The CRA’s final word on making grants

On December 19, the CRA quietly released the final version of its guidance on the new Qualifying Disbursement regime – titled CG-032 Registered charities making grants to non-qualified donees. The final version comes after a discussion version elicited a wide variety of comments from around the sector and there are some important changes in this new draft. The new guidance cements the CRA’s interpretation of the new laws which were originally passed in June 2022. It is only with the knowledge of the regulator’s interpretation of the provisions that a charity can feel comfortable knowing how its grants would be considered by the CRA.

The original version of the guidance surprised many in the sector with a set of detailed considerations that are not explicit in the law at all. Indeed, it seemed as if the CRA was legislating an entirely new accountability system for charities to judge the risk inherent in a particular grant and the measures expected. The guidance also commented on the CRA's interpretation of the directed donation rules which were passed at the same time as the new grant provisions. We review some of the changes below.

Making grants

The guidance begins by recognizing that the purpose of the new rules is so that a charity can support the grantee’s activities - rather than the previous requirement for a charity to engage in its “own activities”. Moreover, the CRA understands that the charity can take reasonable, flexible and proportionate measures based on the nature of each grant (although this could require both more and less stringency), but the fundamental responsibility on the charity is to exercise due diligence. Indeed, the guidance even defines “due diligence” as being the steps required to meet the requirements of the Act and acknowledges the guidance is only a recommended process (but not mandated). On the other hand, the new provisions in the Income Tax Act do not mention ‘due diligence’ anywhere so one is left wondering about the authority of the CRA’s position and the extent one can use different measures to comply with the law.

That said, the guidance does a better job of explaining the reasons why the CRA considers the entire risk assessment and mitigation procedure a critical element of the law. The law states that a charity must “ensure” that its grant funds are being used for the specific charitable purpose. The CRA has focused on the word “ensure” as meaning that the charity must undertake a wide range of measures to guarantee the funds are used the way they are intended. From there flows many of the CRA's “suggestions”.

While there are a number of factors to consider in assessing a project, there is still no suggestion on how to rank these factors or whether there is one consideration more important than the others. So, all charities, even the smallest will now have to analyse all risks, such as social, economic and political as well as the reputation and capabilities of the particular grantee, and the size and length of the grant, to decide if it is high, medium or low risk and then take appropriate measures.

On the other hand, the CRA does make certain allowances based on the commentary they received. For example, previously a large grant was considered an amount in excess of $25,000. This has now been raised to fifty thousand dollars (an amount that is unlikely to mitigate the concerns of many of the large donors in the sector). Also, a medium-term grant is now one that is two to five years from the previous one to two years. Both of these measures are welcome but do not reflect the reality that the charity sector is huge and varied. What is a large amount for a small church is a small amount for a multinational charity. Nor do we expect that this guidance will be regularly updated to reflect changes in the world.

Finally, there is no comment on the consequences to a charity if does not “ensure” that the funds are used properly, but nevertheless the funds are used properly. In this case, based on the CRA’s understanding of the provisions, it would seem that the charity has failed in its duties and is subject to revocation. Clearly, that is not the intent of the legal provisions, but the CRA’s huge focus on the single word of “ensure” – leads to this awkward conclusion. One would have hoped for some comment on this situation.

There are a number of other editing changes to the document under the heading of the due diligence regime. The most important, because they are specifically required by the law, are suggestions relating to the maintenance of supporting documentation related to the grant. In other cases, examples are added or removed, or particular wording may be changed. These are generally helpful to the sector in that they usually clarify the CRA's position – although the removal of a previously welcome sentence can be worrisome. Among the changes is the definition of “risk” which “…refers to conditions that could compromise the charity’s registration and the public’s trust in the charitable sector”. This is (hopefully) more a statement of the CRA’s concerns then it would be for any particular charity but nevertheless the optics of a donation should be kept in mind when structuring a grant.

Directed donations

The second area of major change involved the discussion of directed donations.

The Income Tax Act also include new provisions which make a charity that accepts a gift with the explicit or implicit condition that it be given by way of grant to a non-qualified donee liable to revocation. An explicit condition is obvious, and the guidance gives a straightforward example. However, it is the use of the term “implicit” which is so ambiguous as to give serious concern as to how a charity can comply with this provision. While the guidance gives a better indication of what the CRA would consider “implicit condition” the ambiguity in the term has allowed the CRA to pick examples of implicit which effectively disallow the entire Qualifying Disbursement mechanism to certain parts of the charity sector. And what the CRA leaves unsaid may make many others wary of providing grants.

The guidance discusses an implicit condition as including (i.e., not limited to) a situation where it is known that if the charity were to make a grant it would make it to a specific non-qualified donee. This would be indicated by reference to an inclusion of the name of a non-qualified donee in its own name or elsewhere in its incorporating documents. There is no legal source for the CRA’s position on this, neither is there any commentary on what happens if the Canadian charity actually makes grants to other groups. On the other hand, the guidance agrees that as long as the charity retains direction and control there would be no concern. So, organizations that do work with a single foreign non-qualified donee can still use the original “own activities” mechanism. But the CRA’s interpretation of these provisions will likely spawn a cottage industry of planning options in order to allow charities access to this ostensibly easier route for funding abroad – without triggering an “implicit” condition.

We expect to be quite busy helping charities navigate these new rules and welcome any questions you may have.

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