In addition to reviewing the T2050 Application to Register a Charity Under the Income Tax Act (“T2050”) you should also review the guide T4063 Registering a Charity for Income Tax Purposes (the “Guide”).
You might also find my article Should we Set Up a Canadian Charity helpful.
As well depending on the purposes and activities contemplated some the following CRA Policy statements and commentaries may be helpful.
Yes, within certain restrictions. For more information see my article Canadian Federal Election and Canadian Charities. Some charities that conduct political activities may want to review my article on lobbying and lobbyist registration.
The Top Canadian charities conducting political activities according to the 2006 T3010 data are:
1. DUCKS UNLIMITED CANADA $5,266,908
2. CHAINE DE TRAVAIL ADAPTE C.T.A. INC. $3,625,080
3. UNITED ISRAEL APPEAL OF CANADA INC $2,038,143
4. CANADIAN CANCER SOCIETY $1,039,622
5. THE UNITED CHURCH OF CANADA $963,000
6. ASSOC. OF UNIV. & COLLEGES OF CANADA $804,000
7. WORLD VISION CANADA $711,361
8. ST LEONARD’S SOCIETY OF METRO. TORONTO $529,980
9. FAMILY SERVICE ASSOCIATION OF TORONTO $526,165
10. LLOYDMINSTER AGR. EX. ASSOC. LTD. $457,166
This FAQ looks at whether there are residency requirements for Canadian charities.
To answer this question we first look to Registered Charity Newsletter No. 20 from the Charities Directorate of CRA to answer this question. Newsletter No. 20 advises:
“Board of directors
Q. Does the requirement that a charity be resident in Canada require that a majority of its board of directors be Canadian residents for income tax purposes?
A. Section 248(1) of the Income Tax Act requires that a registered charity reside in Canada, and that it be created or established in Canada. However, how the rules concerning residency apply differs according to the way the charity has been structured. For example, whether it is incorporated or governed by a legal document that creates a trust or by a constitution, and whether it is “a branch, section, parish, congregation or other division of an organization”. The residency requirement for charities and some other rules, notably those dealing with charities having to keep books and records in Canada or with restricting fund transfers to qualified donees only, suggest that registered charities ought to have a significant Canadian presence. However, in the case of corporations, the general provisions of the Income Tax Act concerning corporate residency (ss 250(4)) deem any corporation (charitable or not) to be residing in Canada simply if it was incorporated in Canada. If there is no incorporation, the requirements can be different. For example, in general, a trust is resident in the country where the majority of its trustees are resident. However, an unincorporated association is a “person” for the purposes of the Income Tax Act, and would likely be resident where its central management and control resides.”
Therefore, if the charity will be a Canadian or Ontario corporation then it will be deemed that such corporation (charitable or not) is residing in Canada simply because it was incorporated in Canada.
In addition to Newsletter No. 20, the Canada Corporations Act, which governs federal non-share capital corporations, and the Ontario Corporations Act which governs Ontario non-share capital corporations, do not have a Canadian residency requirement for directors. Therefore in theory all Canadian and Ontario non-profits could have all non-resident Canadian directors.
The rules are different for trusts. A trust is resident in the country where the majority of its trustees are resident. Therefore a majority of the trust’s trustee’s need to be resident in Canada. With unincorporated associations they will likely be resident where its central management and control resides. Generally, trusts or unincorporated associations are not used in conducting international philanthropic activities.
That being said, although there is no legal requirement that Canadian charities have resident Canadian directors, it will be more difficult to show when applying for charitable status, or after the charity has received charitable status, that the Canadian charity is maintaining “direction and control” over its foreign activities if a majority of its directors are not resident in Canada.
I am frequently asked whether a Canadian Charity can pay for the cost of preparing a donor’s will? This is usually in the context of someone leaving their estate to a charity and the donor expecting the charity to pay for the cost of the will or it sometimes comes up when charities are considering having a fundraising event, as is sometimes done in the UK, in which they encourage people to prepare a will hoping that some people put a bequest in for the charity.
There is no question that it is a good idea for charities to suggest to support that they have a will. From a charity’s point of view if the donor does not have a will (dies intestate) the charity cannot get a bequest. On the other hand if the donor has a will then it may, or may not, contain a bequest gift to the charity. There are many sound reasons that are of benefit to a donor as to why people should have wills. A will is an important part of any estate plan. The following are common reasons you should have a will:
Although there is nothing that I am aware of that prohibits a charity from paying for the cost of preparing a donor’s will there are a number of concerns with the practice which I will outline below.
The first concern is that there could be an allegation of undue influence on the part of the charity. Is the donor making a donation on their own free will or is there coercion and pressure from the charity and the lawyer? If a charity is found to have used undue influence with a donor, the bequest may be overturned, and this and other bequests or gifts to the charity may be jeopardized. It is more difficult for the charity to show that there was not undue influence when the process is arranged by the charity and paid for by the charity.
Second, there can be reputational problems for the charity caused by allegations, whether or not correct, of undue influence.
The third concern is for the lawyer. Is the lawyer doing a large number of bequests for clients who are donating to the charity? This could call into question the objectivity of the lawyer depending on the circumstances. If the charity is going to pay for the legal costs there are a large number of steps that the lawyer and charity need to follow to avoid various problems.
