The perplexing guidance: Forewarned is forearmed

This is part three in a series discussing the new qualifying disbursement (a.k.a. granting) rules for Canadian charities. In the past, Canadian charities had to conduct their “own activities" wherever in the world that may have been. Practically, this meant that they had to keep control and direction over the use of their resources. In June 2022, Parliament passed rules allowing charities to support the activities of other organizations as long as they were also in pursuit of the Canadian funder’s objects. In December 2023, CRA published its final position with respect to how charities should implement these new rules. Our previous pieces in the series (see below) looked at the nature of the required risk analysis, here we will discuss some of the more practical elements of the risk analysis.

Anybody who has read the new CRA ‘guidance’ on Qualifying Disbursements¹ can be excused for not feeling particularly guided. The document is more of a window to the attitude CRA auditors will take on audit rather than a roadmap for charities on how to best implement the new rules. As a matter of practice, auditors come into the charity’s office (usually) many years after the events that they are auditing have occurred. With the exception of an oral explanation, this effectively forces them to rely on documentary evidence to determine compliance with the law.

When reviewing documents auditors weigh the persuasiveness of the evidence they see and reject evidence they deem uncompelling or irrelevant. Given that the auditor is extremely important in making the decision as to sanction, the fact that an auditor could be unconvinced by the evidence is clearly of vital importance to passing the audit. The answer to this problem is meticulous planning before getting involved in an international transaction. Practically this requires the charity to arm itself with the necessary evidence and a defensible analysis to illustrate its compliance with the law.

The CRA believes that a charity must undertake a risk analysis prior to making a grant. This is not explicitly mentioned in the law and so we have no outside source to rely upon for an explanation of its requirements except the CRA’s own pronouncements². The CRA itself makes clear that the factors to be considered in the risk analysis are non-exhaustive and the guidance is silent on the weighing of the particular factors. Indeed, the guidance does not even discuss how the analysis should be conducted nor provide a template. Unfortunately, this gives the CRA incredible latitude to assert that the risk analysis is insufficient – either in evidence or analysis.

In our many years of experience with charities operating abroad, the CRA often levies the allegation that there is insufficient control and direction. In part, this is because one can always make that allegation. The same situation exists with the new rules. Given that the CRA has itself stated that the list of factors to consider is non-exhaustive, and it has not provided any type of sample analysis - we have to begin with the assumption that the CRA will expect greater evidence and more analysis rather than less.

The CRA has already listed the minimum factors it expects to see in a risk analysis, so keeping in mind that the name of documents may change based on the location one would expect, at a minimum, the following:

1. A grant proposal with a detailed description of the proposed grant.
2. A description of the potential grantee particularly its experience with delivering results related to the purpose of the grant.
3. A description of the grantor’s prior experience with the potential grantee – if any. This could also include personal reflections of a representative of the charity who gleaned experience from other work and third-party references.
4. Constituting documents of the grantee organization
5. Copies of any trade name or alias documents.
6. Organizational chart of the grantee to understand who controls the money.
7. Certificate of good standing of grantee organization with the relevant foreign government (both corporate status and potentially ‘charitable’ status, and anything else that may be relevant).
8. Any legal documentation (such as bylaws, resolutions or banking documents) that illustrate legal control over the spending of funds.
9. Third-party documentation on the political stability and reliability of the banking sector. Further documentation as required on the region of operation if the country is generally unstable.

In addition to the information necessary to document the minimum elements raised by the CRA, a fully considered risk analysis report may wish to include:

1. Documentation on internal controls to show that funds are unlikely to be misappropriated by the grantee.
2. A declaration of any personal relationships between grantor employees / volunteers and recipient individuals.
3. Any information such as bias which could undermine the reliability of the analysis.
4. Information to indicate the recipient is likely to complete the deliverables. For example:
   1. Newspaper articles on the prospective grant recipient.
   2. Pictures of the prospective recipient’s operations.
5. Any additional context-specific information

Unfortunately, it is always open to a critic (or auditor) to make the allegation that the file has insufficient evidence. There is no bright line to indicate how much evidence is enough evidence, but at the very least there must be something to justify the charity’s forwarding of funds to the grantee.