On July 26, CRA released CG-014, an updated Guidance on community economic development activities and charitable registration. The new Guidance replaces CRA’s former published policy on the subject, RC4143, which was originally released in 1999. In the 13 years since the original policy statement was published there have been dramatic changes in the range of economic development activities conducted by registered charities, and the sector has lobbied CRA for some time to update its policies in this area. The new Guidance provides additional clarity on CRA’s current policies and in some cases expands CRA’s position on when certain forms of activities will be considered charitable.
The Guidance covers much of the same territory as the former policy statement. It states that while community economic development is not a charitable purpose per se, development activities may be found to further a recognized charitable purpose (e.g., relief of poverty). It then reviews various categories of development activities – including employment training, the provision of individual development accounts, loans and loan guarantees to eligible beneficiaries, etc. – and sets out CRA’s views on when the activity will be found to be charitable.
An area of particular focus in the Guidance is “program related investments”. PRIs, broadly speaking, are investments (as opposed to outright grants or expenditures) that directly further an organization’s charitable purpose. While a PRI may involve a financial return to the investor charity, the purpose of the investment is not to earn a financial return but to further a charitable goal. CRA cites examples of program-related investments that include:
- share purchases in a corporation that operates a commercial apartment complex but has agreed to provide a set number of units to low income individuals at reduced rates;
- low-interest loans made to a not-for-profit entity that provides job training to unemployed individuals or those facing imminent unemployment, pursuant to an agreement with the investor charity; and
- lease of a building owned by a charity to an arm’s length organization at less than fair market value, for use by the lessee to teach language skills to help students develop skills necessary for employment, pursuant to an agreement with the investor charity.
In each example, the investment is made at less than “market” rates. The investor charity seeks to further a charitable rather than or in addition to a financial purpose through the investment. Also, the organization in which the investment is made in each example is a non-qualified donee.
The most significant change in the Guidance is its recognition that charities can make PRIs in non-qualified donees. CRA addressed the subject of PRIs in RC4143. However, it stated that because PRIs typically involve investments at less than market rates – which would confer a benefit on the entity in which the investment is made – charities could only make PRIs in entities that are qualified donees. This effectively limited the entities in which PRIs could be made to other Canadian registered charities. CRA previously suggested that investments in non-qualified donees – including non-profit organizations and even commercial organizations carrying out social purpose programs or businesses – could only be made at market rates.
In the new Guidance, CRA states that charities are permitted to make PRIs in non-qualified donees at less than market rates of return provided that the investor charity retains direction and control over the use of its investment. In this way, CRA is adopting an approach to PRIs in the new Guidance that is similar to the approach it takes the use of non qualified donee intermediaries under CRA’s policies related to international and domestic charitable activities. Indeed, CRA cites these Guidance as providing detail on the elements of control – i.e., written agreements providing instructions on the use of the investment, reporting mechanisms to confirm proper use, etc. – that must be shown in order for a PRI in a non-qualified donee to be acceptable. CRA also confirms that the PRI must not confer an excessive private benefit and must include an “exit mechanism” allowing the charity to withdraw from the PRI or turn it into a normal market rate investment when and if the holding of the investments ceases to achieve the organization's charitable purpose.
CRA notes that PRIs may take the form of loans, loan guarantees or share purchases. CRA also notes that specialized entities that facilitate the making of PRIs (for example, a property manager that leases and manages low cost housing properties owned by a charity) may themselves qualify as registered charities. CRA also provides detail on how PRIs are to be accounted for in a charity's books and records and on its annual information returns.
CRA’s revised approach to PRIs is welcome. By clarifying its view on when charities can make PRIs in non-qualified donees, CRA is providing greater certainty to organizations in our communities. While requiring that the charity maintains direction and control over the use of the investment may be cumbersome and some may question the need for it, in effect, CRA has moved closer to the “expenditure responsibility” concept used in the United States. Under this approach, charities may make PRIs to non-charities provided that steps are taken to ensure that the recipient applies the funds for charitable purposes. This approach allows for greater flexibility in the types of social purpose investments that a charity can make, and enables charities to leverage the services of a wider range of organizations in pursuing development goals.
We will continue to monitor the application of this Guidance in practice to determine the parameters of the new policy and CRA’s treatment of PRIs in particular. While these comments are made in the context of economic development work, all charities should review the new Guidance carefully to understand CRA’s most current positions. Miller Thomson’s lawyers would of course be pleased to assist any organizations considering PRIs in their work.