Transcript Slide 1

Charity Law Information Program (CLIP)
Social Enterprise for Canadian
Charities: Legal Compliance from A - Z
November 21, 2009
Mark Blumberg, [email protected]
&
Richard Bridge, www.lawyerforcharities.ca
Production of this workshop and materials was made possible
by a financial contribution from the
Canada Revenue Agency
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Who We Are – Capacity Builders
• Capacity Builders is a division of the Ontario Community
Support Association (OCSA) and it runs the Charity Law
Information Program (CLIP)
• CLIP provides training, workshops, and webinars to
Canadian charities to enhance their understanding
of their legal, ethical, and governance obligations
• http://www.capacitybuilders.ca/clip
• CLIP Communiqué – sign up for free
• (416) 256 – 3010 x 232 or 1-877-484-3030
• [email protected]
• The Charities Directorate of CRA has provided funding
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for CLIP
Who We Are – Blumbergs
• Blumberg Segal LLP is a law firm based in Toronto,
Ontario
• Mark Blumberg is a partner at Blumbergs who focuses
on non-profit and charity law
• Assists charities from across Canada with Canadian and
international operations and foreign charities fundraising
here
• www.canadiancharitylaw.ca and www.globalphilanthropy.ca
• Free Canadian Charity Law Newsletter. Sign up at:
http://www.canadiancharitylaw.ca/index/php/pages/subscribe
• (416) 361 – 1982 or 1-866-961-1982
• [email protected]
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Richard Bridge – Lawyer for Charities
•
Richard Bridge is based in Middleton, in Nova Scotia’s Annapolis Valley. He has been a member
of the British Columbia Law since 1991 and the Nova Scotia Barristers’ Society since 2006.
•
A Lawyer dedicated to his career to being of service to charities, non-profits and co-op
organizations and in helping donors to avoid potential pitfalls and achieve their goals.
•
He was called to the British Columbia Bar in 1991 and the Nova Scotia Bar in 2006
•
He is a sole practitioner focusing on four fields:
Charity and Non-profit Law
Co-operatives
Public sector organizations and issues
Teaching
•
His clients are a wide range of charitable organizations, foundations, non-profit organizations,
philanthropists and co-ops across Canada and Internationally.
Charities Directorate of CRA
• Regulates registered charities
• Based in Ottawa and other offices throughout Canada
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•
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Website: www.cra.gc.ca/charities
E-mail list: www.cra-arc.gc.ca/esrvc-srvce/mllist/sbscrbchrts-eng.html
Webinars: www.cra-arc.gc.ca/tx/cmmnctn/sssns/wbnrs-eng.html
• Telephone:
1-800-267-2384 (English)
1-888-892-5667 (Bilingual)
• Through CPOP supporting 19 registered charities
conducting educational work on legal and Income Tax
Act compliance.
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Save the Date!
February 22nd & 23rd 2010
Being Good at Doing Good:
Safeguarding Yourself and Your Charity in a Complex World
Plan to join us in February for this groundbreaking conference that will
explore good governance and accountability, financial controls, and how
you can prevent your resources from being misused. Watch for program
information and registration details on our website,
www.capacitybuilders.ca/clip
Location: Toronto Board of Trade
Introduction
• Views expressed are our own
• Questions during and at end
• Review of handout
• Logistics and timing
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Charity Law Basics
• Registered charities are regulated by Charities
Directorate of the Canada Revenue Agency (CRA)
• Registered charities fall under both federal and provincial
jurisdiction
• Non-profits and charities are both tax exempt
• Income Tax Act – concept of “registered charity” can
issue “official donation receipt” with income tax savings
for donor
• Benefits and restrictions on registered charities
• Doing good and charity are not synonymous
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Maintaining Charitable Status
• Conduct allowable charitable activities and avoid
prohibited activities
• Keep adequate books and records
• Properly issue official donation receipts
• Meet annual spending requirement (disbursement quota)
• File T3010 Registered Charity Information Return
• Maintain status as a legal entity
• Inform CRA of certain changes
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Top 20 Legal Compliance Concerns for Canadian
Registered Charities
with Mark Blumberg ([email protected])
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1. Failure to File T3010
• Canadian Registered Charities must file their T3010
Registered Charity Information Return every year
• Within six months of the end of the charity’s fiscal period
• For 2009 fiscal years file T3010B
• Form is mailed with labels to charity – also can download
form from:
http://www.cra-arc.gc.ca/tx/chrts/prtng/rtrn/flngb-eng.html
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Why File T3010?
• Legally required
• Only uniform way to compare Canadian charities
• Advertisement for charity
• Important for transparency of charity
• Only beginning of transparency (website, annual report,
newsletters, e-mail lists, etc.)
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Consequences for Failing to File
• Revocation of charitable status within months
• Cannot issue receipts
• Lose benefits of registered status
• Revocation tax if not re-registered within 1 year
• May not be able to reregister
• $500 penalty
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Questions for Follow-Up
• Have you checked on the CRA website that you are a
charity?
• When is your fiscal year end?
• When is 6 months from your fiscal year end?
• Have you diarized the date immediately above?
• Who is responsible for filing the T3010?
• Are you aware how the T3010A and T3010B are
different?
• Have you filed your T3010 on time?
• Is your address with CRA up to date?
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2. Mistakes with T3010B
• T3010 must be the correct form, accurate and complete
including schedules and financial statements otherwise
may be returned or considered incomplete
• Lots of help on internet with T3010B – go to
www.capacitybuilders.ca/clip for a list including our
Annotated T3010B
• CRA has fillable T3010B
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Problems with T3010B
• Using wrong form – T3010A for 2008
– T3010B for 2009 and later
• Not providing all information
• Not providing accurate information
• Not providing all schedules
• Not providing financial statements
• Not providing date of birth of directors
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Form T3010B
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Questions for Follow-Up
• Have you completed all required information?
• Have you checked CRA checklist for documents?
• Have you had lawyer/accountant/your board check
T3010?
• For bigger organizations have you checked a few
months after filing that CRA has inputted your T3010
information correctly?
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3. Incorrect Receipts
• Charities are required to issue correct receipts
• Some receipts:
– Lack required information
– Have mistakes
– Include improper fair market value (FMV)
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What is a “Gift”
Charities can only issue receipts for a gift.
