Will Canadian registered charities need to file T3 forms for “express trusts” beginning next year?

There has been some coverage in the media of a concern that Canadian charities may be required to file a T3 form for each of their “express trusts”. Examples of express trusts could be a perpetual endowment or a long-term fund for a particular area. Another example of an express trust could be a donor advised fund. It is clear that registered charities and non-profits themselves don’t have to file a T3 for their organization but registered charities file for tax purposes a T3010 and non-profits a T2 and/or T1044.

But what if a registered charity has a separate “express trust”? CRA has traditionally exempted registered charities from filing the T3 when they file the T3010 and include the assets of the express trust in the T3010. Over the last five years, there have been discussions of new reporting requirements relating to trusts. New requirements were passed in the Fall Economic Statement Implementation Act on December 15, 2022. It has new reporting requirements and also some explicit exemptions.

It is not clear yet whether CRA will insist on charities having to file the T3 for each express trust or maintain their traditional position that charities did not need to file the T3. There has been concerns raised that beginning in 2024, certain express trusts held by charities will have to file the T3 and provide additional information that had not been required before. There are significant penalties for non-compliance.

So, the short answer to the question is that we don’t yet know what CRA’s position is. To be clear, it is not the Charities Directorate of CRA that is making this decision. I anticipate further communication from CRA on this issue over the next few months. At that point, once CRA has provided some clarity, we will know what the status of the issue is.

As you know, Finance passes laws but is not involved in enforcement. It is the CRA’s job to enforce. It will be nice to hear from CRA what their view is. For a long time, charities have been exempted. Will that continue? We will know when CRA tells us.

Some other points to keep in mind:

1. The bigger current issue for some organizations is that they don’t know about all their restricted gifts and they don’t have an up-to-date and accurate list of restricted gifts. They are distributing funds from restricted gifts but not necessarily in accordance with all the requirements they had agreed to. In some cases, the charity is pretty certain they are following the requirements, but they are not correct. In some cases, changes were made to gift agreements which they are now following but there was no legal ability to make such changes (e.g. court order, amendment clause, cy pres clause, etc.).
2. In my experience, even relatively well-organized charities often don’t have an up-to-date, comprehensive and accurate list of the restrictions, and they are often not complying with all the actual restrictions. My point is that all charities with restricted gifts should have a clear understanding of what restrictions are there and comply with them. Instead of focusing exclusively on a potential filing requirement, which may not happen, it might be a good idea for charities to a) ensure that they have a complete list of restricted gifts and the restrictions, b) ensure that they are abiding by those restrictions and as we will discuss later c) put pressure on the Charities Directorate to have a schedule in the T3010 providing information on restricted gifts (even if only for larger charities say with over 1m in restricted gifts or even 10m.)  Also, some charities who carefully review their restricted gifts realize that there may be options to change those restrictions. You can see our course on restricted gifts.
3. As an aside, remember the DQ issue. Some people said that we could not increase the DQ unless we had more data on the sector. I will not say who said that but it is part of the historic record. I did not agree at the time with that view because some did not have any problem decreasing the DQ from 4.5% to 3.5% without data! So, do we really need such data to increase the DQ? As Finance did ultimately increase the DQ without such data, we have the answer. This T3 requirement would increase CRA’s knowledge of restricted funds held by charities. Not a great way to do so, as I will discuss below.
4. At the moment, no one knows how much of the $130 billion in private and public foundations is restricted and how these funds are restricted.    Finance, CRA and the public do not know. For some, this is a non-issue. For others, such as those concerned with wealth inequality or the FATF or OECD etc., that is a lot of money being stored with very little information on whether any of it has restrictions.
5. The idea of having registered charities file a T3 for all express trusts is a bad idea for a number of reasons.
6. I will tell you what is a worse idea. Having no idea how much of the over $130 billion in private and public foundations is restricted and what restrictions apply.
7. I don’t like a binary world with only two bad options.
8. In June of 2021, I sent a letter to the Charities Directorate suggesting that in order to have a more informed discussion about assets, restrictions and the disbursement quota that CRA either send a letter to 500 largest foundations or alternatively include questions on the T3010 about assets. I thought the smallest effort was the letter to 500 largest foundations and with just a few questions, this would cover most of the assets held by foundations and there would be greater clarity on how much is restricted and on what terms. You can read my email to the Charities Directorate at the end of this note.
9. Needless to say, the Charities Directorate did not send such a letter to the largest foundations or change the T3010. Unfortunately, at the time (the beginning of COVID) people had many things on their minds, and I am not sure if anyone else pushed for greater transparency on assets. Now we are in the position that we are in.
10. It sort of reminds me of a person complaining that a dentist has extracted their tooth. They have been having tremendous pain for months but never saw the dentist. Perhaps if they had visited the dentist a week after having pain, the result might have been less severe than a tooth extraction. I should apologize to CRA for making an analogy in which they are portrayed as a scary dentist!
11. The long and the short – we need an honest conversation about transparency in the charity sector. It cannot be dominated by certain special interest groups who object to any transparency improvements. I should be clear I don’t think anyone says they are opposed to transparency. People say transparency is very important and then complain about every question on the T3010 or suggest that reducing the number of questions or cutting “red tape” is more important or they highlight every possible risk with public disclosure of almost any information about charities.
12. If we continue listening to those who oppose greater transparency in the charity sector, we will never have any increased transparency and public confidence in the charity sector will remain very low. Having little transparency is not good for most charities. It makes due diligence hard. It makes funders and supporters feel that they have to ask lots of repetitive questions. Oh, and yes, it allows some really bad people to get away with very bad things in the charity sector. Probably most importantly it allows mediocre groups to get away with being mediocre. Here is one of many of my recent submissions on transparency in the Charity Sector. Note I am definitely not and have never suggested that registered charities should file a T3.
13. If CRA does not exempt registered charities from this requirement to file the T3, then it will clearly result in a large number of filings and at least the CRA’s understanding of the restricted gifts will improve. Not by much, but a bit. It will not help the public understand the amount and type of restrictions as the T3 is not public. Therefore I think my idea of asking some of the biggest foundations (or some of the biggest charities) in terms of assets to respond to a one-time letter or add some questions for large charities to the T3010 does make some sense and especially today.   Unfortunately, CRA is now only focussing in on one type of restricted gift – donor advised funds, and they will include questions on the T3010 relating to DAFs. DAFs are probably only a small amount of the restricted gifts held by charities. So, it is good they are asking about DAFs but not it is not enough. When we compare what Canadian charities provide in the T3010 to what US 501(c)(3)s provide in their Form 990, it is quite embarrassing for Canada. It is like toddler scratching furniture compared to a Monet.
14. Another little side note. Most charities probably don’t have ongoing restricted gifts or at least not multi-year endowments. Some charities have thousands of these restricted gifts. Unfortunately, in my opinion, public policy in the charitable sector has never been about what is good or bad for most charities. It is almost always what is good for the most powerful charities. You just need to look back to see the huge fights over the disbursement quota changes to see my point but one can look at many other examples.
15. If there is no CRA administrative exemption to the T3 filing for charities, then that will not be great. It will be most difficult for charities who have a few filings to do. Some of the bigger charities will use computer programs etc., to quickly produce and file the T3 filings.
16. It is unfortunate that we are at this point. Having charities file the T3 is not a good option, but nor is opposition by some in the charity sector to any disclosure of information on restricted gifts.

