The Budget Implementation Act No. 1 was recently passed which allows for “(l) enabling registered charities to enter into charitable partnerships with organizations other than qualified donees under certain conditions;”. There has been a lot of changes and misunderstandings about this change. It does not allow Canadian charities to make “gifts” to non-qualified donees (such as non-profits that are not charities, foreign charities or businesses). It does not replace the current options for program implementation including 1) gifts to qualified donees, 2) using staff to implement programs or 3) using non-qualified donees as part of a structured arrangement with direction and control.
The BIA No. 1 introduces terms such as “grantee organization” and “qualifying disbursement”.
A grantee organization includes “a person, club, society, association or organization or prescribed entity, but does not include a qualified donee; (organisation donataire)”
A qualifying disbursement includes a “gift to a qualified donee” and also by making resources available, to a grantee organization (which is a non-qualified donee) if
(i) the disbursement is in furtherance of a charitable purpose (determined without reference to the definition charitable purposes in this subsection) of the charity,
(ii) the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and
(iii) the charity maintains documentation sufficient to demonstrate
- (A) the purpose for which the disbursement is made and
- (B) that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity; (versement admissible)
In addition, the following additional anti-avoidance measure was brought in:
“(f) in the case of a registered charity, registered Canadian amateur athletic association or registered journalism organization, accepts a gift the granting of which was expressly or implicitly conditional on the charity, association or organization making a gift to another person, club, society, association or organization other than a qualified donee.” This new rule could have implications for both charities conducting foreign activities under the “direction and control” rules and also the new qualifying disbursement rules.
While the rules for direction and control were quite clear before this change, it is not clear what the impact of this change will mean on “direction and control” and also these new “charitable partnerships”. Hopefully, CRA will release guidance soon as to how these provisions will be interpreted by CRA. Then there will be further clarity. If the past is any indication, there may be people challenging the new “charitable partnerships” and the CRA’s views of the requirements. Then such court decisions may impact the interpretation of these provisions.
A few things to keep in mind.
- It is not a “qualifying disbursement” if the disbursement is for an activity that is outside the registered charity’s purposes. Keep in mind that many charities don’t even know their purposes, think their old original purposes are their purposes but they have been changed subsequently and in some cases, the purposes have not been updated in decades. So while this should be a simple matter with charities having charitable purposes and operating within those purposes it is often not the case. Many charities are doing activities that are outside their legal objects or purposes. Charities should review and update their purposes if necessary.
- How will the charity ensure “that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity”. Will Canadian charities be able to provide some funds to their partner to be used for administrative purposes relating to the project? Will the requirements be different for Canadian charities operating in Canada vs. outside of Canada? There were a number of significant concessions made by CRA relating to capital property in projects in developing countries and it is not clear if those generous rules will apply to these new qualifying disbursements.
- The charity needs to maintain documentation sufficient to demonstrate the purpose for which the disbursement is made, and that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity. It is not clear exactly what documentation will be needed. How will the charity in Canada show that the disbursement is “exclusively” applied to charitable activities.
- What does it mean “accepts a gift the granting of which was expressly or implicitly conditional on the charity, association or organization making a gift to another person, club, society, association or organization other than a qualified donee.” Will this mean that if a Canadian group is working with a foreign group and the donor knows that their funds would go to that foreign group, then that is a problem?
- Will there be additional changes or additional requirements added?
- Will your charity properly disclose these “qualifying disbursements” on your T3010? When will a disbursement be under “direction and control” and when will it be under a “qualifying disbursement”?
- Will current agreements and partner reporting requirements need to be updated because of these new rules?
- Will these rules be preferable to “direction and control” – presumably it will depend on the organizations, its objects, and the type of activities contemplated?
- The transparency requirements for direction and control and qualifying disbursements may be different. Groups will presumably need to determine whether an expenditure is part of direction and control or qualifying disbursements, keep records on that and then report on the T3010 the information. Groups did not have to report grants to intermediaries in Canada (under direction and control) but now for grants over $5000 under qualifying disbursements they will need to be reported on. This will be an improvement in providing more transparency about grants within Canada. Hopefully, CRA will extend that T3010 to require disclosure of grants within Canada under direction and control as well.
So it will be helpful to hear what CRA’s guidance is.
