On November 27, 2020, the Canada Revenue Agency (“CRA”) released updated versions of CG-004, Guidance on using an intermediary to carry on a charity’s activities within Canada, and CG-002, Guidance on Canadian registered charities carrying on activities outside Canada. While the changes to these Guidances are insubstantial, we take this opportunity to set out CRA’s interpretation of charities that further their charitable purposes through intermediaries within Canada, as well as abroad.
Restrictions on how a Charity can use its Resources
The Income Tax Act (Canada) (the “ITA”) allows a charity to operate in only two ways:
- carrying on its own charitable activities; and
- making gifts to qualified donees.
The ITA requires a charity to devote all of its resources, including physical and financial, as well as staff and volunteers, to charitable activities carried on by the organization itself. This requirement is known as the “own activities” test. A charity can meet the own activities test by carrying on its activities through its staff, including volunteers, directors, and employees, or through an intermediary, which is an individual or organization that is a non-qualified donee that is separate from the charity.[1] In addition to carrying on its own activities, a charity can make gifts of money or other resources to a qualified donee, which is defined in the ITA to be an organization that can issue official donation receipts for gifts they receive from individuals or corporations. Importantly, a charity must not act as a conduit.[2] Acting as a conduit contravenes the ITA, and could jeopardize a charity’s registration. All amounts that a charity spends directly carrying on its charitable activities will go towards meeting its disbursement quota,[3] whether the activities were carried on by the charity’s staff or through an intermediary.
Carrying on Activities through an Intermediary
A charity typically works with an intermediary when it is unable to carry on its own activities through its staff. The intermediary usually can provide resources that a charity needs, such as particular skills, knowledge of a region, or specialized equipment. When a charity works through an intermediary, the charity must direct and control the activities conducted on its behalf and the use of its resources. A charity that does not do so risks sanctions under the ITA, such as financial penalties or revocation of its registration.
The Guidance notes that before deciding to work through an intermediary, and periodically throughout the arrangement, a charity should review the status and activities of the intermediary to make sure it has the ongoing capacity to carry on the charity’s activity, and that it will use the charity’s resources as directed by the charity. A charity may consider examining the intermediary’s stated goals or purposes, research its history and reputation, carry out site visits, check references, and consult with project stakeholders.
Common Types of Intermediaries
There are three common types of intermediaries: (1) consultant or contractor; (2) joint venture participant; and (3) co-operative participants.[4]
Consultant or Contractor
A consultant or contractor intermediary is an individual or organization that carries on specific activities on behalf of a charity. A charity often engages a consultant (which the previous version of the Guidance referred to as an “agent”) to act as its intermediary when its own staff cannot carry on an activity. It may hire a contractor to provide goods or services. In these situations, a charity usually exercises direction and control through an agreement with the consultant or contractor.
Joint Venture Participant
A joint venture participant is an organization that a charity works with to carry on a charitable activity. The charity and one or more joint venture participants pool their resources to accomplish an agreed-upon goal under the terms of a joint venture agreement. This type of intermediary differs from a consultant or contractor intermediary in that the charity does not rely entirely on the joint venture participant to carry on the charity’s activities, but rather the charity works with the joint venture participant to conduct the charitable activity. A charity must be able to show that its share of decision-making authority and responsibility over a venture allows the charity to direct and account for how its resources are used.
Co-operative Participants
A co-operative participant is an organization that works side-by-side with a charity to complete a charitable activity. The charity and the other organization(s) each take on responsibility for specific parts of the project only. This type of intermediary differs from a joint venture participant where participants pool their resources and share responsibility for the project as a whole.
Direction and Control
To meet the own activities test, when a charity transfers resources to its intermediary, it must direct and control the use of those resources. That is, the charity must make decisions and set parameters on significant issues related to the activity on an ongoing basis, such as:
- how the activity will be carried on;
- the overall goals of the activity;
- the area or region where the activity will be carried on;
- who will benefit from the activity;
- what goods and services the charity’s money will buy; and
- when the activity will begin and end.
A charity can delegate the responsibility for day-to-day operational decisions to an intermediary, but the charity must be able to intervene in any decision.
