than 50% of the capital of the charity or RCAAA; or
(c) does not deal at arm’s length with a person in (a) or (b), or with the charity or RCAAA.
Undue benefit does not include
(a) a gift to a qualified donee;
(b) reasonable consideration or remuneration for property acquired or services received by the charity or RCAAA;
(c) a gift made, or a benefit provided, in the course of a charitable act 15 in the ordinary course of the charitable activities carried on by the charity or RC AAA, unless it can be reasonably considered that the beneficiary was eligible for the benefit solely due to the relationship of the beneficiary to the charity or RCAAA.