Also known as the Effective and Accountable Charities Act, Bill S-216 would amend the Income Tax Act (ITA) to eliminate the “own activities” test. It would end the requirement that charities exercise “direction and control” and replace it with “reasonable steps” to ensure resources are used for only charitable purposes.
The status of the bill was raised in question period on February 14, 2022, but no clear answer as to the government’s position on the bill was provided.
What is Direction and Control?
What are we talking about when we say direction and control? This term doesn’t even appear in the ITA!
What does appear in the ITA is a definition of “charitable organization.” Among other characteristics, a charitable organization is one devotes all of its resources to either (1) charitable activities “carried on by the organization itself” or (2) gifts to qualified donees.
For a charity to show that it is carrying on charitable activities itself, the charity must exercise direction and control over the funds it spends. Charities can meet the test by using their own staff to carry out their activities or by working through an intermediary. It is usually straightforward to demonstrate direction and control when a charity uses its own staff, volunteers, etc., but it becomes a bit more complicated when intermediaries are engaged to carry out the charity’s activities, particularly when the activities are outside of Canada.
Direction and control means that charities need to have intermediary agreements and exercise operational control over projects. That means there are additional policy documents, protocols, processes, and periodic payment. Pooled funding agreements are basically impossible for Canadian charities unless they can exercise direction and control over the funded activities. That is difficult, if not impossible, when the Canadian charity is not the majority contributor.
Why is S-216 Important?
The current approach to accountability is “costly, inefficient and inconsistent with contemporary values of equal partnership, inclusion and local empowerment” (Senate Debate on December 1, 2021).
At first reading in the House, the purpose of Bill S-216 was enthusiastically summarized by the Member of Parliament as:
…help[ing] charities do their great work around the world. Currently, charities are unfortunately encumbered by significant red tape and bureaucracy. This legislation would go from granular control, where charitable organizations in Canada have to okay nearly every decision of the partners they work with around the world or in Canada, to a system of accountability and transparency that will increase accountability for charities while giving them the autonomy to do their great work.
The move away from direction and control toward resource accountability provides the necessary transparency and flexibility to charities to accomplish their charitable purposes, a change that CCCC supports.
What are the Specifics?
The Bill would make this change in three ways:
- Replace “charitable activities carried out by the organization itself” with “charitable activities” in the ITA
- Expand the definition of charitable activities so that charities that take reasonable steps before using funds will fall within the definition
- Set out what reasonable steps are, including:
- Collect information to ensure resources will be used for charitable purposes (if not a qualified donee)
- Use measures, restrictions or conditions, or other actions to ensure resources are used exclusively for charitable purposes
The bill will be scheduled for second reading in the House of Commons. At that point, most bills are referred to a committee for a thorough review and to receive input from the public. We’ll continue to monitor its process and update you on key developments, including any opportunity to make submissions to committee.
Details on how resource accountability will be determined through CRA consultations after the bill is passed.
Want to Know More?
For more on the Bill, you can check out our past blogs. You’ll see that some of them refer to Bill S-222. Bill S-222 is Bill S-216’s predecessor. Bill S-222 died when the federal election was called, and when the bill was introduced in the new Parliamentary Session it was given a new number, S-216. They are substantively identical.
Bill S-216 on Direction and Control – Different Name, Same Aim (9 December 2021)
What’s Happening with Bill S-222? (30 June 2021)
Bill S-222: From Direction and Control to Reasonable Steps (10 February 2021)
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.