Fundraising ratio; CRA evaluation of fundraising activities; Allocation procedures; Best practices - Segment 6
Alright, and now we're going to move to the next slide, which is "Section G: The Fundraising Ratio." Probably the area of the original version of the guidance, the CRA received the most feedback on during the review period is the fundraising ratio. This is a charity's fundraising costs divided by its revenue and expressed as a percentage. As a rule, the higher the percentage, and particularly when the percentage is above 35%, the more likely it is the CRA will ask questions about a charity's fundraising activities. However, the fundraising ratio is not a tool for assessing a charity's overall effectiveness in carrying out its charitable activities. The fundraising ratio was developed as a self- assessment tool to give a quick gauge of whether or not the CRA is going to be concerned about a charity's fundraising practices. While a high fundraising ratio might be an indicator of fundraising as a collateral purpose or unacceptable private benefit, it is only one indicator among many. It is the particular circumstances and activities of a charity that will determine whether it is carrying out any unacceptable fundraising activities. You might recall the second example in the collateral purposes part of this webinar. In that example a charity had a fundraising activity that was only a small fraction of the charity's work. In that case, the fundraising ratio—excuse me, the charity had a fundraising activity with a very high fundraising ratio, but the fundraising activity was only a small fraction of the charity's work. In that case, the fundraising ratio alone does not tell the whole story.
Now we're going to move on to the next slide, "Section H: CRA Evaluation of Fundraising Activities." I want to mention Section H of the updated guidance briefly, which explains that when examining a charity's fundraising, the CRA will keep that organization's particular circumstances in mind. None of these factors would allow a charity to avoid the requirements of the Income Tax Act, but they may help a charity explain why a particular indicator does not, in fact, demonstrate that the charity is carrying out unacceptable fundraising. For example, donor acquisition activities tend to represent a long-term investment on the part of the charity, where they spend a larger amount to acquire new donors and then fundraising costs presumably decline as these donors continue to give over the years. In that case, a look at the single year of a charity may show that it has spent more on fundraising than on its charitable activities, but this may be offset by declining fundraising costs in later years. Similarly, a purely financial analysis of a charity's activities may not give the whole picture. A look at a charity's financial statements may seem to show a large amount of money being spent on fundraising, but the charity may have a large number of volunteers actually carrying out its activities.
Now we're going to move on to the next slide, "Appendix B: Allocation Procedures." Charities report their revenues and expenses, including fundraising expenses, on their annual form T3010. In most cases, the cost for a fundraising activity will be reported on line 5020. However, some activities may have more than one type of content. That is, they may fundraise for a charity, but also carry out another function such as furthering the charity's purposes. In these cases, a charity may be able to prorate its costs, putting the portion that represents fundraising on line 5020, and the remainder on the other corresponding lines. If a charity is going to prorate its costs, the CRA expects the charity to do so on a reasonable and consistent basis. The onus is on the charity to show how the expenses should be treated on its T3010. As an example of prorating, a charity that relieves conditions associated with a disability through an art therapy program might have an exhibition or a performance that features its artists. The event could raise funds for the charity, but also serve a therapeutic and therefore, charitable purpose. In this case, the charity could likely split the costs of the event between the fundraising and charitable expenditure lines. How much it expends to each category will depend on the facts of the case and how much weight each component has relative to the entire activity.
Now, here we're going to move on to the second slide on Appendix B, "Allocation." Although a charity may prorate some activities, the CRA considers certain other activities to always require a 100% allocation to fundraising on the T3010. This includes certain specific types of activities such as lotteries, bingos, telemarketing, golf tournaments, and so on, but it also includes activities where 90% or more of the content relates to fundraising. In this case, the charity must round up and report 100% as fundraising. The 90% rule also works in reverse. That is to say, if the charity carries out an activity where 90% of the content does not relate to fundraising, a charity does not have to report any of the costs as fundraising on its T3010. For example, the executive director of a charity gives a talk to a group of stakeholders. The talk is an hour, and 55 minutes of that talk is a charitable activity. The remaining five minutes of the activity is given over to a fundraising solicitation. In this case, because less than 10% of the activity is fundraising, the charity can essentially ignore the fundraising component and report 100% of the costs for the talk as a charitable activity. If those numbers were reversed so that it was 55 minutes of fundraising and 5 minutes of charitable activity, the charity would have to round up and report all of the costs as fundraising on its T3010.
Now we're going to move on to the next slide, "Appendix C: Best Practices." One of the last sections of the updated guidance, Appendix C, discusses fundraising best practices recommended by the CRA. The CRA cannot require a charity to adopt these best practices as they do not generally relate to a requirement of the Income Tax Act. However, they represent a way to minimize the risk of carrying out unacceptable fundraising. For example, a charity could: plan its fundraising activities in advance and evaluate their success afterwards; ensure they follow procedures to purchase supplies and hire staff only for market rates; carry out ongoing monitoring of their fundraising activities; keep detailed records of these fundraising activities; disclose as much information as possible to the public on their fundraising practices; and establish an internal policy that provides guidelines on how much money they should have in reserve.
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