The fourth concern is whether it is an acceptable use of the charity’s money and resources. Is this only being done for people who are committed to leaving a bequest or for anyone. Some donors may be concerned that they are not benefitting from this service which is a private benefit. Others may question why a charity is getting involved in such a matter and that a charity is not an estate planning service. As well, if charities have money to pay for will preparation there may be a perception that they are being lavish and have too much money.
The fifth concern is the cost. Estate planning to be done correctly can be more time consuming and involved than one may think. Presumably there will be a cut off set by the charity and then the charity will only be paying for part of the cost. Estate planning is typically much more than just a will, and may involve understanding ownership of assets, trusts, powers of attorney and other documents.
Sixth, if mistakes are made in the estate planning will the charity be held liable? Will it be the individual’s own lawyer who will be preparing the will? This is most beneficial in terms of understanding the testator and avoiding an allegation of undue influence. However, that particular lawyer may not be a good lawyer in terms of estate planning knowledge and advice.
Seven, will this be restricted to young/healthy people who there are no competence issues and unlikely to make a bequest in the near future. Or will it be offered to older people, or those who have mental health and physical issues. The more frail the testator is the more likely it will be perceived that the charity is taking advantage of a person.
You can see a far more detailed discussion at in the article “Paying for Wills with Charity Funds” by the UK Charity Commission. Keep in mind that “Paying for Wills with Charity Funds” is reflective of UK legal requirements.
If you are interested in bequests you may find some of the following interesting:
Absolutely yes. And many thousands of charities do so.
The Income Tax Act (Canada) allows charities to conduct their charitable purposes by: 1) giving money or assets to another “qualified donee” (see below); or 2) by conducting their “own activities” (at home or abroad). There is no ‘third option’. A Canadian charity cannot just transfer or grant money to a foreign NGO or charity. In general, the same notion applies to operations within Canada. A Canadian charity cannot just give or transfer funds to another Canadian organization that is not a qualified donee (e.g., a registered charity).
Transfers to Another Qualified Donee
Qualified donees are organizations that can, under the Income Tax Act (Canada), issue official donation receipts for gifts that individuals or corporations make to them.
Qualified donees include:
A Canadian charity can transfer funds or assets to another qualified donee. For example, a Canadian charitable organization with no experience in foreign operations that wishes to aid people in Darfur may decide to support Doctors Without Borders Canada, a Canadian qualified donee. There is no need from a CRA point of view to have an agreement between the donor charity and Doctors Without Borders Canada. If the donor charity wishes to restrict the gift to Darfur, then it may wish to have a direction or agreement to that effect. Similarly, if a donor requested that his or her donation to a community foundation (qualified donee) should be applied toward dealing with the issue of AIDS in sub-Saharan Africa, the foundation could transfer the funds to the Stephen Lewis Foundation or Canadian Crossroads International, both qualified donees, without the need for an agreement or monitoring. For many Canadian charities that do not have experience in direct charitable activities outside of Canada, a donation to another qualified donee is the simplest and safest way to have a global impact.
“Own Activities” and Intermediaries
Foreign charities and NGOs are rarely qualified donees. Therefore, as a general rule, a Canadian charity cannot transfer funds or assets to them except in furtherance of the Canadian charity’s “own activities” in a structured arrangement, as discussed below.
There are a number of different structured arrangements through which a Canadian charity can operate abroad, including: 1) Canadian employees or volunteers of the Canadian charity directly working abroad; 2) Agency Agreements with an Agent; 3) Contractor Agreements; 4) Joint Venture Agreements/Joint Ministry Agreements; and 5) Cooperative Partnership Agreements.
Yes. Canadian charities can conduct their “Own Activities” through using foreign intermediaries. However, foreign charities and NGOs are rarely qualified donees. Therefore, as a general rule, a Canadian charity cannot transfer funds or assets to them except in furtherance of the Canadian charity’s “own activities” in a structured arrangement, as discussed below.
There are a number of different structured arrangements through which a Canadian charity can operate abroad, including: 1) Canadian employees or volunteers of the Canadian charity directly working abroad; 2) Agency Agreements with an Agent; 3) Contractor Agreements; 4) Joint Venture Agreements/Joint Ministry Agreements; and 5) Cooperative Partnership Agreements.
1) Canadian Employees or Volunteers
Some Canadian charities send their own employees or volunteers abroad in order to conduct the Canadian charity’s activities. For example, a medical relief organization in Canada may send a Canadian doctor to a developing country to provide medical help to those who cannot afford it or to assist with a natural disaster. A Canadian church may send a missionary abroad to conduct religious activities. There are many advantages of sending your own employees abroad, including using the skill and knowledge of Canadians, using your employees’ understanding of your organization and its belief/philosophy, having control over the employee, and having the ability to harness the experience of the employee on their return to Canada.
However, many Canadian charities operating abroad find that it is not always possible to send Canadian employees abroad. Sometimes, because of logistical reasons, costs, language, culture, security, or other reasons, Canadian charities prefer to contract with foreign intermediaries to conduct the activities. Although CRA does not require a written employment agreement, charities should always have an employment agreement with employees, whether or not they are working in Canada.