A gift must be:
1.
2.
3.
4.
Voluntary – given of free will (not compelled)
Transferred – from donor to charity/qualified donee
Property – cash or gifts in kinds (not services)
Financial Sacrifice on the part of the donor
(donative intent – advantage must be less than 80%
of amount unless Minister agrees)
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Don’t Issue a Receipt When…
• You cannot determine the value of the donation or the
benefit
• Donation of services to charity
• Donation is intended for another organization that is not
a registered charity
• Cannot determine the name of the true donor
• Payment for event (concert)
• Payment for program (daycare)
• Tuition (except IC 75-23 - private religious schools)
• Business advertising expenses
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Mandatory Elements of Receipts
For gifts of cash: (Regulation 3501 of the Income Tax Act)
• A statement that it is an official receipt for income tax
purposes;
• The name and address of the charity as on file with the
CRA;
• The charity’s registration number;
• The serial number of the receipt;
• The place or locality where the receipt was issued;
• The day or year the donation was received;
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Mandatory Elements of Receipts (cont.)
• The day on which the receipt was issued if it differs from
the day of donation;
• The full name and address of the donor;
• The amount of the gift;
• The value and description of any advantage received by
the donor (under proposed legislation);
• The signature of an individual authorized by the charity
to acknowledge donations; and
• The name and Web site address of the Canadian
Revenue Agency (www.cra.gc.ca/charities)
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Mandatory Elements for Gifts in Kind
For non-cash gifts (gifts in kind), these additional elements:
– The day on which the donation was received (if not already
indicated);
– A brief description of the property transferred to the charity;
– The name and address of the appraiser (if property was
appraised); and
– In place of the amount of the gift mentioned above, the
deemed fair market value of the property (under proposed
legislation).
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Sample Official Donation Receipts
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Split Receipting
• New legislative idea – from 2002
• Pre-2002 – if donor received any advantage, then no
receipt
• Now donors can receive some advantage eg. concerts,
golf tournament, gala dinners, etc.
• Charity must determine the eligible amount of that gift for
receipting purposes in order to issue an official donation
receipt
• http://www.cra-arc.gc.ca/E/pub/tp/itnews-26/itnews-26e.pdf
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Consequences for Improper Receipts
• Incomplete or incorrect information: Penalty equal to 5%
of the eligible amount stated on the receipt. Penalty
increases to 10% for a repeat infraction within 5 years.
• If no gift or deliberately false information then charity is
liable to a penalty equal to 125% of the eligible amount
stated on the receipt where the total penalty does not
exceed $25,000
• When penalty over $25,000 the charity gets penalty
equal to 125% and the suspension of tax-receipting
privileges.
• Can also have registration revoked.
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Questions for Follow-Up
• Are you only providing receipts when appropriate?
• Are you only providing receipts for donations to your
organization (not acting as a conduit or lending
registration)?
• Have you checked that all mandatory fields are included
on receipts?
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4. Acting Outside Legal Objects
Most incorporated charities in Canada have legal objects
in their Letters Patent (Articles of Incorporation).
Charities must not act outside of these legal objects.
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Check Your Letters Patent/Articles of Incorporation
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Questions for Follow-Up
• Have you reviewed your legal objects in the Letters Patent?
• Are all the activities of your charity within your objects?
• If something is not within your objects, have you discontinued
such activities or modified the objects to include such activities?
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5. Non-Charitable Activities
A registered charity must devote its resources (funds,
personnel, and property) to charitable activities (the
work that advances the charitable purposes).
Certain non-charitable activities are allowed within limits
like administration, fundraising, related business, social
and political.
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What is a Charitable Purpose?
Four Heads of Charity:
1. Relief of poverty
2. Advancement of education
3. Advancement of religion
4. Other purposes beneficial to the community in a way
the law recognizes as charitable
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Charitable Purpose – The 4th Head
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•
•
•
•
•
•
•
•
•
Agricultural and horticultural societies
Welfare of domestic animals
Parks, botanical gardens, zoos, aquariums, etc.
Community recreation facilities, trails, etc.
Community halls, libraries, cemeteries
Summer camps, daycare/after-school care
Crime prevention, public safety, and order
Ambulance, fire, rescue, other emergency services
Human rights, mediation services, consumer protection
Support and services for charitable sector
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Questions for Follow-Up
• What activities does your charity undertake?
• Are they charitable, fundraising, admin, political,
business, social and how much of each?
• Are you respecting the limits imposed by CRA on noncharitable activities?
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6. Gifts to Non-Qualified Donees
Charities conduct activities in two ways:
1. By gifting to “qualified donees”; or
2. By carrying on its own charitable activities.
Charities cannot gift to a non-qualified donee or be a “conduit”.
(Gifts to non-qualified donees = 105% penalty on the
amount of the gift and second infraction 110% penalty and
greater chance of revocation.)
Need “direction and control” over funds and resources.
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Canadian Registered Charity
“Own Activities”
[Direction and Control]
Qualified Donee, eg.
Canadian registered
Charity, UN, prescribed
University, Canadian
Municipality, etc
Structured
Arrangement -Written
agreement
Employee
Volunteer
Intermediary –
agency, JV,
partner,
contractor
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“Own Activities” or “Direction And Control”
When not working with qualified donee or own staff:
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•
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Investigate Intermediary (due diligence)
Written agreement
Detailed description of activities
Monitoring and Supervision
Ongoing Instruction for changes
Periodic Transfers
Separate Activities and Funds
Books and Records showing above
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Questions for Follow-Up
1) Do you know what a qualified donee is?
2) Is your charity providing resources to organizations or
individuals that are not qualified donees such as
foreign charities?
3) Does your charity have an appropriate written
agreement with all necessary elements?
4) Do you maintain “direction and control” over your
resources?
5) Are you properly categorizing foreign activities on
T3010?
