We’re continuing our look at the Special Senate Committee on the Charitable Sector’s report, Catalyst for Change: A Roadmap to a Stronger Charitable Sector. This installment will look at the policies and guidance that could be reviewed as a result of the Committee’s recommendations.
In Part One, we looked at the context of uncertainty surrounding the report; there is no guarantee the recommendations will be pursued. In Part Two, we looked at recommendations about donations and legislation. Part Three considered potential reporting requirements for charities.
Canada Revenue Agency (“CRA”) gives information to charities in the form of guidance, summary policies, policy commentaries, and policy statements. It is helpful to know and understand the regulator’s point of view, even if charities find the information unwieldy or the policies restrictive.
One such guidance document is Canadian registered charities carrying out activities outside Canada, CG-002. CG-002 explains the CRA’s interpretation of the Income Tax Act(“ITA”) provision that to be a charitable organization, all resources must be “devoted to charitable activities carried on by the organization itself” or through grants to qualified donees (more on that later).
The focus is whether the charity is carrying on its “own activities.” It can do this either by using its own employees or through an intermediary, always maintaining “direction and control.” When working with an intermediary, a charity is expected to direct and control projects by, for example, deciding how and where an activity is carried out, its goals, beneficiaries, budget, start and end dates. To demonstrate the charity is maintaining direction and control, CG-002 lists items the charity should have in place: a signed and implemented written agreement, a detailed description of the activities, ongoing instructions to the intermediary, systems for monitoring and supervising, periodic transfers based on progress and evaluation, and segregated funds, books, and records. 
Without going into further detail, one can already foresee some of the many challenges that arise in this context: administration, working within international networks, inconsistency with development policy that is focused on partnership and empowerment for local leaders and communities. Not surprisingly, all of these concerns were reflected in the report.  Recommendation 30 therefore directs CRA to revise CG-002 with the intention of shifting from a “direction and control” test to an “expenditure responsibility test”.
The expenditure responsibility test stems from the US model. It requires granting organizations to exert all reasonable efforts and to establish adequate procedures to ensure the grant money is spent on its intended charitable purpose, to obtain full reports from the recipient on how the funds are spent, and to make full and detailed reports to the US regulator. Reasonable efforts include asking about the identity and history of the grantee, and having a written agreement, reporting mechanisms and records.
What is the difference? The key difference is that Canadian charities currently have to exercise ongoing operational control, setting parameters on “significant issues” and demonstrating a real, ongoing, active relationship with any intermediary. Even having a director, volunteer or employee work for both the charity and intermediary “is not likely to be enough” to show direction and control over the use of its resources. Moving from direction and control to expenditure responsibility would ease restrictions but maintain transparency and accountability.
In a similar vein of easing restrictions, the report also recommends that CRA develop, implement and evaluate a pilot project allowing registered charities to make gifts to non-qualified donees in limited circumstances. The gifts would be subject to careful monitoring and used exclusively for charitable purposes. Qualified donees was the topic of another recommendation, that the Advisory Committee on the Charitable Sector (“ACCS”) review the policy considerations surrounding qualified donee status with “a view to establishing a principle-based framework for new categories of qualified donee.”
Based on witness’ concerns about permissible business activities lagging behind the times, the current regime’s failure to address technological advances, a decline in donor base, and increasing demand for charitable services, the report recommends CRA revisit CPS-019, What is a Related Business to “provide greater clarity on permissible revenue generation activities” with a particular focus on new technological opportunities.
Out of that discussion, another pilot project was recommended, this one to consider implementing a “destination of funds” test, giving charities greater latitude to undertake revenue-generating activities. This would be no small change in CRA policy. As the CRA explained in its newsletter upon the release of CPS-019, it had received many comments encouraging a destination of funds test; however, a 2002 Federal Court of Appeal decision held that a business does not become a related business simply because profits are used for charitable purposes or activities.
While there are practical concerns with a “destination of funds” test such as unfair competition with the private sector, one witness pointed to a more fundamental question about clouding the character of charity and the “culture of giving … the choice to share.” For faith-based charities in particular, this is worth further consideration. As Christians, we are called to serve, to sacrificially and generously give, to give not only out of abundance but poverty,  and so let our light shine before others and give glory to God. There are, to be sure, the realities of raising funds and the practicalities of paying bills, but there is something distinct about the heart and hands that serve despite the cost.
In the discussion of policy, taxes, fundraising, and
international agency agreements, let’s not forget our primary purpose and
identity as servants of Christ.
 ITA, RSC 1985 c.1 (5th Supp.), s.149.1(1)
 CCCC has extensive resources on this topic, including a decision tree Contractual Arrangements for Operating Outside of Canada; Charities Handbook sections on Carrying out Charitable Activities Outside Canada, and Direction and Control; discussion on What Overseas Ministries Think of CRA’s Foreign Activity Guidance; sample Agency Agreement; webinar on Foreign Activities; and Bulletin articles on Books and Records for Foreign Activities, CRA’s Guidance on Foreign Activities
 The report also makes reference to an article by Andrew Valentine, “Foreign Activities by Canadian Registered Charities: Challenges and Options for Reform,” The Philanthropist, 21 November 2016 which outlines these concerns, and others, in more detail, along with discussion of many of the proposed solutions mentioned in the Senate report.
 Report, pp.92-97
 Valentine, note 3 at p.3
 CG-002, section 7.5
 Recommendation 31, pp.97-99
 Recommendation 26, pp. 78-80
 Recommendation 29, pp. 88-92
 Recommendation 28, pp.88-92
 CRA, Registered Charities Newsletter No. 17 – Winter 2004 [Archived]; see also CRA Excise and GST/HST News – No. 90 (Fall 2013), “Third Party Fundraising – Income Tax Issues”
 Earth Fund v Canada (Minister of National Revenue), 2002 FCA 498, paras 26-31
 Report, p.90, citing Professor A.Parachin, Evidence (8 April 2019)
 1 Peter 4:10-11, Matthew 20:28, 25:35-40, John 13:12-14, James 2:14-17
 Proverbs 19:17, 2 Corinthians 9:6, Hebrews 13:16, 1 John 3:17
 Mark 12:41-44
 Matthew 5:16
Noteworthy is provided for general information purposes and does not constitute legal or professional advice. Every organization’s circumstances are unique. Before acting on the basis of information contained in this blog, readers should consult with a qualified lawyer for advice specific to their situation.