2) Agency Agreement
The most commonly used method of operating abroad is through an agency agreement. The Canadian charity appoints an agent to conduct the Canadian charity’s activities on behalf of the Canadian charity. The Canadian charity provides all of the funding and is in control of the relationship pursuant to a written agency agreement. This is one of the most popular methods of Canadian charities operating abroad.
An example would be a Canadian development organization entering into an agency agreement with an organization in Bolivia to provide food to needy children. The activities carried out by the Bolivian agent would be on behalf of the Canadian charity. The project would be a project of the Canadian charity. Either the Bolivian agent, who is on the ground and knows more about local conditions, or the Canadian charity, could suggest projects. However, all projects and budgets need to be approved by the Canadian charity’s board of directors. The Bolivian agent must report, pursuant to the requirements of the agency agreement, to the Canadian charity on the project.
The concern with agency agreements is that the Canadian charity, as principal, is liable for the actions of the agent. As well, there is sometimes legitimate resentment by the agent, especially in the international development context, that the Canadian charity is controlling the project and relationship and foreign charity is the “agent” of the Canadian charity. The relationship does not seem equal or fair. After all, it is not a partnership or joint venture (those models are discussed below). Another concern with agency agreements is that the funds are considered to have been used by the Canadian charity for financial statement/accounting and disbursement quota purposes only after they have been expended by the foreign agent.
Another concern with the agency agreement structure is the requirement for the agent to segregate the agent’s Canadian funds from its other funds. The CRA has noted in an information letter (CIL - 1997 - 003):
In general, the segregation of principal and agent funds should be respected. Where commingling takes place, we would require a complete and detailed accounting for every expenditure out of the mixed fund. The invoicing procedure you describe, if applied to all expenditures involving the Canadian charity’s funds, would seem to satisfy this requirement. … We would point out that where the funds of several organizations are commingled, this will not necessarily be legitimized by the adoption of a joint ministry agreement.
Many organizations view segregation of funds as cumbersome. However, if one decides to use the agency model, then one may realize that there are advantages to having a separate bank account, including the reduced likelihood that co-mingled funds will be deliberately or unintentionally spent on unauthorized activities. If you are monitoring the activities of your agent, would it be easier to review 100 transactions related to your project or 10,000 transactions related to all the projects of the agent? Additionally, if the CRA audits the Canadian charity, it is doubtful that the foreign charity will be excited about providing complete information on all its banking transactions. Sometimes it would be a lot simpler if the Canadian funds were in a separate bank account and were dealt with separately.
3) Contractor Agreement
A Canadian charity can also retain a foreign contractor to conduct certain work. For example, a Canadian charity that is interested in providing clean drinking water could, by written agreement, employ a contractor in a developing country to dig a well. This type of agreement would have many similar features to an agreement between a Canadian charity and a for-profit company in Canada. The contractor could be either a for-profit entity or a nonprofit and contractor agreements are becoming more popular in relationships between Canadian charities and foreign charities. The advantage of this type of independent contractor relationship is that of limited liability. The contractor is an independent entity responsible for its own actions. This is not to say that the Canadian charity could not be dragged into litigation if there were a problem, but it is less likely to be held responsible for the actions or inactions of the contractor. Foreign contractors do not need to segregate the funds of the Canadian charity, as agents do. Also, once funds are transferred from the Canadian charity to the foreign contractor, the funds have been spent and are no longer on the books of the charity and can be used to meet the charity’s disbursement quota obligations. A very clear written agreement as to exactly what the contractor’s obligations are, remuneration, ownership of work, etc., is required.
4) Joint Venture/Joint Ministry Agreement
A Canadian charity can work jointly with a foreign person or entity pursuant to a joint venture agreement, and they can pool their resources to carry out certain charitable work. The Canadian charity would need to have control of the charitable work at least in proportion to the funds that the Canadian charity is contributing. This type of agreement is popular because it can be used when two or more entities are pooling their resources with respect to a particular project – in many cases with international charities there could be ten or twenty parties to the joint venture, which can also make the agreement cumbersome.
An example of a joint venture is a Canadian charity and a U.S. charity working together on an educational project in India. The Canadian charity contributes 15% to the cost and the U.S. charity contributes 85%. The Canadian charity will have at least 15% representation on the management committee of the joint venture and must have input on all of the decisions of the joint venture. Therefore, the Canadian charity will have control over the project that is proportionate to the amount it contributed. Some joint venture agreements are for a particular project and others relate to a number of projects. Some joint ventures have a mechanism for adjusting the amounts that each party contributes, with a consequential adjustment in representation on the management committee.
Additional Joint Venture Requirements
The CRA also has identified in RC4106 additional guidelines relevant to joint ventures to ensure proportionate ongoing control. These are:
The concern with a joint venture agreement is the liability that the Canadian charity may face from the actions of their joint venture partners. It is possible to reduce the risk by separately incorporating the joint venture and by actively managing the joint venture risk by being very involved with the management of the joint venture.
5) Cooperative Partnership Agreement
In the cooperative partnership model, a Canadian charity works with a foreign entity and each contributes different resources and undertakes a different part of the project. This arrangement is different from a joint venture in which the parties pool their resources together.
