The new Qualifying Disbursement rules will give some charities (with certain objects) some more flexibility when dealing with non-qualified donees in Canada and outside of Canada. At the same time, the anti-avoidance provision passed at the same time will make it more difficult in many cases for registered charities to deal with non-qualified donees. It is not clear on balance whether these changes are better for particular charities or the broader charity sector in the long run.
We have been working with many clients to understand the implications of these new rules.
One good thing is that these new rules will result in greater transparency in some cases relating to grants to non-qualified donees in Canada and more information that will need to be provided on the T3010.
But it will also affect fundraising and the messaging around fundraising. It will impact grants received from funders and any restrictions or requirements in those grant agreements.
Registered charities may need to review their objects and whether such objects should be amended. In addition, for some groups, it may be better to create non-profit subsidiaries that are not covered by these rules.
If any charity uses the qualifying disbursement approach, there are significant new requirements for books and records and due diligence. For most groups continuing to use “structured arrangements” with “direction and control” may make more sense for the moment.
Charities over the next few months should consider how the new rules will impact them and their operations. Specifically, how do these new rules compare to the direction and control rules (which have not been replaced) and will it make it easier or harder to work with non-qualified donees? For the vast majority of charities, you may want to avoid using the new qualifying disbursement rules until there is greater clarity on how they operate.
CRA has released a draft guidance for consultation purposes, which we recently blogged about here: www.canadiancharitylaw.ca/blog/cra-releases-draft-guidance-for-registered-charities-making-grants-to-non-qualified-donees-as-part-of-budget-2022-qualifying-disbursements/. It is important to note that the current guidance is still in draft form, and therefore more likely to be subject to future changes. Further, none of the rules in CRA’s guidance have been tested in court, and a court may impose stricter standards than CRA is currently suggesting. Therefore, it may take 10 or 20 years and three to five court cases to have a better understanding of some of the nuances of these rules, assuming that there aren’t further legislative changes that make the rules better or worse.
I would only encourage groups who really understand the previous regulatory environment and the current changes to respond to the CRA consultation. I have seen some really poorly prepared submissions and presentations that show the authors don’t really understand the rules, the impact and what will have the greatest impact on charities.
Unfortunately for the CRA, there are some very clear ITA provisions which are already in force. There is little that CRA can do to change anything. The specific wording in the Income Tax Act such as “the charity ensures that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity” is interesting because “ensures” is a high standard and requires more than for example just taking reasonable steps to try and have the resources used for charitable activities.
Also, the anti-avoidance rules are broad and can result in receipted donations not being valid or registered charities being revoked.
The new section 168(1)(f) of the Income Tax Act (Canada) gives CRA the power to revoke the registration of a charity if it “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 anti-avoidance rule seems to be more restrictive than the previous conduit requirements which made it clear that if you provide funds to a non-qualified donee, but had the necessary measures of control in place, then the CRA would not view the arrangement as a conduit arrangement. We note that, even under the previous rules, we did not recommend that any gift agreement explicitly required the receiving charity to work with a specific non-qualified donee. However, under the new rules, a charity cannot accept funds that implicitly or explicitly require them to transfer some or all the funds to a specific non-qualified donee.
As discussed above, it is important to note that this new anti-avoidance provision not only applies to the new qualifying disbursement rules but also when a charity is conducting a “structured arrangement” with “direction and control”.
Can you imagine a donor giving you a $5 million dollar cash donation and the donor finds out two years later that CRA will not accept that donation? CRA can adjust or massage its guidance, but they cannot change the Income Tax Act.
An important complexity is that we really cannot compare the direction and control rules with the qualifying disbursement rules without also bringing in the new anti-avoidance rules brought in in the same legislation, which affect both the qualifying disbursement grants and direction and control activities.
Some people mistakenly thought that the new qualifying disbursement rules had replaced the direction and control rules, but in fact the qualifying disbursement rules are a new set of rules that work alongside the direction and control rules and a registered charity has the choice between using qualifying disbursements, direction and control or both.
These new anti-avoidance rules make it much more difficult for certain charities to operate in the same way they have been operating whether by using direction and control or qualifying disbursements. Many charities are going to have to change their operations and communications significantly as a result or face dramatically increased risk of losing their charitable status or having CRA deem certain donations to be not eligible for official donation receipts.
It is important to note that this legislation was done in response to a private members’ bill that, in our view, was ill-conceived and would have reduced transparency and accountability for charity resources and easily allowed some wealthy Canadians to avoid taxes without any charitable benefit. It can be very uncertain when you are making changes to a regulatory system what the end results will be. The results can be very disappointing. We had warned in a number of posts and forums that this whole attempt to make these changes was potentially opening a pandora’s box of problems.
The costs and problems related to that private members’ bill were so great that even though it was passed unanimously by the House, the Finance Department felt that it was necessary to override the legislation in a Federal Budget. Therefore, these new rules were proposed in a Federal Budget, and now the sector has to grapple with the impact. You could say that this is a problem created by certain people in the sector that will now affect many registered charities.
We need better public policy in the sector, especially when it comes to regulatory matters.
By Mark Blumberg, Blumbergs Professional Corporation
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