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7. Fundraising Costs and Practice
• Fundraising is important for charities but it is not a
charitable activity
• Lots of media and donor concern about costs and
practices
• CRA Guidance on Fundraising recently released
• Must read for anyone very involved with fundraising:
http://www.cra-arc.gc.ca/tx/chrts/plcy/cps/cps-028eng.html
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CRA Guidance for Fundraising
• Prohibited fundraising conduct (illegal, main purpose, too
much private benefit, misleading or deceptive)
• Disclosure and transparency
• Apportioning expenses between fundraising and
charitable
• Best practices
• Indicators of concern
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Indicators of Concern
•
•
•
•
Sole-source fundraising contracts
Non-arm's length fundraising contracts
Fundraising initiatives that are not well-documented
Fundraising merchandise purchases that are not at
arm's length, not at fair market value, or not purchased
to increase fundraising revenue.
• Most of the gross revenues for non-charitable parties.
• Commission-based fundraiser remuneration
• Misrepresentations in fundraising solicitations or in
disclosures about fundraising or financial performance.
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CRA Guidance on Fundraising
Best Practices
a. Prudent planning processes
b. Appropriate procurement processes
c. Good staffing processes
d. Ongoing management and supervision of fundraising
practice
e. Adequate evaluation processes
f. Use made of volunteer time and volunteered services or
resources
g. Disclosure of fundraising costs, revenues, and practice
(including cause-related or social marketing arrangements)
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Fundraising Ratio of Costs to Revenues
Ratio of Costs to Revenues over
Fiscal Period
• Under 35%
• 35% and Above
• Above 70%
CRA Approach (Cost to Revenue)
• Unlikely to generate questions or concerns.
• The CRA will examine the average ratio over
recent years to determine if there is a trend
of high fundraising costs. The higher the
ratio, the more likely it is that there will be
concerns and a need for a more detailed
assessment of expenditures.
• This level will raise concerns with the CRA.
The charity must be able to provide an
explanation and rationale for this level of
expenditure to show that it is in compliance;
otherwise, it will not be acceptable.
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Questions for Follow-Up
• Have you read the CRA Guidance on Fundraising and
do you understand it?
• Are any of your activities prohibited?
• Do any of the indicators of concern apply to your charity?
• What are your charity’s ratios of cost to revenue?
• Are your charity’s ratios in line with CRA expectations?
• What steps are you taking to reduce your fundraising
costs?
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8. Failure to Meet Disbursement Quota
The Disbursement Quota (DQ) is the amount that a
registered charity must spend each year on its charitable
activities or as gifts to qualified donees. (“80% rule”)
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Two Key Disbursement Quota Elements
1. Receipted Donations: Each year, registered charities must spend
amounts that are at least equal to 80% of the amounts for which it
issued official donation receipts (with some exceptions) in the
immediately preceding fiscal year.
PLUS
2. Assets: 3.5% of the average value of any assets the registered
charity owned over the previous 24 months that were not used
directly in charitable activities or in the administration of the
registered charity (a complicated calculation).
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Why is There a Disbursement Quota?
The Disbursement Quota was established in the Income
Tax Act (Canada) to achieve 3 purposes:
1.
To ensure that most of a charity’s funds are used to
further its charitable purposes and activities;
2.
To discourage charities from accumulating excessive
funds; and
3.
To keep other expenses at a reasonable level.
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Activities as Disbursements
• Only monies spent directly on charitable activities or on
gifts to qualified donees are included in calculating the
disbursement quota. This includes paying the salaries of
persons performing actual charitable work (e.g. caring
for the sick), buying equipment used in charitable
activities.
• It should not include amounts spent on activities that
support charitable objectives but do not directly
accomplish them, such as management and
administrative activities, fundraising or political activities.
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Questions for Follow-Up
• Review Registered Charity Information Return Summary
received after filing T3010
• Optionally complete T1259 Capital Gains and
Disbursement Quota Worksheet from CRA
• Do you have surplus or deficit in DQ?
• Have you reviewed T3010 resources at
www.capacitybuilders.ca/clip?
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9. Political Activities
“A registered charity may pursue political activities to
retain, oppose, or change the law, policy, or decision of
any level of government inside or outside Canada
provided the activities are non-partisan, related to its
charitable purposes, and limited in extent.” (see
T3010B)
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Political Activities
• Cannot have political purpose (object); only political activities
• No illegal or partisan political activities
• Political activities must be “connected and subordinate” to purpose
(legal objects)
• Comply with “10% rule” and disbursement quota restrictions
(political work on not charitable and only if DQ room)
• Informative, accurate, and well-reasoned (not false, inaccurate, or
misleading)
• Read CRA Policy Statement on Political Activities (CPS-022)
(http://www.cra-arc.gc.ca/tax/charities/policy/cps/cps-022-e.html)
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An Activity can be…
• Prohibited activities (illegal and/or partisan political)
• Allowable political activities
• Charitable activities:
- Public awareness campaigns
- Communicating with an elected representative or public official
- Education
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Questions for Follow-Up
• What are your charities legal “objects”?
- Not mission or vision
• Does your organization engage in political activities?
• Are political activities reported on T3010?
• Are political activities connected and subordinate to legal
objects?
• What percentage of expenses is political?
• Do you have DQ excess?
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10. Unrelated Business Activities
Income Tax Act prohibits “unrelated business activities” by all
charities
Charitable organizations and public foundations are permitted
to engage in “related business activities” but private foundations
may not engage in any business activity
“Carrying on business” - activity is commercial in nature (derive
revenue and provisions of goods and services, intention to earn
profit) and continuous
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Why Prevent Unrelated Business?
• Unfair competition with private businesses
• Why should charities be able to compete tax-free?
• Business is not a charitable object
• Will encourage regular business to set up as charities
• In some countries, unrelated business is permitted, but
the charity will be taxed on unrelated business income
like a private business but not in Canada
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What is a Related Business?
There are two kinds of related businesses that a registered
charity can conduct:
1. Businesses that are linked to a charity’s purpose and
subordinate to that purpose (for example, a hospital
parking lot); and
2. Businesses that are run substantially (90%) by
volunteers (for example, weekly bingos).
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Business Activities
For more guidance, see CRA’s CPS-019 “What is a
Related Business?”
•
Penalties for unrelated business: 5% (1st infraction) on
gross unrelated business revenue
• Earned in a taxation year
• 2nd infraction: 100% penalty on that revenue and
suspension* of tax-receipting privileges
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CRA Website “What is a Related Business?”