The BIA provides:
16 (1) The definition charitable purposes in subsection 149.1(1) of the Act is replaced by the following:
charitable purposes includes making qualifying disbursements; (fins de bienfaisance)
(2) Paragraph (a.1) of the definition charitable organization in subsection 149.1(1) of the Act is replaced by the following:
- (a.1) all the resources of which are devoted to charitable activities carried on by the organization itself or to making qualifying disbursements,
(3) Subsection 149.1(1) of the Act is amended by adding the following in alphabetical order:
grantee organization includes a person, club, society, association or organization or prescribed entity, but does not include a qualified donee; (organisation donataire)
qualifying disbursement means a disbursement by a charity, by way of a gift or by otherwise making resources available,
- (a) subject to subsection (6.001), to a qualified donee, or
- (b) to a grantee organization, if
- (i) the disbursement is in furtherance of a charitable purpose (determined without reference to the definition charitable purposes in this subsection) of the charity,
- (ii) the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and
- (iii) the charity maintains documentation sufficient to demonstrate
- (A) the purpose for which the disbursement is made, and
- (B) that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity; (versement admissible)
(4) Paragraphs 149.1(2)(b) and (c) of the Act are replaced by the following:
- (b) fails to expend in any taxation year, on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements, amounts the total of which is at least equal to the organization’s disbursement quota for that year; or
- (c) makes a disbursement, other than
- (i) a disbursement made in the course of charitable activities carried on by it, or
- (ii) a qualifying disbursement.
(5) Paragraphs 149.1(3)(b) and (b.1) of the Act are replaced by the following:
- (b) fails to expend in any taxation year, on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements, amounts the total of which is at least equal to the foundation’s disbursement quota for that year;
- (b.1) makes a disbursement, other than
- (i) a disbursement made in the course of charitable activities carried on by it, or
- (ii) a qualifying disbursement;
(6) Paragraphs 149.1(4)(b) and (b.1) of the Act are replaced by the following:
- (b) fails to expend in any taxation year, on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements, amounts the total of which is at least equal to the foundation’s disbursement quota for that year;
- (b.1) makes a disbursement, other than
- (i) a disbursement made in the course of charitable activities carried on by it, or
- (ii) a qualifying disbursement;
(7) Paragraph 149.1(4.1)(d) of the Act is replaced by the following:
- (d) of a registered charity, if it has in a taxation year received a gift of property (other than a designated gift) from another registered charity with which it does not deal at arm’s length and it has expended, before the end of the next taxation year, in addition to its disbursement quota for each of those taxation years, an amount that is less than the fair market value of the property, on charitable activities carried on by it or by way of gifts that are qualified disbursements to qualified donees or grantee organizations, with which it deals at arm’s length;
(8) Subsection 149.1(6) of the Act is replaced by the following:
Devotion of resources — charitable activity
(6) A charitable organization shall be considered to be devoting its resources to charitable activities carried on by it to the extent that it uses those resources in carrying on a related business.
Qualifying disbursement limit — charitable organizations
(6.001) In any taxation year, disbursements of income of a charitable organization by way of gifts to a qualified donee (other than disbursements of income to a registered charity that the Minister has designated in writing as a charity associated with the charitable organization) in excess of 50% of the charitable organization’s income for that year are not qualifying disbursements.
(9) Subsection 149.1(10) of the Act is repealed.
(10) Subsections 149.1(20) and (21) of the Act are replaced by the following:
Rule regarding disbursement excess
(20) Where a registered charity has expended a disbursement excess for a taxation year, the charity may, for the purpose of determining whether it complies with the requirements of paragraph (2)(b), (3)(b) or (4)(b), as the case may be, for the immediately preceding taxation year of the charity and five or less of its immediately subsequent taxation years, include in the computation of the amounts expended on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements, such portion of that disbursement excess as was not so included under this subsection for any preceding taxation year.
Definition of disbursement excess
(21) For the purpose of subsection (20), disbursement excess, for a taxation year of a charity, means the amount, if any, by which the total of amounts expended in the year by the charity on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements exceeds its disbursement quota for the year.
It also provides:
21 Paragraph 168(1)(f) of the Act is replaced by the following:
(f) in the case of a registered charity, registered Canadian amateur athletic association or registered journalism organization, accepts a gift the granting of which was expressly or implicitly conditional on the charity, association or organization making a gift to another person, club, society, association or organization other than a qualified donee.
It also provides:
40 The Regulations are amended by adding the following after section 3702:
Information Returns
3703 For the purpose of subsection 149.1(14) of the Act, the following is prescribed information for the public information return of a charity in a taxation year:
- (a) in respect of each grantee organization that received total qualifying disbursements from the charity in excess of $5,000 in the taxation year, the name of the grantee organization;
- (b) the purpose of each qualifying disbursement made to a grantee organization referred to in paragraph (a) in the taxation year; and
- (c) the total amount disbursed by the charity to each grantee organization referred to in paragraph (a) in the taxation year.
By Mark Blumberg, Blumbergs, Canadian Charity Law
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