The recently tabled Budget Implementation Act, 2022, No.1 (BIA) and its accompanying Explanatory Notes Relating to the Income Tax Act and Other Legislation show that Budget 2022 will take a very different approach than S-216.
Procedural sidenote: the BIA was preceded by a Notice of Ways and Means Motion. This motion “seeks to approve the budgetary policy of the government” and is a required step before taxation legislation can be read (introduced) for the first time.
Bill S-216 would amend the ITA to eliminate the “own activities” test. It aims to end the requirement that charities have to exercise “direction and control.” Instead, charities would have an obligation to take “reasonable steps” to ensure resources are used for only charitable activities.
The BIA, in contrast, does not eliminate “own activities” from the ITA. Instead, it adds a new category, called “qualifying disbursements.” In brief, qualifying disbursements are resource transfers from a charity to a non-qualified donee that are subject to mandatory conditions.
How does all of this work? Let’s walk through the definitions, conditions and distinctions.
What is a Qualifying Disbursement?
“Qualifying disbursements” are disbursements or gifts or resources from a charity to a “grantee organization” that are subject to certain conditions:
- The disbursement furthers a charitable purpose of the charity
- The charity ensures the disbursement is exclusively applied to charitable activities in furtherance of a charity purpose of the charity
- The disbursement meets prescribed conditions
What is a Grantee Organization?
A “grantee organization” is “a person, club, society, association or organization or prescribed entity, but does not include a qualified donee” [emphasis added].
Qualified donees are organizations that can issue official donation receipts. That usually means registered Canadian charities but also includes registered entities like journalism organizations, municipalities, amateur athletic associations.
By default, then, a grantee organization is not a registered charity.
What are the Prescribed Conditions?
The prescribed conditions that make a disbursement, gift or resource a “qualifying disbursement” are listed in a new section of the Income Tax Regulations (3703).
All of these conditions must be met:
Written agreement that includes:
- Terms and conditions, including a requirement that all resources be used exclusively for charitable activities in furtherance of a charitable purpose
- Description of activities the grantee will undertake
- Requirement that resources not used for the intended purpose be returned
- Requirement that the grantee make period reports (at least annually) with details on the use of resources, compliance with terms and conditions, and progress made
- Requirement that the grantee provide a final written report, including a summary of results achieved, how resources were used, evidence that resources were used for intended purposes
- Requirement that books and records be given to charity or kept by grantee for minimum 6 years
- Requirement that books and records for disbursement be made available to the charity to inspect, audit, examine or copy
Before making disbursements, the charity makes inquires to be reasonably assured that the grantee will comply with all the requirements of the written agreement; this includes reviewing the grantee organization (and it’s directors, officers and like officials):
- Prior history
- Areas of expertise
Charity provides ongoing monitoring, including
- Receiving periodic reports
- Verifying the disbursement is being applied for its intended purpose
Charity receives, reviews and approves the final report
Charity undertakes adequate remedial action when it becomes aware that any part of the agreement is not being complied with
What are the Reporting Requirements?
Another new regulation (3704) adds to the existing reporting requirements in ITA s 149.1(14). As part of their public information return, charities have to report:
- The name of each grantee organization that received more than $5000 from the charity
- The purpose of each reported qualifying disbursement
- The total amount disbursed by the charity to each named grantee organization
What else is Different?
The BIA would change the definition of charitable purposes.
- Current definition: “charitable purposes includes the disbursement of funds to a qualified donee”
- BIA definition: “charitable purposes includes making qualifying disbursements”
Bill S-216 would not change anything related to charitable purposes but focuses instead on charitable activities.
- S-216 definition of charitable activities adds a new subsection to include: “making resources – including grants, gifts or transfers – available through transactions, arrangements or collaborations of any kind whatsoever in furtherance of a charitable purpose to a person that is not a qualified donee if those resources are made available by a charity that takes reasonable steps to ensure that those resources are used exclusively for a charitable purpose in accordance with subsection (27)”
The BIA would keep the terminology of “own activities” whereas Bill S-216 focuses on removing that phrase from the definition of charitable organization.
- Current: charitable organization is one where (a.1) all the resources … are devoted to charitable activities carried on by the organization itself
- BIA: charitable organization is one where (a.1) all the resources … are devoted to charitable activities carried on by the organization itself or to making qualifying disbursements.
- S-216: charitable organization is one where (a.1) all the resources … are devoted to charitable activities.
What Will Happen to S-216?
If S-216 is passed and receives royal assent before (or on the same day as) the BIA receives royal assent, S-216 is deemed never to come into force and is repealed.
How will this Impact Charities?
Right now the BIA is at second reading in the House of Commons and is being pre-studied by the Senate. Assuming the BIA passes in its current form it will mean charities can make qualified disbursements to non-qualified donees without the formal requirement of it being the charities “own activities.” In other words, charities can give funds to non-charities.
However, the conditions that have to be met are, in essence, the same as those under the “own activities” / direction and control requirements. Some have argued that the conditions for qualified disbursements are actually more onerous than under “own activities” /direction and control: Robert B. Hayhoe, Stephen Hsia, “The new qualifying disbursement rules: An improvement?” (2 May 2022), Miller Thomson Social Impact Newsletter.
Others have expressed concern that the new “qualifying disbursement” changes “don’t really appear to take us where we need to go”; see Aidan Macnab, “Ottawa proposes changes to how charities can fund third-party organizations”, Canadian Lawyer (3 May 2022).
The BIA changes raise a number of questions: will the conditions be too onerous? Will the reporting requirements add to the administrative burden? Will having a third category for the use of resources be unnecessarily complex and confusing? Will the distinction between “qualifying disbursements” and “own activities” though intermediaries be one without difference? Will it muddy the waters and expectations as between the two?
CCCC is concerned that these changes will indeed create confusion and that the changes, at best, will not decrease administrative burdens and at worst, will increase those burdens. The changes proposed in the BIA are not the changes proposed in Bill S-216. We support the aim of Bill S-216 and are concerned that the BIA will not effectively accomplish those goals.
One thing is clear – it’s too early to definitively state whether the BIA will actually make positive changes. We’ll be watching closely.
Looking for More?
For more information on Bill S-216, see
- Update: Bill S-216 on Direction and Control (3 March 2022)
- 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)
For more information on direction and control, see our Resource Page in CCCC Knowledge Base. And for members interested chatting about the topic, you can head over to our dedicated discussion space in The Green.
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.