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Questions for Follow-Up
• Read CPS-019 What is a Related Business?
at http://www.cra-arc.gc.ca/tx/chrts/plcy/cps/cps-019-eng.html
• Is charity carrying on a business? i.e. activity commercial in nature
(derive revenue and provisions of goods and services) (not issue of
whether profitable or fees charged)
• If yes, then are all goods donated? (yes=fine)
• If not, is it ongoing? (no=fine)
• Is business related? (i.e. 90% volunteers or linked AND
subordinate to charity’s purpose)
• If not, either then may be unrelated business
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11. Religious School Tuition Receipts
• If religious schools (either exclusively religious or dual
(secular or religious)) are issuing tax receipts, they must
ensure that they are only issuing receipts for religious
portion of tuition, which, in the case of dual capacity
schools, is based on the calculation set out in IC 75-23.
• Concern regarding inflated receipts
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12. Fraudulent Tax Receipts
• Tax receipts are sold for a small percentage of their face
value
• No donation, or small donation, to charity
• No complicated scheme
• Keep tight control over receipts
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13. Charity Gifting Tax Shelters
• People can donate to registered charities in Canada and
get an official donation receipt which is very valuable and
can cost the tax system a lot. Promoters and “charities”
cannot, through various games and tricks, abuse the tax
system to issue whatever receipt they wish.
• Usually “investor” or “donor” is told that the tax benefits
and deductions arising from the scheme will equal or
exceed the costs of entering into the arrangement or the
property.
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CRA Taxpayer Alerts on Tax Shelter Gifting
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Tax Shelter Gifting – Charity Concerns
1. Undermine public confidence in charities
2. Depletes tax revenues needed for basic services, many
of which are delivered by charities
3. They are often illegal or fraudulent, usually unethical
4. Your donor will be audited (175,000 donors are
currently being audited)
5. Determining the correct amount for the donation receipt
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Tax Shelter Gifting – Charity Concerns (cont.)
•
Disbursement quota problems
•
Fundraising by using commissions may violate codes of
ethics
•
Tax Shelter Identification Numbers
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You don’t want to be considered a Promoter
•
Lawsuits
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Tax Shelter Gifting – Charity Concerns (cont.)
11. Questionable legal opinions
12. Civil penalties
13. Professional advisors
14. Advanced tax rulings
15. CRA’s fundraising guidelines
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Tax Shelters
• “If it sounds too good to be true, it probably is.”
• There are consequences
• Almost all schemes market themselves as being
“different” from other schemes that CRA has warned
about and promising that they are safe
• The CRA audits all charity gifting arrangements
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Is this an Abusive Tax Scheme?
1. Person donates $100 to charity, receives no benefit and
charity issues $100 tax receipt.
2. Person donates $100 to charity and receives $10,000 tax
receipt.
3. Person buys pharmaceuticals in India as part of a scheme
for $100, pharmaceuticals donated to charity and valued
for purposes of tax receipt, at $10,000, and tax receipt
issued for $10,000.
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14. Transactions with Directors
In Ontario, the Public Guardian and Trustee takes the
position that directors of charities can only be
reimbursed for reasonable out of pocket expenses –
directors cannot be consultants or employees of charity.
In other provinces, more scrutiny of salaries, loans to
directors, investments in companies of directors,
transactions with businesses owned by directors, etc…
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Questions for Follow-Up
1)
Does your charity have any transactions with directors
except for repayment of reasonable expenses?
2)
If in Ontario, have you received permission from court?
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15. Employment Issues
• Employee vs. Independent contractor
• Withholding source deductions
• Remitting source deductions
• Proper employment agreements
• Excessive compensation / private benefit
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Questions for Follow-Up
1) Are your “independent contractors” really independent
contractors? See CRA publication Employee or Selfemployed?: http://www.cra-arc.gc.ca/E/pub/tg/rc4110/
2) Is charity deducting appropriate amounts of CPP, EI,
and income tax and remitting to CRA?
3) Do you have agreements with all employees and
independent contractors?
4) Is compensation appropriate?
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16. Mishandling of Audit
• CRA has an obligation to audit registered charities to
spot whether they are complying with the Income Tax
Act
• Charities must assist with audit
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Tips for Handling Audit Properly
1.
2.
3.
4.
Respond quickly
Be cooperative and polite
Use your time wisely before the audit
Choose carefully which charity officer or employee
represents the charity with CRA
5. The lawyer is generally best kept in the background
6. Have your records up-to-date
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Tips for Handling Audit Properly (cont.)
7. Answer questions at the audit truthfully and only if you
know the answer
8. Providing documents – don’t dump documents on CRA,
remember solicitor-client privilege
9. Copying of documents – provide copies, keep originals,
know what you have provided to CRA
10. Preliminary discussions and findings – take notes
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17. Failing to Keep Adequate Books and Records
A Canadian registered charity must keep adequate books
and records, in either English or French. CRA must be
able to:
– Verify revenues, including all charitable donations
received;
– Verify that resources are spent on charitable
programs; and
– Verify that the charity's purposes and activities
continue to be charitable.
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Why We Need Adequate Books and Records
• Help with charity audits and can result in suspension of
receipting privileges, or the loss of its registered status
• Knowing where expenses go and revenues come from
• Needed for issuing official donation receipts
• Help with decision making
• Makes it easier for you to complete filings
• Information on current and past financial position of
charity
• Stakeholders may require
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Questions for Follow-Up
1) Do you have governing documents (incorporating
documents, constitution, trust document), bylaws,
financial statements, copies of official donation
receipts, copies of T3010, written agreements, board
and staff meeting minutes, annual reports, ledgers,
bank statements, expense accounts, inventories,
payroll records, promotional materials, and
fundraising materials.
2) Do you have source documents? e.g.. invoices,
vouchers, work orders, delivery slips, purchase orders,
and bank deposit slips.
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18. Other Legal Concerns for Charities
• Breaching contractual relationships (funding agreements,
leases, etc.)
• Abuse of children and beneficiaries
• Criminal gangs and terrorism
• Fraud against charities, misuse of charitable assets
• Failure to respect donor restrictions (breach of trust)
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Charity Law Problem Solving
• Understand basic framework and definitions
• See CRA site for information
• See other sources of info (e.g.
www.capacitybuilders.ca/clip,
www.canadiancharitylaw.ca)
• Seminars and webinars
• Bolster board with diversity, skills, knowledge, passion,
resources, active educational program
• Call CRA if you need
• Have charity lawyer on retainer or hire as needed
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Charities and
“Related Business”
Richard Bridge
www.lawyerforcharities.ca
82
What is Related Business?