An example of a cooperative partnership would be a Canadian group providing an x-ray machine to a clinic in Malawi. The clinic provides the space and the technicians to use the equipment. Both parties are working together to achieve a charitable end; however, they are each contributing something different to the partnership.
The concern with a partnership is the liability that the Canadian charity may face for the actions of its partner(s).
Summary of Structured Arrangements
The simple way to conceive of the five structured arrangements is as follows:
Yes. There are many ways to perform good work outside of Canada that are outside the charitable sector. Some examples include:/p>
In addition, many Canadians remit funds to their families, friends, former employees in other countries, but they do not receive any tax benefit from it.
It is always important to keep in mind that there are alternatives to being a registered Canadian charity. If a group wishes to avoid being constrained by the rules for Canadian charities conducting foreign operations, then they should consider operating as a for-profit or nonprofit entity, not as a registered charity.
Does the Public Guardian and Trustee (PGT) in Ontario with respect to Ontario charities have a different view on restrictions on which qualified donees an Ontario based charity can gift their funds to as compared to the Charities Directorate of the CRA?
Yes. The PGT in Ontario, unlike the other PGTs, is quite involved with regulation of charities, whether they are registered with CRA or not.
There are differences between a ‘qualified donee’, which is defined under the Income Tax Act and a charity in Ontario, which is defined under the common law. The definition of a qualified donee encompasses organizations that are not considered charities under the laws of Ontario. And, in Ontario, charities exist that are not qualified donees simply because the charity has not registered with CRA. For example many small organizations have charitable objects and carry on exclusively charitable work but have not registered with the CRA.
Under the Income Tax Act, a qualified donee includes:
Numbers 1, 3, 5, and 9 would qualify as charities in Ontario for the purposes of receiving gifts from other Ontario charities. Any organization falling into one of the other categories would need to be evaluated by the Ontario based charity to ensure that it falls within the common law definition of charity per Vancouver Society case [Vancouver Society of Immigrant and Visible Minority Women v.Canada (Minister of National Revenue - M.N.R.),  1 S.C.R. 10, at paragraphs 38 - 41.]- i.e., objects that are exclusively charitable and for the benefit of an appreciable section of the population. The most common example of a qualified donee that is not a charity is an amateur athletic association and it would not be acceptable for an Ontario based non-profit to simply grant funds to such amateur athletic association.
According to the CRA here are some common mistakes made by Canadian charities when they complete the T3010. I have put my comments in brackets and I have added below a few of my favourites omissions or mistakes.
“Avoiding common mistakes when filing the T3010A return Mistakes can cause various problems such as processing delays, missing returns, and incorrect disbursement quota calculations. Below is a list of common mistakes made when filing the T3010A Registered Charity Information Return:
- the return is mailed to an address other than the Charities Directorate; [ahem. But how does CRA know?]
- the return is filed on the wrong form (see Filing the information return);
- the financial statements are not attached; [Interestingly even if the T3010 has a nil return - a new charity, no activities, no funds received or spent, nothing in the bank they still require the financial statement]
- the financial statements do not have the same fiscal period ending as the T3010A return;
- the Registered Charity Basic Information sheet is not attached;
- fundraising activities instead of charitable activities are described in Section C2;
- lines 4500 to 4650 do not add up to the amount on line 4700;
- lines 4800 to 4920 do not add up to the amount on line 4950;
- there is no entry on line 5000 for charitable program expenditures;
- lines 5000 to 5040 do not add up to the amount on line 4950;
- the amount on line 5050 does not agree with the total amount of gifts on Form T1236, Qualified Donees Worksheet;
- there are entries on lines 5500 to 5520 when the charity has not been granted permission to accumulate funds;
- there are no entries on lines 5900 and 5910 when required;
- Section G has been completed when the charity is not a foundation;
- Director/Trustee dates of birth are missing on Form T1235, Directors/Trustees Worksheet;
- Directors/Trustees arm’s length status is missing on Form T1235;
- Directors/Trustees postal codes are missing on Form T1235;
- Qualified Donees’ BN/Registration numbers are missing on Form T1236;
- the Certification area in Section H is not signed. “
My favourite errors have to be what people put in the field for operations outside of Canada. It is supposed to be countries or regions outside of Canada but sometimes you get “Quebec”, Toronto or the name of some missionary in the field etc. Another little pet peeve is when an operating charity does not fill in the activities or new activities or uses the same description year after year even though their operations have changed. Keep in mind that with many charities if the description of activities is not filled in and they don’t have a website it may be very hard to know anything about the charity. Another concern that I will reserve for larger charities occurs when the posted T3010 information is missing a few zeros. It is either the charity or CRA’s fault that the information is correct but larger charities should check that CRA has the correct information or their T3010 will be misleading and will look wonky. I don’t expect smaller charities to do much more than file the form and hopefully on time. In the past these sort of mistakes were not really picked up by anyone. Now that services exist such as CharityCan that allow users to prepare reports with 5 years T3010 information side by side the mistakes will become more noticeable. Unfortunately the T3010 numbers are the only available financial information that is collected from all charities and therefore despite the lack of precision of the categories and the reliability of the numbers for some who are moved by or impressed with numbers they have little to go on other than the T3010 figures.
