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Major Changes Proposed!

S-222 would allow charities to transfer resources to non-qualified donees, eliminate all references to “own activities” and instead require charities to take reasonable steps to ensure the resources will be used exclusively for charitable purposes

On February 8, Bill S-222 An Act to Amend the Income Tax Act (use of resources) was introduced in the Senate. It proposes to significantly change how charities are allowed to use their resources by allowing transfers to non-qualified donees.

It would accomplish this through a few key changes.

1.Permit resource transfers by redefining charitable activities

“Charitable activities” would be redefined to include making resources available to non-qualified donees. Resources could be made available through grants, gifts or transfers through any form of collaboration so long as it furthers a charitable purpose and reasonable steps are taken to ensure the resource are used exclusively for that charitable purpose.

Right now, the definition of “charitable activities” simply clarifies that public policy dialogue and development activities are considered charitable activities when they further a charitable purpose.

2.Remove the “own activities” test

The Income Tax Act (ITA) currently requires that charitable organizations devote all of their resources to charitable activities carried out by the organization itself. The “own activities” test is how the Canada Revenue Agency (CRA) determines whether or not a charity is doing that. To meet the own activities test, a charity has to either directly carry out its own activities or exercise sufficient direction and control when working with an intermediary (non-qualified donee).

The Bill would remove the own activities test by deleting all references to charitable activities being “carried on by the organization itself,” “carried on by it,” and other similar phrasing. The definition of “charitable organization” is a good example.

Current (s.149.1(1) ITA)Proposed
Charitable organization … means an organization … (a.1) all the resources of which are devoted to charitable activities carried on by the organization itselfCharitable organization … means an organization … (a.1) all the resources of which are devoted to charitable activities carried on by the organization itself

Another example comes from one of the grounds the Minister can use to revoke an organization’s charitable registration:

Current (s.149.1(2)(b)(i) ITA)Proposed
The Minister may … revoke the registration of a charitable organization … where the organization   (c) makes a disbursement by way of a gift, other than a gift made  

(i) In the course of charitable activities carried on by it
The Minister may … revoke the registration of a charitable organization … where the organization   (c) makes a disbursement by way of a gift, other than a gift made  

(i) in the course of charitable activities carried on by it

3.Require reasonable steps

If a charity doesn’t have to carry out its own charitable activities and doesn’t have to exercise direction and control over an intermediary, what does a charity have to do?

A charity would have to take “reasonable steps to ensure its resources are used exclusively for charitable purposes.” This standard would be met if

  • Before providing resources to a non-qualified donee, the charity collects information, including information about:
    • the identity of the recipient
    • the experience of the recipient
    • the activities of the recipient
  • When providing resources to a non-qualified done, the charity
    • Establishes measures, or
    • Imposes restrictions or
    • Conditions, or
    • Otherwise takes actions

Both categories of information must be sufficient to satisfy a reasonable person that the resources will be used for a charitable purpose.

It is proposed that the Bill would come into force two years after it receives royal assent (i.e. is passed by the House of Commons and the Senate). It is also proposed that the Minister of National Revenue would have to undertake a review of the changes within 5 years of its coming into force, with one year to complete and present the report to Parliament.

Discussion

This Bill has the potential to massively change how charities function. Of course, with any significant change, there will also be a lot of questions.

For example, one big question that the legislation does not answer is how the proposed reasonable person standard will be applied and interpreted by CRA in its administrative guidance. We have seen that “carried on by the organization itself” led to “own activities” and “direction and control.”

While the categories of information needed to satisfy the reasonable person are set out in the proposed legislation, these will need to be fleshed out into tangible, practical guidance for charities. To that end, we’d love to hear from you. Does this change help you? In what ways? Does this change challenge you? In what ways? What guidance do you think would be helpful to understanding the reasonable person standard? What parameters should or could be built on the framework set out in the Bill? And taking a step back, are there amendments that should be considered in the Bill?

For an overview and background of the Bill, and an outline of support for the changes, you can check out Carters Charity & NFP Law Bulletin (24 February 2021). And for a different take on the Bill and the current direction and control framework, you can check out this post from Blumberg’s Canadian Charity Law blog.

We’ve created a space for member discussion in our online community, The Green. It’s open and ready for visits and conversation – we look forward to hearing from you!

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.

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