• Income Tax Act prohibits “unrelated business activities”
by all charities.
• Charitable Organizations and Public Foundations are
permitted to engage in “related business activities.”
Private Foundations may not.
• The ITA does not fully define either term.
• Canada Revenue Agency Policy Statement CPS-019
http://www.cra-arc.gc.ca/tax/charities/policy/cps/cps-019e.html
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Charities & Related Business
The Policy issue: competition & tax fairness
• Should charities be able to compete tax-free?
• In most other countries unrelated business is permitted,
but the charity will be taxed on that income like a private
business.
• Related business income is usually tax exempt.
• In the UK, there is a destination test. So long as the
income from unrelated or related business supports a
charity’s purposes, it is tax exempt.
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Charities & Related Business
The ITA does clarify in section 149.1 that:
• ““related business”, in relation to a charity, includes a
business that is unrelated to the objects of the charity if
substantially all persons employed by the charity in the
carrying on of that business are not remunerated for that
employment.”
- CRA views substantially all as 90% or more.
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The Case Law
2 Contradictory Cases:
Alberta Institute on Mental Retardation – Federal Court of
Appeal (1987)
• The Institute worked with Value Village. All of the
revenue the Institute received was used for charitable
purposes.
• The court adopted the UK “destination test.” It was a
“related business” because the business income was
used for charitable purposes.
86
The Case Law
Earth Fund v. the Queen (2003)
• Organization created to raise money for charities by
holding international internet lotteries.
• Court rejected the “destination test” – concluded it was a
commercial activity, but not a related business.
• Alberta case not overturned. No practical guidance from
the Court.
• The legal meaning of related business is murky.
87
The CRA’s Guidance
• Two kinds of “related business”
– Those that are run substantially by volunteers.
– Those that “are linked to a charity’s purpose and
subordinate to that purpose.”
• Charities must have exclusively charitable
purposes. Business cannot become a purpose
in its own right.
88
The CRA’s Guidance
“Business” involves commercial activity – deriving revenue
from goods or services – with the intention to earn profit.
Factors indicating business:
– Intention to make profit
– Potential to show a profit
– Past profit
– Expertise of person doing the work
89
The CRA’s Guidance
3 important things that are not “business”
• Soliciting donations.
• Selling donated goods.
• Fees charged for charitable programs & services.
Factors:
• Fees set to defray costs of the program, not make
profit;
• Comparable services not available in the market;
• Fees set according to charitable not market goals.
90
The CRA’s Guidance
Fundraising events:
• Considered “business activity,” but not “carrying on” a
business if they are not continuous.
• A charity that holds the same event frequently (a weekly
raffle) may be “carrying on” a business.
91
The CRA’s Guidance
• Investments – not “business” if passive
• Partnerships – are considered “business”
92
Related Business
Must be linked to the charity’s purposes.
•
4 types of connections or linkages:
1)
“A usual and necessary concomitant of charitable
programs.”
e.g. hospital parking lot, museum gift shop, university
book store.
93
Related Business
2) “An off-shoot of a charitable program.”
Assets that are a by-product of a charitable activity, e.g.:
– heritage village selling the produce or flour it grows or
grinds;
– A church that records its choir and sells CDs.
94
Related Business
3) “A use of excess capacity.”
The use of assets or staff when they are not being used
at full capacity for charitable work. e.g.:
– An arts charity renting out its tents when not using
them.
– A university renting its residence rooms in the
summer.
– A church renting out its parking lot during the week.
95
Related Business
4) “The sale of items that promote the charity or its objects.”
e.g. t-shirts, golf balls, pens with names and logos.
Posters displaying the charity’s work, etc.
96
Related Business
Business must be subordinate to a charity’s purpose.
Must not become a non-charitable purpose in its own right.
“This requires looking at the business activities in the
context of the charity’s operations as a whole.”
4 factors or indicators:
97
Related Business
a) “Relative to the charity’s operations as a whole, the
business activity receives a minor portion of the
charity’s attention and resources.”
*(“minor” is not defined)
b) “The business is integrated into the charity’s operations,
rather than acting as a self-contained unit.”
98
Related Business
c) “The organization’s charitable goals continue to
dominate its decision-making.”
d) “The organization continues to operate for an exclusively
charitable purpose by, among other things, permitting
no element of private benefit to enter its operations.”
99
Unrelated Business
Penalties:
For a charitable organization or public foundation carrying
on an un-related business:
1st infraction: 5% penalty on gross unrelated business
revenue earned in a taxation year.
2nd infraction: 100% penalty on that revenue and
suspension of tax-receipting privileges.
*Suspension is for 1 year. Revocation of registration is permanent.
100
Unrelated Business
• CRA says: “before proceeding to revocation, a charity
should normally be invited to wind-up the unrelated
business or to place it in a separate taxable corporation.”
• The charity may invest in the taxable corporation. As
with other investments, the directors must conclude that
it is a prudent use of the charities assets.
101
Unrelated Business
• The charity must not subsidize the business. Investment
does not include grants, gifts, free use of the charity’s
resources.
• Profits can flow to the charity (up to 75% of net profits
can be donated to the charity; only the remainder is
taxed).
102
Unrelated Business
• A charitable organization can retain control over the
taxable corporation through share holdings or a power to
nominate the board of directors.
• Careful record keeping critical (minutes and financials).
• A foundation must not acquire more than half of the
voting shares of a taxable corporation, unless the shares
are donated to the foundation.
103
Unrelated Business
• Private Foundations cannot engage in any business
activities.
• New “excess holding rules” prevent private foundations
from holding more than 20% of the shares of a
corporation.
104
Ontario’s Unique Requirements
The Charitable Gifts Act:
• prevents charities from owning more than 10% of “an
interest in a business;”
• such an interest must be disposed of within 7 years; and
• religious institutions are exempt.
105
Ontario’s Unique Requirements
• Charities Accounting Act prohibits charities from holding
real property not used or occupied by the charity for
more than 3 years.