In order to show direction and control over the use of a charity’s resources, CRA recommends that charities:
- create a written agreement, and implement its terms[5];
- communicate a clear, complete, and detailed description of the activity to the intermediary;
- monitor and supervise the activity, including requiring regular reporting;
- provide clear, complete, and detailed instructions to the intermediary on an ongoing basis;
- make periodic transfers of resources to the intermediary, based on demonstrated performance; and
- arrange for the intermediary to either keep the charity’s funds separate, or account for it separately in its books and records.
A charity must record all steps taken to exercise direction and control as part of its books and records. This allows CRA to confirm that the charity’s resources were used to carry on its own activities.
The CG-002 Guidance specifically changed all references to “capital property” in previous versions to “real property” in this update. These references relate to written agreements between a charity and intermediary where real property is acquired in foreign jurisdictions for the purpose of the activities undertaken which the charity contemplates transferring to a non-qualified donee.
Monitoring and Supervising
A charity which operates outside of Canada must also demonstrate direction and control through consistent monitoring and supervision of its intermediary. In the CG-002 Guidance CRA recognizes monitoring and supervision as the process through which a charity receives timely and accurate information from its intermediary in the form of regular reports. The reporting methods do not need to be uniform for all intermediary arrangements, but the depth of information must reflect the nature and complexity of the activities which the intermediary is undertaking on behalf of the charity. New to the updated CG-002 Guidance is the reference for videoconferencing records of communication being a viable option for charities and intermediaries to consider as part of appropriate reporting.
Books and Records
Charities must maintain adequate books and records when working with an intermediary. When the CRA considers whether a charity’s books and records are adequate, it looks at the risk of non-compliance for the particular activities. The risk level may relate to the location, the activity, or the type of resources. A charity’s books and records must therefore allow the CRA to check whether:
- the charity’s funds are being spent on its own activities or on gifts to qualified donees;
- the charity is directing and controlling the use of its resources;
- revenues, including charitable donations, can be verified; and
- the charity’s purposes and activities continue to be charitable.
The books and records should be sufficiently detailed to allow CRA to verify that all of the charity’s resources have been used for its own activities. Intermediaries must maintain books and records for the charity which are separate from its own. This includes maintaining separate financial records. The CG-002 Guidance clarifies that the intermediary does not need to maintain the charity’s funds in a separate bank account, but instead must only ensure that it maintains separate accounting records for the charity which are separate from its own. At a minimum, the intermediary’s books and records should contain enough detail to ensure the charity’s funds can always be tracked and accounted for. There is not a requirement for the intermediary to maintain the charity’s funds in a separate bank account.
The CG-002 Guidance also clarifies that a charity should make every reasonable effort to get original source documents from its staff and intermediaries. Charities should require its staff and intermediaries to collect receipts for purchases in order to document its expenditures and provide these documents to the charity. CRA acknowledges that it may not always be possible or practical to receive all original source documents and therefore provides direction in this updated Guidance that it will usually accept copies of original documents – including electronic scanned copies – as long as proper imaging practices are followed.
Complying with Laws Internationally
In Guidance CG-002, CRA confirmed that Canadian charities must always comply with Canadian charity law and the ITA. CRA does not require charities to comply with the laws of foreign jurisdictions where they operate. This said, CRA clarifies that Canadian charities are not exempt from the laws of other countries where it operates and should make reasonable efforts to understand what these laws are and how they are enforced before undertaking activities there.
This updated Guidance confirms that all Canadian charities are still required to comply with Canada’s anti-terrorism laws.
Conclusion
Miller Thomson LLP recommends that existing charities that use an intermediary to carry on their activities, as well as organizations that are considering charitable registration with the intention to carry on activities through an intermediary, should review both of these Guidances carefully. Take the time to consider how CRA’s views impact your particular organization. We would be pleased to assist you in applying these Guidances to your circumstances.
[1] There are limited circumstances in which a charity may transfer charitable goods (i.e., not money) to a non-qualified donee and meet the own activities test.
[2] A conduit is a charity that funnels its resources to a non-qualified donee without direction or control.
[3] The disbursement quota is the minimum amount a charity must spend each year on its own charitable activities or on gifts to qualified donees.
[4] A charity can make other arrangements to carry on its own activities through an intermediary, as long as the charity directs and controls the use of its resources.
[5] Where a charity spends $5,000 or less (which is an increase from the previous versions of each of the Guidances being $1,000 or less) on a one-time activity, the complications of developing a full, formal, written agreement may outweigh the benefits, and so other documents might be enough to show ongoing direction and control over the intermediary’s use of resources.
