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The Charity Commission of England and Wales has recently released a draft guidance on the types of controls English charities should be using when providing grants to non-English charities.
The draft guidance is entitled “Grant funding an organisation that isn’t a charity”.
It is interesting to note that the Charity Commission states that " The content draws from existing commission guidance, and does not represent any new regulatory requirement." Unlike the Canadian requirements for direction and control which stem from the "own activities" test in the Income Tax Act and related case law, the Charity Commission of England and Wales is focussed on the fiduciary or trust obligations of charities to spend their resources appropriately.
The guidance summary provides:
What this guidance is about
Charities can further their purposes by funding other charities, or in some cases organisations that aren’t charities, to carry out charitable work or projects. Grant funding can benefit causes or groups which otherwise struggle to obtain the support they need.
This guidance explains what you need to do if you are considering a grant to an organisation that isn’t a charity. Some parts of it are relevant to any charitable grant giving, but if you only want to fund other charities, see the commission’s separate guidance Work with other charities.
Making grants to organisations that aren’t charities may present new opportunities to further your charity’s purposes. Remember, organisations that aren’t charities don’t have to deliver public benefit or stick to charitable objectives. So you need to understand the risks and boundaries before you start. Any grant your charity makes must only be used for activities that are within your charity’s purposes. This means there are limits on what you can fund.
confirm that the organisation you are considering giving a grant to is not a charity
make sure you understand your own charity’s purposes
have appropriate governance systems and procedures in place for making decisions about grants
take reasonable steps to assess risks and carry out an appropriate process of assurance (or due diligence) on the organisation
ensure that the organisation receiving the grant understands your charity’s purposes and their boundaries (part of the due diligence process); a charity can only make grants for activities that in principle it could carry out itself
be aware that trustees remain responsible for grant decisions even if decisions are delegated, and understand where extra care may be needed
set appropriate grant conditions and ensure that the organisation understands and accepts them
put appropriate monitoring arrangements in place
know what to do if things go wrong
Many of the elements required by the Charity Commission are similar to those required by CRA in its guidance on foreign activities or CRA's guidance on dealing with intermediaries who are not qualified donees in Canada. Although the guidance from the Charity Commission reads differently than the CRA guidance the net effect in the end is similar. From a fiduciary perspective charities have an obligation to ensure that their resources are appropriately applied and that means that they cannot make unrestricted grants to non-charities (what we call non-qualified donees). Whether the Charity Commission calls it "control, monitor and document " or CRA calls in direction and control there are a large number of similarities. I will highlight some of the wording from the UK guidance which essentially says that there need to be a high degree of oversight which is similar (but not exactly the same) to the Canadian concept of direction and control. As I have noted before in some cases the Charity Commission expectations can be higher than those of the CRA as the Charity Commission is very focused on protecting the reputation of the charitable sector and I would argue for CRA that is a far lower priority. For example, see my blog from 2011 "Failure to control and document use of charity funds can lead to serious problems" on the Crescent Relief organization.
Below I have pasted some of the text of the Charity Commission Guidance and emphasized (bolded) some of the text which is similar to the Canadian requirements and in practice result in the charity needing to have a significant amount of direction and control.
Understand your charity’s purposes
You and your co-trustees must make sure that everything your charity does helps (or is intended to help) to achieve the purposes for which it is set up, and no other purpose. You need to understand your charity’s objects – the description of your charity’s purposes in its governing document. You need to know their scope and limits.
You must be able to show that any grant to another organisation (whether it’s a charity or not) is clearly in line with your charity’s purposes. A charity can only make grants for activities that in principle it could carry out itself. You must also comply with the powers and any restrictions in your governing document. It’s vital to be clear about, and make sure the recipient understands and agrees:
Systems and procedures
Charities that regularly make grants should have appropriate systems and procedures in place to:
Risk assessment and assurance
Before you commit to making a grant to an organisation that isn’t a charity, you should carry out an appropriate level of risk assessment.
You must avoid exposing your charity’s resources, its reputation or the well-being of its beneficiaries to inappropriate risk. It’s vital to identify and consider risks in relation to a particular grant proposal and respond to them proportionately, as risks will vary in their significance from case to case. You and your co-trustees are responsible for deciding what level of risk-taking is appropriate for your charity, responsible and reasonable in the circumstances. Use your assessment of the risks to inform your decision making.
