This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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In Canada, registered charities operate under strict regulations governed by the Income Tax Act (Canada) and monitored by the Canada Revenue Agency (CRA). A key feature of Canadian charity law is the concept of “direction and control,” which limits how registered charities can distribute funds, particularly to non-qualified donees. This article explores the framework and challenges surrounding grants to non-qualified donees, recent changes in the law, and best practices for charities navigating this complex area.
What Are Qualified and Non-Qualified Donees?
A qualified donee is an organization recognized under the Income Tax Act (Canada) as eligible to issue official donation receipts and receive funds from registered charities. Examples include:
• Other registered charities
• Canadian municipalities
• Universities outside Canada registered with the CRA
• The Government of Canada or provincial governments
In contrast, a non-qualified donee is any organization or individual that does not fall into these categories. This often includes non-Canadian charities, grassroots organizations, or private groups without registered charitable status in Canada.
The Traditional Requirement: Direction and Control
Historically, Canadian charity law required registered charities to maintain direction and control over any funds they disburse to non-qualified donees. Under this framework:
• The charity must demonstrate that funds are being used for exclusively charitable purposes.
• The charity must exercise ongoing control over how funds are spent, often through detailed agreements, reporting requirements, and oversight mechanisms.
While intended to prevent misuse of charitable funds, this approach has been criticized for being overly burdensome and inconsistent with international funding practices. It often limited partnerships with community-led organizations that were better positioned to deliver impactful programs.
Bill C-19 and the New “Resource Accountability” Model
In 2022, the Canadian government introduced legislative changes under Bill C-19, shifting from a strict “direction and control” model to a more flexible “resource accountability” framework. Under the revised rules:
• Charities can make grants to non-qualified donees without retaining full direction and control, provided they meet specific accountability standards.
• The charity must ensure that funds are used for charitable purposes through written agreements and due diligence processes, but the donee organization retains greater autonomy in implementation.
This change aligns Canada’s charitable sector more closely with international norms and promotes equity in global partnerships.
Requirements for Granting to Non-Qualified Donees
Under the new rules, charities must take reasonable steps to ensure funds are used for charitable purposes. These steps include:
1. Written Agreements: A formal agreement outlining the charitable purpose of the grant and the terms of use.
2. Monitoring and Oversight: Proportional to the size and risk of the grant, monitoring should confirm compliance with the agreement.
3. Documentation: Maintaining records of due diligence, agreements, and reports for CRA review.
4. Public Disclosure: Charities must report grants to non-qualified donees in their annual filings.
Benefits and Challenges
Benefits:
• Encourages partnerships with diverse organizations, especially those without the capacity to register as charities.
• Reduces administrative burdens associated with direction and control requirements.
• Promotes more effective delivery of charitable programs by leveraging the expertise of local or grassroots organizations.
Challenges:
• Increased accountability requirements may still deter smaller charities with limited resources.
• Uncertainty about CRA’s interpretation and enforcement of the new rules.
• Balancing flexibility with compliance remains a nuanced process.
Best Practices for Charities
To effectively and lawfully grant funds to non-qualified donees, registered charities should:
• Develop Clear Policies: Outline internal processes for granting to non-qualified donees, including criteria for selecting partners.
• Conduct Due Diligence: Evaluate the non-qualified donee’s capacity, reputation, and alignment with the charity’s mission.
• Establish Robust Agreements: Clearly define the charitable purpose, reporting expectations, and use of funds in legally enforceable terms.
• Invest in Monitoring: Proportional oversight ensures funds are used appropriately while fostering trust with partners.
Conclusion
The ability to make grants to non-qualified donees under the new resource accountability model marks a significant evolution in Canadian charity law. While it presents new opportunities for partnerships and impact, it also requires careful navigation to comply with the CRA’s requirements. By adopting best practices and remaining diligent in their operations, Canadian charities can expand their reach and effectiveness while adhering to their legal obligations.
This shift represents a progressive step toward a more inclusive and impactful charitable sector, enabling Canadian charities to collaborate with a broader range of organizations and address global challenges more effectively.