Unacceptable fundraising: excessive private benefit - Segment 3
Now we're going to move on to the next slide, which is "Unacceptable Fundraising Two: Excessive Private Benefit." A charity must be careful about providing what the CRA calls "private benefit." Generally, providing private benefit means that a charity has used its resources for the personal, that is, private benefit of a person or company. To be eligible for registration under the Income Tax Act, charities must serve the public benefit. That is, they must use their resources to benefit the public, or a sufficient segment of it. Naturally a charity that focuses on providing private benefit will not meet this requirement, and will not be eligible for registration. Now, I have to clarify a few points about private benefit. First, providing private benefit is not the same as a charity using its resources to help someone who is the proper recipient of charitable aid. For example, if a charity were registered to relieve sickness and it gave medicine to a sick person, the CRA does not consider this to be a private benefit. The charity is simply carrying out its charitable activities. However, if a charity gives more of its resources to a charitable beneficiary than is actually necessary, this can become unacceptable private benefit. For example, if the charity from the previous example gave a sick person medicine but also a gift of money even though that person is not poor, that gift of money would likely be considered an unacceptable private benefit.
Now we're going to move on to the next slides, incidental private benefit can be acceptable. I also want to clarify that it's important to distinguish between excessive or unacceptable private benefit and incidental or acceptable private benefit. While the CRA wants charities to be very careful any time they're providing private benefit, providing private benefit will generally be acceptable when it's merely an incidental by-product of a charity's activities. In this case, incidental means necessary, reasonable, and proportionate. For example, a charity might buy fundraising supplies from a store. The store's profit from the sale is a private benefit. But assuming the charity plays market rates for supplies, the private benefit will probably be an incidental by-product of the charity's fundraising activities and therefore, acceptable.
Now we're going to move on to "Section G: Indicators of Unacceptable Private Benefit." When looking for indicators of providing unacceptable private benefit, the CRA would obviously be very concerned if a charity paid more than market rates for fundraising goods or services, including salaries of its fundraising staff. It's possible there may be a good explanation for paying above market rate, such as paying a premium for a particularly experienced and knowledgeable fundraising professional, but this will tend to be cause for concern. As a rule, it's the CRA's expectation that a charity will seek to minimize its fundraising costs. If a charity needs to contract with a third party for fundraising goods and services, calling for bids is often a good way to keep costs down. If a charity were not calling for bids, in this kind of circumstance, we're only permitting one person or company to submit a bid, this could be an indicator that the charity is providing unacceptable private benefit. If a charity is using a non-arm's length supplier for fundraising activities, like a business owned by the relative of one of the charity's directors, the CRA would expect there is a good reason for selecting this business. Otherwise, this could be an indicator that the charity is providing unacceptable private benefit.
Now I'm going to move on to the next slide scenario. In this case, we have an organization that is applying for registration and has made it clear it intends to hire the company of one of its own directors to carry out its fundraising. This is not necessarily offside in all cases, but the applicant will have to provide a clear justification for choosing the director's company for the private benefit to be acceptable. For example, it's possible the director may be providing her company services at cost so that there's no profit, or for no charge at all. In this case, hiring the company is likely acceptable. If the applicant cannot justify hiring the director's company, then the CRA will likely not consider the private benefit to be incidental in this case and it will, therefore, not be acceptable.
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