You should also carry out appropriate checks to assure yourself and your co-trustees that:
This process is described as due diligence in commission guidance. It’s also known as assurance. It involves assessing:
You will need to decide what level of assurance or due diligence is appropriate, taking account of the level of risk to your charity’s assets, beneficiaries or reputation.
You should regularly review the sufficiency of your due diligence. You should carry out additional checks during the course of the funding relationship if you identify that the risks are significant.
Making the decision to award a grant
Awarding any grant is an important decision. If you and your co-trustees delegate decision making, you remain responsible for the decision that is made. You should therefore supervise delegated authority through an appropriate policy framework and reporting procedures. High risk and unusual decisions should not be delegated, and you should consider carefully whether it is appropriate to delegate decisions about funding an organisation that is not a charity. You should set guidelines to help assess what is likely to be high risk or unusual.
Follow and apply the principles in the commission’s guidance on trustee decision making. Trustees are responsible for deciding what level of scrutiny and discussion are appropriate in the circumstances. The commission may ask you to explain and justify a decision.
Limits on funding organisations that aren’t charities
An organisation that isn’t a charity is not restricted by charitable purposes or public benefit. A charity can only fund charitable activity that is intended to further its purposes. It follows that:
This is to avoid the charity’s funds being applied for activities that are outside its purposes or not charitable in law.
It will also help you to comply with the rule that any private (ie non-charitable) benefit must be ‘incidental’ to carrying out your charity’s purposes. Private benefit is incidental where (in terms of both its nature and the amount) it’s a necessary result or by-product of carrying out the purpose. A non-incidental private benefit would be a misuse of charity funds.
Any funding of the organisation’s ‘core’ costs, such as office or staff costs, must therefore be limited to the proportion of those costs that is directly linked to delivering the grant activities. You should be able to explain and justify your decision in the charity’s interests.
Setting the terms of the grant
You should put in place a written agreement that sets out the terms and conditions of the grant. These terms and conditions should ensure that:
Decide what kind of agreement and terms and conditions are appropriate in the circumstances. In the case of a small grant where you are satisfied that the risks to your charity’s funds and reputation are low, a letter or other informal agreement may be sufficient. In other cases, you may need a more formal legal document. You should consider taking appropriate advice on preparing the document.
You will need to check that the organisation you are funding uses your charity’s funds only for your charity’s purposes and in accordance with the funding agreement.
You should put in place monitoring arrangements that are proportionate to the value of the funding and your assessment of the risks. This is important even if the funded activities clearly further charitable purposes. The recipient may carry out other activities that your charity can’t support. It may have a limited understanding of charitable purposes or what activities your charity can fund.
For anything more than a small one-off grant, you should obtain regular written updates and financial reports from the organisation during the grant period. These should set out progress on the work being carried out and details of spending within the reporting period. You should always obtain a report when the grant activity is completed.
You should also consider whether to carry out your own monitoring checks. These could include site visits, scrutiny of published information (such as annual accounts and the organisation’s website), and interviews with the organisation’s governing body.
Find out more: due diligence and monitoring.
Situations where extra care and scrutiny are needed
Some charitable purposes, such as community development or promoting human rights, are only charitable within certain legal boundaries. These boundaries are not always straightforward. If you are planning to fund activities to advance these purposes, read the commission’s guidance and take appropriate advice:
Promotion of rural and urban regeneration (RR2)
The promotion of human rights (RR12)
Guidance on other charitable purposes – Reviews of the register
Some activities such as political campaigning, are only permissible within certain limits for charities:
Speaking out: guidance on campaigning and political activity by charities (CC9)
Where a project that you are funding will generate intellectual property (for example in the case of research by higher education institutions), you will need to take steps to protect the charity’s share, as this can be a valuable asset.
If things go wrong
It’s impossible to eliminate all risk. Some grants will not work out as planned and may not deliver the planned outcomes. You and your co-trustees need to be able to explain and justify decisions that you have made.
If something more serious goes wrong, take action to minimise any financial loss or harm to the charity’s beneficiaries or assets, including its reputation. This may include suspending or withdrawing funding, or requiring repayment of the grant under the terms of the funding agreement. Plan how you will respond to questions from your staff, volunteers, members, donors, the public or the media.
You should report serious incidents (or suspected serious incidents) to the commission as soon as you are aware of them. You should use your own judgement to assess the risk to your charity. There are no hard and fast rules, but an incident can be considered serious if it results in, or risks, significant:
Find out more: How to report a serious incident in your charity
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.