The CRA list is posted here
Yes. There are a number of different regulators of charities. If a charity is a registered charity with the Charities Directorate of the Canada Revenue Agency, which is part of the federal government, then that registered charity is subject to the rules and regulations of the Income Tax Act that apply to registered charities. CRA regulates organizations by determining which of them can have registered charity status, by revoking registered charity status of charities that do not comply with the rules and spot auditing charities to check compliance. CRA educates charities about their obligations, including filing an annual return, restrictions on political and business activities and other matters. As well the Canadian Department of Finance is responsible for the Income Tax Act and its regulations and amendments to the Act. If there is a dispute between the CRA and a charity then it may go to court in which case the courts determine the outcome.
As well charities that operate in a particular province are subject to the jurisdiction of the public guardian and trustee of that province. Ontario is the only public guardian and trustee that is active in regulating charitable activities.
Other government departments are also involved with regulating charities. For example if charity is incorporated it is subject to the rules of the incorporating statute. Therefore an Ontario non-profit corporation must look in part to the Ontario Corporations Act. Different types of charities are subject to sectoral regulation - for example universities, hospitals, daycares etc.
Charities do a lot of great work. But with 83,500 of them and a few hundred bad apples amongst the lot there will be times that you will be disappointed with a charity. When you have a concern about a charity, or a charity does something wrong, here are some ideas about how you can complain.
If you have a complaint about a registered Canadian charity the first thing to do is to discuss the complaint with the charity. In the vast majority of cases, registered charities are responsible and respond to queries and concerns. The charity may have a very legitimate reason for their action or there may have been a misunderstanding etc. As well sometimes charities make mistakes just like people or businesses - it is inevitable. Before proceeding to another level it is a good idea to discuss the complaint with someone who knows a lot about charities - whether it be a person working for a different charity or your own professional advisor etc. Having an independent voice to discuss the complaint can be helpful.
Next if you have not achieved a satisfactory response see whether the charity is a member of an organization that has a code of conduct and whether the actions of the charity may contravene such code of conduct. In some cases the codes of conduct or codes of ethics also provide for a mechanism for complaining about the particular conduct to another body eg. Imagine Canada, CAGP, AFP, etc.
Another way to complain about charities is to contact the media. Send a note to a reporter interested in charities and who has written about charities. You may wish to read some of the articles by Kevin Donovan of the Toronto Star or David Baines of the Vancouver Sun. No disrespect to umbrella organizations or charity regulators but charities are far more concerned about these two people than all the others combined.
If you wish to complain about the conduct of a Canadian registered charity then you can also call the Charities Directorate of CRA. Alternatively you can e-mail your complaint to CRA. See the CRA website. Unfortunately, registered charities are treated like individuals and they are accorded lots of privacy rights - does not make much sense to me but CRA will not be able to tell you if they are investigating a charity because of someone else’s complaint, whether because you have complained they are investigating a charity etc. But complaining to the CRA is almost a last resort.
As the regulation of registered charities is both a provincial and federal responsibility, your provincial public guardian and trustee, or equivalent, may also be prepared to act on a complaint.
There are many sources of information on the legal and ethical issues facing Canadian charities that operate abroad. Some of them include:
A large number of Canadian charities operate to some degree outside of Canada. The latest statistics from the 2006 T3010s indicate that of the 83,223 registered charities that filed that year, 12,319 charities identified themselves as carrying on programs directly or indirectly outside of Canada. This number represents over 15% of Canadian registered charities. The amount spent by these charities outside of Canada has risen from $1.4 billion in 2002 and $1.8 billion in 2004 to $2.3 billion in 2006.
One does not require a lawyer to set up a charity in Canada. It costs money to hire a charity lawyer to help set up a non-profit or charity but in this note I will argue that it is a worthwhile expense. The views that I am expressing in this note are obviously not impartial – lawyers often benefit from their clients paying legal fees. However, it is true that lawyers also benefit probably more from fixing mistakes made by others.
With most organizations the vast majority of legal fees during their first five years of existence are spent in the first year. This is a onetime capital expense. It is part of the cost of setting up a charity properly and obtaining registered charity status, which makes fundraising easier. If an organization is not prepared to spend say $4,000-$6,000.00 to pay for legal fees properly set up a charity properly they may have to spend a lot more to fix the mistakes they have made.
Documents prepared will be reviewed by numerous entities who each are concerned about their own issues. In the example of a federally incorporated charity - Industry Canada, the Charities Directorate of CRA, your bank, partners, prospective donors or funders - will all review one or more of the documents you create in the first few months. It is very easy to produce a document or fill in an application, but more difficult to produce one that is reflective of what you are trying to accomplish, satisfactory to a regulator or stakeholder and not appearing amateurish to a funder.
Also keep in mind that to properly run a legally compliant, transparent and accountable charity is expensive and the legal expenses are the least of it. You need audited financial statements in most cases – and that is every year. Such audited financial statements can cost thousands of dollars per year. You need computers and equipment. Websites costs money. You can try do everything with volunteers but eventually you will probably if successful be looking at hiring staff and contractors. Staff and contractors cost money.