Here is a copy of an email I sent to Tony Manconi on June 9, 2021, who was the Director General of the Charities Directorate at the time:

Tony,

 

Hope you’re keeping well.

In the recent 2021 Federal Budget there was mention of a consultation to discuss the disbursement quota.  It is not clear to me who will be conducting that consultation but irrespective of who is conducting the consultation it appears to me that in order to have a reasonably informed discussion on this topic, CRA needs to collect some data ahead of time. Unfortunately, this topic is another example of having a short T3010 that does not ask some important questions.

Specifically, I am referring to questions regarding charitable assets and what restrictions, if any, may apply to them, including whether they are restricted and how they are restricted. This information is essential to understand so that one can make informed decisions relating to the ability of foundations to spend money on charitable activities or gifts to qualified donees and to meet the disbursement quota.

The budget estimated $85 billion is held by private foundations and I heard another more updated estimate that there is now about $95 billion.  There are also significant assets being held by public foundations.

Whether the disbursement quota should be changed depends on various matters (legal, ethical, political) but it will not be an informed discussion unless we have information on the assets of the largest foundations and specifically the following:

1. Externally restricted vs. unrestricted: how much of a foundation’s assets are restricted as compared to the foundation’s unrestricted assets (which would include board restricted or internally restricted) – and the amounts of each.
2. Nature of External Restrictions: If it is an externally restricted gift then the nature of the restriction(s) for each fund (keeping in mind that there can be more than one restriction per fund). For example:

1. 1. Perpetually endowed funds where only the income can be disbursed
   2. Perpetually endowed funds where a total return approach to disbursement is permissible
   3. Restrictions as to timing of when funds can be spent (e.g. funds must be disbursed over 5 years, or only the income can be spent for the first 10 years, then can encroach on capital)
   4. Restrictions as to purpose of funds (e.g. can only be spent in a particular charitable scope
   5. Restrictions as to location of funds (i.e. can only be spent in a particular geographic area)
   6. Restrictions as to how funds can be spent on a particular purpose (e.g. can only be spent on a particular charitable activity that furthers a broader charitable purpose)
   7. Other ____________
   8. Explanation of each fund: current value of the fund and list of restrictions which apply
   9. Origin of Restrictions: When were the restrictions imposed and by whom (donor or Board or other person/entity)
   10. Flexibility of Restricted Assets: What flexibilities if any are provided in terms of the restriction (some may have amendment clauses, cy pres options, ability to loan against capital, ability in exceptional cases to encroach on capital, etc.)

It will be hard to have a constructive discussion if representatives of foundations are going to make representations that a large number of foundations have restricted gifts (especially perpetual foundations) and cannot expend more and others are going to ignore completely the issue of restrictions and suggest that every foundation should spend 10-20% per year.

There is no doubt that charitable assets are subject to a variety of restrictions, but how many foundations exactly it affects and what percentage of their funds are restricted and how they are restricted is certainly not information that I have seen and it is vital for the consultation.

My request is that the CRA send out an information return, questionnaire or other document to try to determine at least for the largest 500 public and private foundations what the nature of their assets are and the restrictions that they have to deal with.  I know that the CRA has sent out form letters to thousands of charities to collect information on receipting for gifts-in-kind in the past and it could largely be a form letter that hopefully would not take up too much time.

If you are not comfortable sending out such a request, then I would suggest that these questions are permanently added directly to the T3010 form as it is certainly a weakness of the form that it does not ask these questions.