• PGT allows 20% of the total area of a property to be
used other than for the charities purposes.
• PGT may seize and sell the property, with proceeds to
the charity.
106
Registered Charities &
Community Economic
Development
Richard Bridge
www.lawyerforcharities.ca
107
CRA’s Key Guidance
“RC4143 Registered Charities Community Economic development
Programs”
• http://www.cra-arc.gc.ca/E/pub/tg/rc4143/rc4143-e.html
• CRA website: http://www.cra-arc.gc.ca/tx/chrts/menu-eng.html
108
Summary of CRA’s views of CED
• CED involves a combination of economic & social goals.
An evolving, dynamic field.
• “Many projects carried on in the name of CED are
charitable, some are not, and some fall into a grey area.
When we evaluate the charitable status of CED projects,
we ask two key questions:
1. Who benefits?
2. What is the nature of the benefit provided?”
109
Some factors are not relevant from a charitable
perspective
Work that:
• is democratically controlled;
• is broadly representative of community interests;
• is located in the community or outside it;
• hires and buys locally;
• derives its income from within the community; or
• has assets that are controlled by the community.
110
The 4 Heads of Charity
•
•
•
•
relief of poverty;
advancement of education;
advancement of religion; and
other purposes beneficial to the community in a way the
law recognizes as charitable.
111
Some examples of 4th head charity
•
•
•
•
•
•
•
Health care & clinics
Community recreation facilities, trails, etc
Community halls, libraries
Community halls
Ambulance, fire, rescue services
Environmental protection, recycling
Support and services for charitable sector
• Agricultural and horticultural societies
112
Unemployment & Employment
• Relieving and preventing unemployment is a charitable
purpose under the first head and the fourth.
• Providing employment is not a charitable purpose in its
own right, though on occasion it can be a way to achieve
a charitable purpose.
113
Unemployment
• Helping people who are unemployed is usually a
charitable activity. Where it may not be charitable is
when the clients have enough resources and skills of
their own that they do not need the help of others.
114
Helping hard-to-employ people is charitable
Persons who:
• have been out of the labour force for over a year;
• have not completed high school;
• are graduates who have not found employment within a
year;
• are over age 45;
• have a previous criminal conviction;
115
Helping hard-to-employ people is charitable (cont.)
• are on social assistance;
• are affected by a physical, mental, or developmental
disability:
• are located in an economically challenged community
(ECC); or
• are refugees.
116
Preventing unemployment
• Can be charitable, if:
– any private benefit is a minor by-product of its
programs.
– the prospect of unemployment must be an immediate
problem, not some vague future possibility.
• Greater latitude in this area applies in ECCs.
117
Charitable Activities – Job Search Programs
Examples:
• career counselling;
• referrals of persons with special needs to other agencies
for assistance;
• encouragement to pursue a job search, including the
formation of peer groups for mutual support;
• help preparing résumés or preparing for job interviews;
118
Charitable Activities – Job Search Programs (cont.)
Examples:
• establishing lists of those seeking work and of available
jobs;
• matching its clientele to an appropriate employer;
• where needed, providing funds to allow a client to attend
interviews or to relocate.
119
More Charitable Activities
• Assistance to unemployed people claiming employment
insurance or other benefits to which they are entitled.
• Vocational, employability, and entrepreneurial training. In
general, training that offers a formal course of instruction
is charitable under the second head of charity.
• Training to meet a particular employer's needs is
generally not charitable because of the substantial
private benefit that results for the employer. Special rules
apply.
120
Training "businesses"
Training businesses typically share the following
characteristics:
• classroom & on-the-job training;
• the participants are employed in the business for a
limited period of time;
• the charity offers a job placement service to help
program graduates find work in the labour force;
• 70% or more of the workers are from the target
population (higher if considerable supervision is
required; and
• revenues derived from the business are on a break-even
basis.
121
Individual development accounts
• Accounts that are restricted savings accounts for lowincome individuals, families, or groups.
• Unlike loans, which must be repaid, charities involved in
these accounts provide matching grants at a ratio
determined by the charity (e.g., 2:1) to help these people
develop savings over a one- to three-year period.
• To be charitable, these funds must be restricted in use to
purposes that help to relieve the poverty of the recipients
(e.g., funding post-secondary education).
122
Micro-enterprises and community loan funds
• CRA recognizes the setting up in business of hard-toemploy persons as a charitable activity.
• Such businesses may be sole-proprietorships or
collective enterprises such as worker co-operatives.
• These programs usually include entrepreneurial training,
plus support services and start-up loans.
• Ongoing support services are justifiable until the
business is viable, including office space, consulting and
secretarial services.
123
Micro-enterprises and community loan funds
• Micro-lending organization must provide CRA with its
policy for determining when a business is viable and no
longer in need of its support services or further loans.
• Start-up loans (or guarantees) can be offered to those
who cannot finance even the smallest business venture
from other sources. Amounts loaned by the charity are
typically under $10,000.
• Larger loans suggest the crossing of the line between
the relief of poverty and the non-charitable support of
small business.
124
Relieving poverty through the operation of stores
Providing low-cost necessities
• CRA recognizes the operation of thrift stores and similar
outlets as a charitable activity if the stores are located in
sections of a community inhabited largely by the poor, if
they sell donated goods at a low price, and if they
operate on a break-even basis.
125
Relieving poverty through the operation of stores
Selling goods produced by the poor
• CRA will not register such stores separately, but will
recognize them as ancillary and incidental to a charitable
program and allow this mechanism only for charities
working with the extreme poverty found in certain thirdworld countries.
• The sale of items made by poor artisans in third-world
countries and the development of a marketing network
for their products can relieve their poverty.
• This concept is not extended to Canadian artisans.
126
Relief of People with Disabilities
• Social "businesses" address the needs of the disabled
and are recent equivalents of sheltered workshops. They
seek to provide employment on a permanent basis,
unlike training businesses that provide employment for a
limited period.
• They usually provides services, but it can also
manufacture articles.
• The charity provides technical assistance, tools,
materials, and marketing.
127
Relief of People with Disabilities
• These workshops provide persons working in them with
the sense of self-esteem, competence, and usefulness
that comes from earning an income.