The cost of setting up a charity can be born by a number of people – it does not have to be one person paying the whole cost. The charity that is being set up can also pay its legal fees. Many of my clients have a sponsor, whether individual or business, who is prepared to take the leap to promote the project and to be one of the founders. If you do not have anyone who is prepared to help raise a few thousand dollars to get things up and running you should questions whether how successful your fundraising is going to be in the future.
“We have a wonderful cause and can you help us set up the non-profit for free?” No. Lawyers have to pay for their overheads including salaries of associates and support staff, library, memberships in professional organizations, etc. Just like you would not ask a taxi driver for a ride without paying or expect a life insurance agent to provide you with insurance for free, or a bank to provide a mortgage for free, a charity lawyer who works in the non-profit and charity area charges for their time.
If you are interested in reducing the amount of legal fees you pay you may wish to read my article on How can Canadian charities or Non-profits obtain cost effective and useful legal services from a lawyer.
Furthermore, you might find my article Should We Establish a Canadian Charity and If So Then How? useful reading before ever approaching a lawyer.
The charity sector is a very important part of the Canadian economy and delivers vital services. Establishing a charity should be done with serious thought and proper legal advice.
Books and records for Canadian charities operating abroad should generally be either English or French and kept in Canada. From the CRA point of view, books and records are required to be able to substantiate the qualification of the Canadian charity for registration and to permit verification of donations. As well, in terms of foreign activities, the books and records show how the charity’s funds and resources are used, show that the charity is actively involved with the activity, and assist in the accurate completion of the T3010.
RC4106 requires charities to keep records of the regular direction that the charity provides to the foreign intermediary, to monitor the structured arrangements, and to obtain “reasonable reports on the progress of its projects and programs.” What is reasonable in one circumstance may be different in another. These reports should be supported by backup evidence such as copies of written agreements, deeds, financial statements, invoices, photos, minutes of meetings, and any other materials that reflect the charity’s ongoing participation and that show how the charity’s funds are used. The frequency of reporting will depend on the agreement, but CRA suggests that progress reports should be received before sending payments by installment and that many charities have these reports filed quarterly.
In RC4106, CRA makes specific suggestions for recordkeeping with respect to Agents, Contractors, Joint Ventures, Cooperative Partnerships, and CIDA projects.
RC4106 suggests for agency relationships: “Copies of these books and records should be forwarded regularly to the charity, and the originals should be available for inspection at the place where they are being kept by the agent.” With fax, scanning, and e-mail, it is ever easier for agents to provide copies of all necessary documents.
RC4106 suggests for contractors: “As with agency agreements, a Canadian charity that employs contractors should obtain regular progress reports. The charity should also obtain a final complete report on the work that has been done on behalf of the charity, along with documentary evidence, such as invoices, receipts, and photographs, that the project has been completed. The reports should also show the amounts received from the charity and the expenses incurred.”
RC4106 provides: “In the case of joint ventures, the Canadian charity should ensure it regularly receives a copy of the full and complete financial information relating to the entire venture or program, along with other documentation that will enable the charity to demonstrate that it has devoted its resources to its own charitable activity.”
RC4106 provides: “A Canadian charity involved in co-operative partnerships should maintain adequate records relating to its particular share of the program. It should also have available sufficient documentation to establish that the program as a whole is charitable and to show how the charity’s contribution fits into the overall undertaking.”
CRA’s publication IC78-10R4 also has further details. If a charity needs to request books and records prior to an audit, instead of receiving information on a regular basis, then it will be more difficult to demonstrate to CRA that the charity is monitoring its own activities.
In terms of records retention, charities are required to keep duplicates of receipts for at least two (2) years from the end of the calendar year in which the donations were made. Most other documents need to be kept for six (6) years from the end of a fiscal year. Some other records must be retained in perpetuity or until two (2) years after the charity is no longer a charity, such as “ten-year gifts,” minutes of meetings, and all governing documents, such as letters patent.
Failure to keep adequate books and records is a ground for revocation. As well, without adequate books and records, a charity will have a difficult time monitoring the intermediaries’ activities and convincing a sophisticated or observant donor that the funds donated to the charity were properly spent. If in doubt, it is better to keep more information rather than less.
In order for a charities foreign activities to be its “Own Activities” the charity needs to maintain “direction and control”
The Canada Revenue Agency has identified in RC4106 certain elements that are required in order for the foreign activities of a Canadian charity to be considered the “own activities” of the Canadian charity:
1) The charity has obtained reasonable assurance before entering into agreements with individuals or other organizations that they are able to deliver the services required by the charity (by virtue of their reputation, expertise, years of experience, etc.). I would compare this to due diligence in the purchase of a business – if you are going to transfer large amounts of money to an agent to undertake your charity’s work, you need to satisfy yourself that they have the capacity, skills, interest, honesty, etc., to carry out the work.
This step is vital – without the right intermediary (i.e., individual or organization), a Canadian charity can cause more harm than good. Have you or other trusted charities ever worked before with this organization? Have you met the intermediary in person? Have you visited the site of their activities? Can the intermediary carry out all the Canadian charity’s work or will some have to be subcontracted out? Are there conflicts of interests? Has the intermediary or any of its principles ever been involved with illegal or nefarious activities? Have you received a number of positive references?
