The Canada Revenue Agency (the "CRA") has released a new policy guidance, effective July 8, 2010, regarding Canadian registered charities carrying on activities outside of Canada (the "Policy Guidance"). This Policy Guidance updates and replaces previous policy statements issued by the CRA on this topic, and in particular Guide RC4106, Registered Charities Operating Outside Canada.
The Policy Guidance is relevant to all registered charities, not only those carrying on activities outside of Canada, because it provides information on what steps registered charities have to follow when using intermediaries (such as agents or contractors) to carry out charitable activities in Canada or around the world.
The Policy Guidance does not substantively change the CRA's position with respect to the use of intermediaries by registered charities, but it does provides greater detail regarding the CRA's expectations and requirements in this regard, and in this way, it is a useful resource for registered charities to consider when planning their activities on an ongoing basis.
1. What Requirements are Imposed on Registered Charities when working with Intermediaries?
Pursuant to the provisions of the Income Tax Act (Canada), registered charities can only use their assets in two ways:
- in the course of carrying out their own activities; and
- on gifts to qualified donees (i.e., other registered charities and other specified entities).
The Policy Guidance indicates that a registered charity's own charitable activities are those which are directly under the registered charity's control and supervision and for which it can account for any funds expended.
The Policy Guidance provides information on what steps registered charities have to follow when using intermediaries (such as agents or contractors) to carry out their charitable activities in order to ensure that they are in compliance with the requirements of the Income Tax Act (Canada). In brief, the CRA requires that registered charities take all necessary measures to direct and control the use of their resources when carrying out charitable activities through an intermediary.
What registered charities cannot do, pursuant to the provisions of the Income Tax Act (Canada) and the Policy Guidance, is act as conduits to funnel money to organizations that are not qualified donees. To avoid being a conduit, a registered charity must have demonstrable control over its own funds, so that the carrying out of the activity by the intermediary amounts to the charity carrying on its own activity itself.
2. How Can a Registered Charity Use an Intermediary to Carry Out Charitable Activities?
Generally speaking, an intermediary is an individual or non-qualified donee that the charity works with in order to carry out its own charitable activities. Examples include a business hired by the registered charity to deliver a particular service, a non-profit organization engaged by the registered charity to deliver specific charitable programs, or another organization with which the registered charity has pooled its resources in order to complete a project.
The most common forms of intermediaries are: (i) agents (an intermediary that agrees to carry out specific activities on a charity's behalf); (ii) joint venture participants (an organization that works with the charity to carry out a charitable activity); (iii) co-operative participants (an organization that works side by side with the charity to complete a charitable activity); and (iv) contractors (an organization or individual that the charity hires to provide goods and/or services).
Prior to engaging the intermediary, the charity must also ensure investigate its status and activities to ensure that the intermediary has the capacity to carry out the charity's activity and that there is a strong expectation that the intermediary will use the charity's resources as directed by the charity.
3. How Can a Registered Charity direct and control its resources when working with an Intermediary?
In order to ensure it retains direction and control, the Policy Guidance states that the charity must be the body that makes decisions and sets parameters on significant issues related to the activity on an ongoing basis, such as: (i) how the activity will be carried out; (ii) the activity's overall goals; (iii) the area or region where the activity is carried out; (iv) who benefits from the activity; (v) what goods and services the charity's money will buy; and (vi) when the activity will begin and end.
The charity can accept advice from the intermediary and does not have to be involved in every decision with respect to the given activity. However, it does have to retain the power to intervene in any decision. A charity is also able to delegate responsibility for day to day operational decisions to its intermediary. However, the intermediary provide the charity with information regarding the decisions made, so that the charity can ensure that its activities continue to conform to the requirements of the Income Tax Act (Canada).
The Policy Guidance suggests that the nature and number of measures adopted by a charity to ensure that it continues to direct and control the use of its resources should relate to the nature of the activity, including the amount of resources involved, the complexity and location of the activity, the nature of the resources being transferred, any previous experience working with a particular intermediary and the capacity and experience of the intermediary.
4. What Measures Should a Registered Charity adopt to ensure it maintains direction and control over its resources when working with an Intermediary?
The Policy Guidance strongly recommends that registered charities take the following steps when working with an intermediary:
(a) Create a written agreement, and implement its terms and provisions
Written agreements are not legally required but a properly executed agreements do provide good evidence that a registered charity is exercising direction and control over its resources. However, signing an agreement is not enough to prove that a registered charity meets the appropriate test; it must still demonstrate to the satisfaction of the CRA that it has a real, ongoing active relationship with its intermediary. The CRA has indicated that if the amount of resources is relatively minor (i.e., $1000 or less) and the activity is a one-time event, forms of communication other than a formal written agreement may be sufficient. In the Policy Guidance, the CRA has provided examples of the types of terms and conditions that it expects to see in written agreements between registered charities and intermediaries.
(b) Communicate a clear, complete and detailed description of the activity to the intermediary
Before the activity begins, the Policy Guidance indicates that the charity and the intermediary should agree on a clear, complete and detailed description of the activity. The charity should be able to document is exact nature, scope and complexity. The Policy Guidance states that depending on the nature of the activity involved, the charity should be able to provide documentary evidence that demonstrates the following:
- what the activity involves, its purpose and the charitable benefit it provides;
- who benefits from the activity, where the activity is carried on, the expected start-up and completion dates for the activity;
- a comprehensive budget for the activity, including payment schedules, and a description of the relevant deliverables, milestones and performance benchmarks;
- specific details on how the registered charity monitors the activity, the intermediary and the use of registered charity's resources;
- the mechanisms that enable the registered charity to modify the activity, including its discontinuance if the situation requires;
- the nature, amount, sources and destination of income that the activity generates and any contributions that other organizations or bodies are expected to make to the activity.
(c) Monitor and supervise the activity
According to the Policy Guidance, timely and accurate reports enable registered charities to monitor and supervise the activities carried out by intermediaries. Reporting methods can take many forms, including progress reports, receipts for expenses and financial statements, informal communication via telephone or email, photographs, audit reports and on-site inspections by the charity's staff members.
(d) Provide clear, complete and detailed instructions to the intermediary on an ongoing basis
The Policy Guidance indicates that registered charities should ensure that they engage in a process of providing any necessary additional instructions or directions to intermediaries on an ongoing basis. Such instructions should be provided by means of written communication whenever possible.
(e) Make periodic transfers of resources, based on demonstrated performance
Funds should be transferred from the registered charity to the intermediary in instalments so that the registered charity can monitor the intermediary's performance.
A registered charity should retain the right to discontinue transferring funds to the intermediary and have unused funds returned if it is not satisfied with the intermediary's carrying out of an activity and/or its reporting or other obligations with respect to the registered charity.
(f) Record all steps taken to exercise direction and control over its resources
This information should be kept as part of the registered charity's books and records in order to verify that all of the registered charity's resources have been used for its own activities.
(g) For agency relationships, segregate funds as well as books and records
A registered charity must take steps to ensure that its own activities are kept separate from those of the intermediary. When a registered charity enters into an agency agreement, any funds transferred by the registered charity to the intermediary should be kept by the intermediary in a separate bank account. Such funds should only be used by the intermediary when authorization is given by the registered charity or certain enumerated benchmarks are met. The intermediary should also keep separate books and records for such segregated funds.