• The products must accordingly be sold. The charity may
operate a retail outlet or send the products to a store.
• This store, to the extent that it only accepts products
produced in the programs of a number of registered
charities assisting the disabled, can itself be registered
as promoting the efficiency and effectiveness of these
charities.
128
Relieving suffering in economically challenged communities
• An economically challenged community (ECC) is a
geographically defined community where the
unemployment rate has been 50% or more above the
national average for two or more consecutive years.
• A community is no longer an ECC when its
unemployment rate has fallen below this level for four
years in a row.
• When this happens, a charity would be given a further
two years to wind up any of its programs that are
charitable solely because they have been located in an
ECC.
129
Economically challenged communities
• Labour force participation may be used as an alternative
to the unemployment rate.
• An ECC may be either larger or smaller than a
municipality. No precise measures. A suggested
maximum size for an ECC is a population of 20,000, but
this can only be a suggestion since people's sense of
sharing a neighbourhood will depend on the area's other
factors (history, geography political boundaries)
• In one region, there could be a number of contiguous
ECCs.
130
Economically challenged communities
ECCs frequently display a number of the following
symptoms of social stress:
• a declining population, as the working-age population is
forced out of the community in search of employment
elsewhere;
• high rates of: family breakdown and family violence,
crime generally, health problems, including mental health
problems and suicides, drug and alcohol addiction, and
children taken into care and school drop-outs.
131
Economically challenged communities
Other indicators:
• the community's social infrastructure is underdeveloped
or declining.
• affordable housing in short supply,
• medical services unavailable locally,
• places for religious congregation abandoned,
• community centres or recreational facilities, libraries,
theatres, and other venues for educational and artistic
development absent.
• a degraded physical environment,
• vandalism.
132
Charitable activities regardless of ECC status:
• providing affordable housing to the poor, or specially
adapted housing for the aged and the disabled;
• providing community facilities, such as a hall, park, or a
multi-sport recreational centre;
• providing cultural facilities, the opportunity to see artistic
works, or training in the arts and crafts;
• preserving heritage properties owned by the organization
or a qualified donee such as a municipality;
• beautifying and preserving natural sites; and
• training volunteers
133
Charity in economically challenged communities
• Building or retaining a community's infrastructure of
professional and commercial services, such as a general
store, bank, post office, doctor or dentist, may be
important for the continued viability of the community.
• May be charitable if the absence of these services is
creating suffering among the people of the community,
not mere inconvenience.
134
Charity in economically challenged communities
• Attracting health professionals to an ECC can be
charitable work.
• It may be possible to establish a connection between a
lack of health professionals and documented distress in
a community.
• CRA recognizes that the public benefit can sometimes
greatly outweigh any private benefit conferred on the
health professionals in these situations, such as
providing them with a low-rent clinic out of which to
operate.
135
Charity in economically challenged communities
• When potential private benefit is at issue, each case has
to be examined on its own merits.
– Is there (or would there be) actual suffering if the
service was not locally available?
– How necessary is it to offer an inducement in order to
obtain the service?
– Is the inducement no more than is necessary?
136
Charity in economically challenged communities
• Community mobilization is considered essential to a
successful CED strategy. This is based on the
assumption that a community can only hope to
overcome its problems through the combined efforts and
resources of the entire population.
• Fostering social interaction in a geographic community
as a by-product of other, charitable programs, is certainly
acceptable. But it is not a charitable purpose.
137
Charity in economically challenged communities
• A social club is not charitable.
• A political purpose is not charitable.
• Barter systems for exchanging goods and services of
commercial value, unless an organization has an
appropriate mechanism in place to ensure compliance
with the relevant tax laws.
• some measures-such as the communication of
information-can stand on their own as charitable even
though this would not be the case in less distressed
communities.
138
Promoting industry and trade
• The courts have specifically sanctioned the promotion of
agriculture and craftsmanship in this context.
• CRA does not accept the promotion of any other industry
as charitable.
• It appears impossible to advance a particular industry,
such as car manufacturing or tourism, without at the
same time conferring an advantage on those who make
their living from making cars and serving tourists.
139
Promoting industry and trade
Other charitable activities:
• Research conducted to establish the socio-economic
profile of a community, to assess its strengths and
weaknesses, and to identify potential economic
opportunities (advancement of education).
• Holding exhibitions, open to the public, of a community's
products and services, with prizes awarded to promote
excellence, and demonstrations held both to enable
spectators to learn about the community's industries and
to showcase new advances in technology.
140
Factors negating charitable registration
• Existence of a private benefit
(subsidies not permitted)
• Political purpose
• Objects not fully charitable
• Funding non-qualified donees
141
Other issues
•
•
•
•
Related business
Program related investments
Community land trusts
Corporate structure for non-charitable programs
– Non-charitable programs can be "housed" in a legal
entity that is separate from the charitable body.
However, it is essential that there be a financial
firewall between the two bodies, so that the charity's
assets can in no way be used to benefit the noncharitable entity.
142
Fundraising by
Canadian Charities
Richard Bridge
www.lawyerforcharities.ca
143
Draft CRA policy
www.cra-arc.gc.ca/tx/chrts/plcy/cps/cps-028-eng.html
• Final version released June 11, 2009.
• Applies to all registered charities.
• Provides general advice only. Individual cases are
decided on their own facts and situtations.
• Should be studied in conjunction with the policy on
“related business”.
144
Provides direction on:
• distinguishing between fundraising and other
expenditures;
• allocating expenditures for the purposes of reporting
them on Form T3010, Registered Charity Information
Return;
• dealing with activities that have more than one purpose;
and
• understanding how the CRA assesses what is
acceptable fundraising activity, what may preclude
registration, or what may result in a sanction, penalty, or
revocation.
145
What is fundraising?
As a general rule, any activity that:
• includes a solicitation of support for cash or in-kind
donations (including sales of goods or services to raise
funds);
• is part of the research and planning for future
solicitations of support; or
• is related to a solicitation of support (efforts to raise the
profile of a charity, donor stewardship, donor recognition,
etc.).
Fundraising includes activities carried out by the registered
charity, or someone acting on its behalf.
146
Fundraising is not a charitable activity
• CRA’s position is that fundraising is not in-and-of-itself
charitable.
