Unacceptable fundraising: collateral purpose - Segment 2
Alright, now we're going to move on to the next slide, "Section F: When Is Fundraising Not Acceptable?" Section F of the updated guidance identifies five types of unacceptable fundraising. That is, fundraising that would violate the provisions of the Income Tax Act. From the CRA's perspective, this is very likely the most critical message in the guidance for any registered charity. If a charity does not carry out any of these types of unacceptable fundraising, its fundraising activities are very likely going to be acceptable to the CRA. Note that this does not mean that its fundraising will also automatically comply with any other regulatory bodies' requirements, such as a province's. A charity that did use its resources for any of these types of fundraising could be subject to compliance action. The CRA usually follows an "education–first" approach before moving on to more drastic measures. Although revocation is generally the last resort, the Income Tax Act allows revocation at any time when it is appropriate to the circumstances.
Now we're going to move on to the next slide, "Unacceptable Fundraising One: Collateral Purpose." In the view of the CRA, one of the most important points to make when discussing fundraising and registered charities is that fundraising must never be a purpose for a charity. Merely an activity that serves or supports its charitable purposes. That is, fundraising can only be a means to an end, not an end in itself. Charities must, of course, be registered for exclusively charitable purposes. The Income Tax Act does not define what is charitable, so the CRA looks to the common law or court cases for clarification on what is charitable. The Courts have identified four categories, or heads, of charity, and a charity's purposes must fall under at least one of these heads: relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community. This last category contains all the purposes the courts have decided is charitable but that do not fit under the other three heads. Examples include the promotion of health, relief of the aged, or relief of conditions associated with a disability. The CRA's position is that fundraising cannot be a charitable purpose. Therefore, if a charity begins fundraising to the extent that it becomes a purpose, the charity will have a non-charitable purpose and will not meet the requirement for registration of having exclusively charitable purposes.
Now we're going to move on to the next slide, "Purposes and Activities." I'd like to pause here and just explain that the words "purpose" and "activity" have a particular meaning for the CRA. The CRA considers a purpose to be the aim of an organization (what it was formed to accomplish), and an activity is how it accomplishes that purpose. To put this all into context, let's take the example of a food bank that is registered as a charity. The purpose of the food bank is feeding the impoverished, which would be a charitable purpose under the relief of poverty heading. The food bank's activities to achieve its purpose will include buying food, leasing a building, hiring staff and/or recruiting volunteers and so on. Under the Income Tax Act, the food bank can certainly use some of its resources to fundraise to buy food, maintain a building, and pay its staff, as long as the fundraising remains in the service of feeding the hungry. However, if the organization begins focusing on raising money to the point where it becomes as or more important than feeding the hungry, there's a good chance that it's adopted fundraising as a collateral purpose.
We're going to move on to the next slide, "Section G: Indicators of Fundraising as a Collateral Purpose." So, what are the signs a charity might be putting fundraising ahead of its charitable purposes? When reviewing a charity's fundraising activities, the CRA looks for several indicators that a charity is carrying out unacceptable fundraising. Section G of the updated guidance lists many examples of these types of indicators. The presence of an indicator does not always mean the charity is not complying with the Income Tax Act. A charity may be able to provide a reasonable explanation. However, without a reasonable explanation, the CRA will likely consider the charity to be carrying out unacceptable fundraising. One indicator that a charity has adopted fundraising as a collateral purpose is if it raises funds without any identifiable use or need for the proceeds. A charity can certainly fundraise for its regular operations or for special projects it intends to undertake. What the CRA is concerned about is a charity that fundraises simply because it has the opportunity to do so without any plan or use for that money. There's also considerable concern on the part of the CRA when a charity devotes more of its resources on its fundraising than it does on its charitable programs. The CRA generally considers devoting this much of a charity's resources to fundraising to be a strong indicator the charity has adopted fundraising as a purpose.
Now we're going to move on to a "Scenario One." This slide shows a scenario that illustrates what we mean when we discuss fundraising as a collateral purpose. Specifically, we have a situation where a charity has a single fundraising event every year which is the sole source of its revenue. The charity spends the large majority of its funds on carrying out the fundraiser and only a relatively small portion of the funds on its charitable programs. In this case, the CRA would likely consider the charity to have adopted fundraising as a collateral purpose, even though carrying out this fundraising activity has some advantages for the charity such as its being a well-established event with good participation from the community, the amount of resources devoted to the event compared to the charity's charitable purposes makes it difficult to say it is operating for exclusively charitable purposes.
Now we're going to move on to the next slide, "Scenario Two." Here is another scenario where a charity is spending a large amount on a fundraising event. The charity does spend most of its government funding on its charitable programs, but it also has one inefficient fundraiser. In this case the CRA would likely not consider the charity to have adopted fundraising as a collateral purpose. Even though the fundraiser is far from efficient, it represents only a very small portion of what the charity does. The overwhelming majority of the charity's resources are spent on its charitable activities, so it would be extremely difficult to say that it has adopted fund raising as a purpose. This is not to say the event is guaranteed to be acceptable in all respects. There may be another problem with the event. For example, it might simply be a lavish party for the directors of the charity. However, it is unlikely to be considered by the CRA to be a collateral purpose.
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