A. INTRODUCTION

Over the past year the Canada Revenue Agency (“CRA”) has been pursuing a new fundraising policy for charities. CRA has stated that the purpose of the policy is “to distinguish between fundraising and other expenditures and clarify how to classify and report activities intended both to raise funds and advance charitable programming.”

I suspect that the unwritten reason for the revised policy may be a response to the public’s concern about issues raised in a series of articles in the Toronto Star. These articles sought to force charities to become more accountable to the public for donated funds and to answer the question: “how much of my hard-earned money is going to the charity and how much to the annoying telemarketer?”

B. THE DRAFT POLICY

The draft policy is found in two separate documents: the Consultation on Proposed Policy and Fund Raising (updated June 2008 – modified October 2008) and the Background Information for Proposed Policy and Fundraising for Registered Charities (June 2008). It is important to keep in mind that, at common law, all activities of a charity must be exclusively charitable. Many feel that, at law, fundraising is not a charitable activity itself and therefore to do so is an exception to the general rule. Accordingly, the policy seeks to provide guidance as to when fundraising has gone too far so that it may lead to a charity losing its registered status.

The draft policy specifically notes that fundraising falling into any of the following categories is prohibited:

1. conduct that is illegal or contrary to public policy;

2. conduct that has a main, prevailing or independent purpose of the charity;

3. conduct that results in excessive or disproportionate gains by individuals or corporations; or

4. a charity not devoting 100% of its resources to charitable ends, since the harm arising from the fundraising outweighs the public benefit (i.e. undertaking misleading fundraising).

Even if fundraising activities fall outside of the prohibited categories, they must still meet certain criteria and be reported annually unless:

1. substantially all of the resources devoted to the activities advance an objective other than fundraising – in this situation, the costs may be allocated to non-fundraising expenditures; or

2. the following four-part test is met:

(a) the main objective is not fundraising;

(b) the activity does not include ongoing or repeated requests, emotive requests, gift incentives, donor premiums or other fundraising merchandise;

(c) the audience is selected for reasons other than ability to give; and

(d) commission-based remuneration is not used.

If the four part test is met, a portion of the expenses can be allocated to non-fundraising expenditures.

C. FUNDRAISING COSTS AS A PERCENTAGE OF FUNDS RAISED

To assist charities in determining whether an amount spent on charitable activities is acceptable, the following grid was created:

(a) rarely acceptable – the activity results in more than 70% of the proceeds being spent on fundraising costs;

(b) generally not acceptable – the activity results in 50% to 70% of the proceeds being spent on fundraising costs;

(c) potentially not acceptable – the activity results in 30% to 50% of the proceeds being spent on fundraising costs;

(d) generally acceptable – the activity results in 20% to 35% of the proceeds being spent on fundraising costs;

(e) acceptable – the activity results in less than 20% of the proceeds being spent on fundraising costs.

The grid is not intended to be interpreted as a formal requirement for all charities. CRA has advised that it will look at extenuating factors when reviewing whether fundraising activities are acceptable.

The following factors are among those to be applied in conjunction with the grid:

1. the charity maintaining a presence of sound fundraising practices;

2. the absence of practices that increase the risk of unacceptable fundraising; and

3. a trend in cost/ratio meeting the conditions of the evaluation grid.

CRA has noted that the grid will not apply to all charities equally. For example, it will not necessarily apply to small charities or those with limited appeal, or to charities that exist to make gifts to other donees or charities who will not show an income return until some time in the future.

D. SUMMARY

Upon closer review of the published fundraising policies, many feel that they create more questions and difficulties than answers. For example:

1. The policy provides very subjective tests that may not assist charities prior to undertaking the fundraising activity when funds raised and fundraising costs are still unknown.

2. The evaluation grid is only an initial tool – even if a charity is onside the grid, the CRA may find it is offside.

3. Different charities can be treated differently (i.e. there is no uniformity).

Perhaps the most concerning issue in respect of the policies is the lack of explanation of how it works with the current disbursement quota. Neither the Background Document nor the Consultation Policy explain the difference between the 80/20 disbursement quota and a 20% permitted fundraising expense ratio.

Everyone who is knowledgeable and/or works in the sector, knows that this is a very difficult area for the management of charities, the directors of charities, CRA, and provincial regulators of charities such as The Office of the Public Guardian and Trustee in Ontario.

CRA has made an attempt to clarify fundraising requirements in the draft policy and no doubt will be making further adjustments in the months to come.

CRA has announced that after further consultation, Fundraising Guidelines for Canadian Charities will be published in its website late in the winter of 2009.