2) All expenditures will further the Canadian charity’s objects and constitute charitable activities that the Canadian charity carries on itself.
The objects or formal purposes of the charity are found in the Letters Patent of the charity. Charities are restricted to carrying out activities that are within their objects. What is ‘charitable’ under Canadian law is an evolving area but, as discussed above, what is charitable in Canada is broader than what is charitable abroad.
3) An adequate agreement is in place. CRA requires that any agreement must be in writing and must contain the minimum elements outlined in RC4106
While CRA considers having a written agreement essential to showing “own activities,” many charities have had problems because having such written agreements, while necessary, is only a small part of demonstrating direction and control. Having a written agreement but ignoring it is not maintaining direction and control. CRA has for a while also been requiring that new applications for charity registration that involve foreign activities using intermediaries include a draft agreement. CRA is particularly concerned about the adequacy of the description of the project.
The agreement should set out a clear and complete description of the activity, which will depend on the nature of the activity, the complexity and duration of the activity, and the type and quantum of resources allocated. It may include the purpose; who will benefit; in some cases, the precise location; a budget, including if there is other income generated by the activity; a schedule with beginning and end dates; a description of deliverables or targets; details on monitoring; mechanism by which the agreement can be modified or discontinued; and what other organizations will be contributing to the activity.
4) The charity provides periodic, specific instructions to individuals or organizations when appropriate.
In Registered Charity Newsletter #20, CRA advises that “The charity must maintain sufficient control to ensure that its resources are devoted to charitable purposes. The amount of control will vary by the nature of the resources being used and the characteristics of the foreign organization.” After the charity and the intermediary agree on a clear description of the activity, there will be monitoring and reports. As a result of receiving interim monitoring and reports, the charity may provide additional instructions or directions to the intermediary to act upon.
5) The charity regularly monitors the progress of the project or program and can provide satisfactory evidence of this to the Canada Revenue Agency.
The two elements are regular monitoring and satisfactory evidence. With respect to regular monitoring, although required by CRA, I would argue that no donor should contribute to a charity that does not regularly monitor its activities. The monitoring could take place on the ground by the Canadian charity, or by a third party, or by the foreign NGO reporting on the progress with the Canadian charity by reviewing the reports and requesting further information or clarifications when necessary. Satisfactory evidence will depend on the circumstances. Having a site visit by a director or employee of the Canadian charity is good, especially with larger projects; however, if no detailed written report is provided by the director or employee to the Canadian charity, then the visit is of little use in showing ‘satisfactory evidence’. As well, although it may be useful to have a Canadian representative on the board of the intermediary, or an intermediary representative on the board of the charity, one needs to manage potential conflicts of interest, and board representation alone is far from adequate in showing direction and control. (See the section on Books and Records below.)
6) Where appropriate, the charity makes periodic payments on the basis of this monitoring (as opposed to a single lump sum payment) and maintains the right to discontinue payments at any time if it is not satisfied.
“Where appropriate” probably means that if you have a $10,000 budget, you may not need periodic payments, especially if it is a long-term relationship. However, foreign entities frequently balk, in my opinion unreasonably, at this requirement. In the event that a Canadian charity is funding the building of twenty schools, each costing $50,000 for a total budget of $1 million, I see nothing wrong with sending funds for five schools at a time, and when those schools are satisfactorily completed sending along the next payment. The periodic payments need to be based on monitoring and on demonstrated performance by the intermediary; otherwise, the periodic payments serve little use in ensuring that there is direction and control. I think it would be generally not prudent for the Canadian charity to wire transfer $1 million in the example above and hope for a detailed report at the end. Many charities also retain a hold back, which will be sent once reporting is completed.
Your charity may one day receive a letter from CRA or a call announcing that CRA would like to do a Books and Records Review of your charity. Although the letter may state something to the effect of “Please note that this review is not an audit, but review of the records to ensure they meet the requirements of subsection 230(2) of the Income Tax Act. As we would like to examine the current books and records, we request you to make available all the books and records, minutes of meetings, and any additional information that may be needed in connection with the above charitable registration.”
For most charities, they should treat a books and records review in a similar way to an audit. After all if the books and records review does not turn out well you will probably have an audit. Here is some information specifically on the books and records review process but you also may wish to review my article on CRA audits.
By way of background in 2001, the CRA also introduced a new ‘visibility outreach initiative’ known as the “Books and Records Review”. These reviews are on-site visits to review a taxpayer or charity’s books and records, to ensure that they are adequate. The visits are directed primarily at new businesses or new charities or sectors of particular industries where the adequacy of the books and records was noted as a concern in previous audits.
A books and records review is a separate non-audit activity that is part of CRA’s ‘balanced’ approach to increase compliance.
According to the CRA they visit the charity’s premises to:
An auditor from the CRA will meet with the charity to review the books and records to make sure they are adequate for Income Tax Act, Goods and Services Tax, and Harmonized Sales Tax purposes. With the aid of a questionnaire, the CRA representative will gather general business information and review some of the accounting transactions.