• Consequently, the costs of fundraising cannot usually be
reported as charitable expenditures on a charity's
T3010B, Registered Charity Information Return, and are
not part of the disbursement quota.
• “Fundraising activities that are appended to activities
primarily directed at achieving a charitable purpose can
be allocated between charitable and fundraising for
purposes of the reporting.”
147
Prohibited conduct
•
•
•
•
Conduct that is illegal or contrary to public policy.
Conduct that has become a main or independent
purpose of the charity.
Conduct that results in more than an incidental or
proportionate private benefit to individuals or
corporations.
Conduct that is misleading or deceptive.
148
Allocation of expenses
• Registered charities must report fundraising
expenditures on their annual Form T3010B.
• Fundraising expenditures include all costs related to any
activity that includes a solicitation of support, or that is
undertaken as part of the planning and preparation for
future solicitations of support.
• This applies unless it can be demonstrated that the
activity would have been undertaken whether or not it
included a solicitation of support.
149
Allocation of expenses
A solicitation of support includes any request by the registered
charityor someone acting on its behalf, for financial or in-kind
donations, and also includes the marketing and sale of goods
or services not within the entity's charitable programs, such as
selling chocolate bars to fundraise, even where no donation
receipt is issued.
150
Allocation of expenses
• Solicitations of support do not include requesting funding
from government or other registered charities.
• To show that an activity would have been undertaken
without the solicitation of support, charities must satisfy
test A or B below:
151
Two tests – charity versus fundraising A. substantially all test
•
•
An activity would have been undertaken without a
solicitation of support if substantially all of the activity
advances an objective other than fundraising. For the
purposes of this test, substantially all is considered to
be 90% or more.
Generally, this determination will be based on the
proportion of the fundraising content to the rest of an
activity, as well as the resources devoted to it.
However, the prominence of the fundraising content in
the activity must also be considered.
152
Two tests – charity versus fundraising A. Substantially All Test
•
If this test is satisfied, the charity may report all the
expenditures of the activity on its Form T3010 under
charitable expenditures, management and
administration, political activity, or other expenditures
as applicable.
Example:
A ¼-page solicitation for donations for a church project
is included in a 4-page leaflet for a church service
along with staff contact information and the schedule
of church services. None of the costs of the leaflet
(staff time, paper, printing) need to be attributed as
fundraising expenditures.
153
Test B. – 4-part test
All of the following questions must be answered “no.”
1.
2.
Was the main objective of the activity fundraising?
Did the activity include ongoing or repeated requests,
gift incentives, donor premiums, or other fundraising
merchandise?
154
Test B. – 4-part test
3.
Was the audience for the activity selected because of
their ability to give?
4.
Was commission-based remuneration or
compensation derived from the number or amount of
donations?
155
Test B. – 4 part test
•
When the answer to all four questions above is “no”,
the charity may allocate a portion of the costs as nonfundraising expenditures and a portion as fundraising
expenditures on its annual Form T3010.
•
If any of the answers to the four questions above is
“yes”, all costs must be reported as fundraising
expenditures, unless the exception below applies.
156
Exception
•
•
Even if an activity would not have been undertaken
without the solicitation of support, charities may still be
allowed to allocate a portion of the costs other than to
fundraising, if the activity furthers one of the charity's
purposes.
The CRA recognizes that, in certain circumstances, an
event or activity may serve multiple purposes—for
example, as a way to advance its charitable programs
and to raise funds for the charity.
157
Exception
•
•
The CRA only considers that an event or activity could
advance an organization’s charitable programming
when it is designed to prompt an action (other than the
giving of a donation or other financial support) or a
change in behaviour.
The event or activity should also reach a significant
portion of the charity's stakeholders other than its
current or prospective donors, or clearly exhibit greater
emphasis on helping beneficiaries than on obtaining
financial support.
158
Charity versus fundraising
“Note:
The CRA generally does not consider raising
awareness of a charity's mandate or work, when it is
carried on in conjunction with fundraising through noncharitable third parties (such as for-profit
telemarketing, direct mail or canvassing companies),
to qualify for the exception.
So, charities must allocate costs for such activities to
fundraising expenditures.”
159
Ratio of fundraising cost / fundraising revenue
• CRA has established general guidance on fundraising
costs.
• Fundraising ratios alone are not determinative in
assessing whether a charity’s fundraising complies with
the requirements of the guidelines in this guidance.
160
Ratio of fundraising cost / fundraising revenue
• If costs are under 35% of revenues:
“Unlikely to generate questions or concerns”
• Costs that are 35% or higher:
“The CRA will examine the average ratio over recent years
to determine if there is a trend of high fundraising costs.
The higher the ratio, the more likely it is that there will be
concerns and a need for a more detailed assessment of
expenditures.”
161
Ratio of fundraising cost / fundraising revenue
• If costs are higher than 70% of revenues:
“This level will raise concerns with the CRA. The charity
must be able to provide an explanation and rationale for
this level of expenditure to show that it is in compliance;
otherwise, it will not be acceptable.”
162
Ratio of fundraising cost / fundraising revenue
Other factors
•
The size of the charity (which might impact fundraising
efficiency).
•
Causes with limited appeal (hard to raise funds).
•
Donor acquisition and planned giving campaigns
(where financial returns are realized in later years).
163
Best practices:
•
•
•
•
Prudent planning processes
Appropriate procurement processes
Good staffing processes
Ongoing management and supervision of fundraising
practice
• Adequate evaluation processes
• Use made of volunteer time and volunteered services or
resources
• Disclosure of fundraising costs, revenues, and practice
164
Areas of concern:
• Sole-source fundraising contracts without proof of
market value.
• Non arm’s length fundraising contracts without proof of
market value.
• Fundraising initiatives or arrangements that are not well
documented.
• Fundraising merchandise purchases that are not at
arm’s length, not at fair market value, or not purchased
to increase fundraising revenue.
165
Areas of concern:
• Activities where most of the gross revenues go to
contracted non-charitable parties.
• Commission-based fundraiser remuneration or payment
of fundraisers based on amount or number of donations.
• Total resources devoted to fundraising exceeding total
resources devoted to program activities.
• Misrepresentations in fundraising solicitations or
disclosures about fundraising or financial performance.
166
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167