Ottawa proposes changes to how charities can fund third-party organizations

The Federal Government has proposed changes to make it easier for charities to grant money to third-party organizations in Canada and abroad.

Deputy Prime Minister and Minister of Finance Chrystia Freeland tabled Bill C-19, the Budget Implementation Act, 2022, for first reading on Apr. 28. Two charity and non-profit lawyers who spoke with Canadian Lawyer say they are disappointed that the proposed legislation failed to eliminate a requirement that charities must have “direction and control” over third-party organizations to whom they provide grants.

The federal government has proposed to amend the Income Tax Act to allow charities to provide funding to separate organizations which are not qualified donees (generally registered charities), such as a third-party organization in charge of a project which serves the charity’s objectives. The Act currently requires that charities devote all their resources to activities the organization carries out, known as the “own-activities” test. When using third parties, charities must “maintain sufficient control and direction of the activity such that it can be considered their own,” said a Department of Finance document detailing the budget’s tax measures.

Under the current rules, when a charity funds a project run by an organization which is not a qualified donee, the two entities must agree that any activity the recipient carries out is formally an activity done by the charity, says Terrance Carter, a lawyer who practises charity and non-profit law.

The new proposed rules will allow charities to make disbursements to organizations which are not qualified donees, provided the organization meets specific accountability measures. To qualify, the money paid must further the charity’s charitable purposes, and the charity will have to ensure the funds are ultimately applied to charitable activities. The accountability requirements include a pre-grant inquiry, a written agreement between charity and third party, monitoring and periodic reports, a final report and public disclosure of grants above $5,000.

The budget’s proposals also maintain the option to make disbursements under the “own activities” regime, says Carter, managing partner of Carters, an Orangeville, Ont.-based firm with offices in Toronto and Ottawa.

“This is a topic that has been of great interest to charities for a long time,” says Susan Manwaring, a partner at Miller Thomson who advises social enterprises, charities and non-profits and leads the firm’s social impact group.

The current rules are “complicated and quite onerous” and counter to how Canada does international development work, says Manwaring. “It’s similarly unattractive if a Canadian charity – particularly a settler-based Canadian charity – is working with an Indigenous organization and suggesting they’re going to direct and control the activity. It’s quite problematic.”

Whether working with an organization from an Indigenous community or an organization overseas in Africa, those situations are seen as “very paternalistic, colonial, patronizing relationships,” says Carter. He says that the sector views the practice as inconsistent with international standards and diverges with practice in the U.S. and the UK.

“The fact that this government has introduced a change – on its face – seems helpful because we really need to change these rules,” says Manwaring. Unfortunately, the proposed changes fail “to move away from direction and control and open up the work that can be done into a more realistic structure,” she says.

“It was good that we’ve got the government’s attention. It’s unfortunate that the changes being proposed don’t really appear to take us where we need to go.”

In November, Senator Ratna Omidvar proposed Bill S-216, An Act to amend the Income Tax Act (use of resources of a registered charity). The bill completed first reading in the House of Commons on Feb. 3. The bill would eliminate the own-activities requirement and allow charities to work with unqualified donees through a system where the charity would provide evidence of what the third party would do, says Carter. Despite some critics, he says that Bill S-216 had “phenomenal support” from the charitable sector.

Bill S-216 is more in line with a “21st century way of working with partners,” says Manwaring. The bill’s approach is more respectful and involves accountability but not the “direction and control” contained in the budget.

While Carter would have preferred to get rid of the own-activities regime completely, the budget’s proposals might improve the current system. “I would have preferred the [Bill] S-216 model as proposed by Bill S-216, but it looks like Finance might be coming up with something to consider. However, we will have to see details of the Budget Implementation Act before determining if what the government is proposing will work or not.” Canadian Lawyer spoke with Carter before the government tabled the Budget Implementation Act for first reading.

After the government tabled the Act, Carter said he was “very concerned about what is contained in the proposed legislation.” He says Bill C-19 fails to eliminate the fictitious “own activity test” and is more reflective of a prescriptive, U.S.-style “expenditure responsibility” regime than a principled “resource accountability” regime, as proposed by Bill S-216.

The rules around disbursements to non-qualified donees help prevent tax avoidance, says Mark Blumberg, a partner at Blumberg Segal LLP who practises non-profit and charity law.

Without rules like this, people could facilitate a scheme in which they donate money to a charity, have the charity transfer the money to their own business in a foreign country, and then collect a donation tax credit in Canada.

“You need to have some rules to say, ‘Wait a second, if money goes into a Canadian charity, we need to have some level of assurance that those funds are going to be used for actual charitable activities.’”

Blumberg says he had concerns about how Bill S-216 would allow such a process to occur. He adds that until the government reveals the CRA guidance, it is impossible to say too much about how these proposals affect Canadian charities working with non-qualified donees.

“I don’t know what these rules will ultimately result in, but I do want to have some accountability and transparency,” he says.