According to CRA the objectives of such a review are:
The CRA representative performing this review will assist the charity in understanding what is required to maintain adequate books and records. Some of the benefits of this initiative are:
That being said a Books and Records Review is important in that if deficiencies are found it can lead to a further audit and other consequences.
Charities should treat a books and record review seriously and in a similar vein to an audit.
As a general rule Canadian charities can only gift or grant resources (money and equipment or anything of value) to a qualified donee including another Canadian registered charity. Canadian charities operating abroad should maintain ownership and control over all of their assets. In general, the Canadian charity can only sell these assets at fair market value or transfer them to another Canadian qualified donee. Except for example in the case of the charitable goods policy and a few other exceptions, a Canadian charity cannot just transfer assets to a foreign charity or NGO that is not a qualified donee. In other words the charitable goods policy is a narrow exception to the general rule stated above..
CRA has a charitable goods policy, which allows certain limited types of goods to be transferred to a foreign organization or given away, in some cases without the need for a written agreement. Frequently cited examples include food in a famine situation or prayer books. However, there are limits to CRA’s charitable goods policy, and CRA is very concerned that the charitable goods may be used for non-charitable or private purposes. In those cases, it is important that the charity impose controls on the use of the goods.
The basis of the ‘charitable goods policy’ is a CRA Staff Memo produced in 1985 and cited in the Canadian Magen David Adom case (hereafter “CMDA”), which provides:
Equally acceptable are transfers of goods and services that are directed to a particular use by the very nature of the goods and services so transferred. Examples of such
The CRA Staff Memo also provides that:
Transfers of goods or services can more easily be viewed as charitable activities per se. The transfer of a piece of equipment that is meant to be used only for charitable purposes to an organization that will clearly use it for such purposes is likely to be a charitable activity. [emphasis added]
In Registered Charities Newsletter #20, CRA advises:
…the Charities Directorate will consider a transfer of property reasonable where the nature of the property means that it can only be used for a charitable purpose. For example, it is generally reasonable to assume that a copy of the Bible will be used for religious activities, that medical equipment will aid the sick, and that student books will be used for educational purposes in a school. In some cases, where the property could be used for something other than charitable purposes, it may none-the-less be unreasonable to expect the charity to maintain control of assets. The Charities Directorate will consider such situations on a case-by-case basis when requests are received in writing.
As can be seen from the italicized parts of the above two quotes, the charitable goods policy in the CMDA case or Newsletter #20 is anything but a foundation upon which to base charitable operations abroad, unless you have requested in writing consent from CRA and CRA has agreed in writing to that request. When could the charitable goods policy be useful? Perhaps it may be appropriate in the provision of a small amount of a clearly charitable product such as food in a country experiencing a famine, where it is an emergency, and the charity involved is dealing with a reputable agency that is non-political, non-sectarian, and the agency is acting as the charity’s representative in distributing the food.
Most items are “dual use” - they can be used for charitable purposes and they can be used for private gain or business or other purpose. When large amounts of anything are being transferred it is best to have an agreement in writing, wherever possible, that documents what is supposed to happen with the goods.
If a charity is a corporation, it should ensure that its objects allow for particular that the charity wants to undertake before embarking on such activities abroad. The Letters Patent/Articles of Incorporation contain the objects of the corporation. A charity wants to avoid operating outside the scope of its objects; otherwise, such actions would be outside the charity’s legal authority (ultra vires). The consequences of acting ultra vires can result in the actions undertaken or decisions made being null and void, the revocation of charitable status, and, potentially, personal liability for the directors of such a charity.
Examples of appropriate object clauses can be found in the Ontario Not-For-Profit Incorporator’s Handbook at the Ontario Public Guardian and Trustee website or CRA has recently released some model objects on their website.
Some pre-approved clauses in the international sphere include: “To relieve poverty in developing nations by providing food and other basic supplies to persons in need”; ”To improve the quality of drinking water in developing nations by constructing wells and water treatment, irrigation and sewage treatment systems”; or “To advance and teach the religious tenets, doctrines, observances and culture associated with the (specify faith or religion) faith.” An example of an object clause that would require modification in order to allow foreign operations is “To establish and maintain a hospital in Mississauga, Ontario.”
A ‘standard’ foundation clause might have the following wording: “To receive and maintain a fund or funds and to apply all or part of the principal and income therefrom, from time to time, to charitable organizations that are also registered charities under the Income Tax Act (Canada).” This clause allows for the transfer of funds to Canadian registered charities but would not allow a foundation to carry out directly work abroad or have an agreement with a non-qualified donee to transfer funds.
The type of objects that are defined as charitable fall into one of four categories accepted by CRA and by the courts, namely to relieve poverty, advance education, advance religion, or benefit the community as a whole. In addition to fitting under one or more of the four categories, the charity must also be established for the benefit of the public or a sufficiently large segment of the public. CRA will examine issues such as whether the benefit is tangible, whether the beneficiaries are either the public-at-large or a sufficiently large segment of the public, and whether there are benefits to private individuals except under certain limited conditions.
If the objects of the corporation are too broad and could include non-charitable activities or could have significant private benefit, then the corporation may not be successful in obtaining registered charity status, as discussed below in the Travel Just case. On the other hand, if the objects are too narrow, the charity will have trouble conducting effectively its activities.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.