Registered charities making grants to non-qualified donees (draft)

Guidance

Reference number
CG-032

Issued
November 30, 2022

1.0 Introduction

1. Before the enactment of amendments to the Income Tax Act proposed in Budget 2022,^{Footnote 1} registered charities that wanted to work through a non-qualified donee^{Footnote 2} could only do this in one way. Charities had to show that the activities were their own, demonstrated by maintaining ongoing direction and control over the use of their resources. 

2. The Income Tax Act was amended in 2022 to provide another way for charities to work with non-qualified donees: by making grants. With this change, charities can support the activities of non-qualified donees (grantees), provided charities can show that they meet accountability requirements set out below. 

3. This guidance focuses on making grants to grantees. It aims to balance the Canada Revenue Agency’s (CRA) role of overseeing the use of tax-assisted resources with the charitable sector’s need for accountability tools that are reasonable and flexible.

1.1 Definitions

4.    In this guidance, unless otherwise stated:

• “charity” includes all three types of registered charities: charitable organizations, public foundations, and private foundations.^{Footnote 3} The term “charity” also includes applicants for registration. 
• “grant” refers to transfers of both monetary and non-monetary resources, or otherwise making resources available, to a non-qualified donee (grantee).
• “grantee” is a non-qualified donee and is defined in the Income Tax Act to include “a person, club, society, association or organization or prescribed entity, but does not include a qualified donee”.^{Footnote 4} A grantee is an individual or organization that the charity works with to further its charitable purposes.

2.0 General requirements for a charity

2.1 Purposes and activities

5. To be registered as a charity under the Income Tax Act, an organization must be constituted and operated exclusively for charitable purposes.^{Footnote 6}  An organization must meet two basic requirements:^{Footnote 7}

• Its purposes^{Footnote 8} must be exclusively charitable and define the scope of the activities it may carry out.
• All of its resources must be devoted to activities that further its purposes.

6. A charity's resources include all its physical and financial resources.^{Footnote 9}

7. Purposes (or “objects”) are an organization’s goals or objectives. Each must be clearly stated in an organization’s governing document. For more information, see Guidance CG-019, How to draft purposes for charitable registration. We rely on the common law (case law or court decisions) to determine when purposes are charitable and whether the activities further the charitable purposes.

2.2 Public benefit test

8. To be considered charitable, a charity must meet the “public benefit” test. This means that a charity must deliver a measurable and socially useful benefit to the public or a sufficient section of the public. It also means that a charity must not deliver a more than incidental private benefit.^{Footnote 10} A private benefit is incidental when it is necessary, reasonable, and proportionate to the resulting public benefit. 

9. Public benefit requirements apply when a charity makes a grant. 

10. For more information about public benefit, see Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.

3.0 How can a charity operate?

11.  The Income Tax Act allows a registered charity to operate in the following ways:

• carrying on its own charitable activities through:
  • its staff and volunteers
  • an intermediary (over which a charity must exercise direction and control)
• making qualifying disbursements through:
  • gifts to qualified donees
  • grants to non-qualified donees (a charity must meet accountability requirements) 

12. Under the Income Tax Act, a charity continues to be able to carry on activities using an “intermediary”, provided the charity exercises “direction and control”. For more information about working through an intermediary to carry on charitable activities, see Guidance CG-002, Canadian registered charities carrying on activities outside Canada and Guidance CG-004, Using an intermediary to carry on a charity's activities within Canada.

13. A charity can also operate by making a qualifying disbursement through either a gift to a qualified donee or a grant to a grantee. A grant includes both monetary and non-monetary resources. A charity’s resources include all its physical and financial resources. For example, this includes its staff, intellectual property, and real property.

14. When a charity intends to work with another organization, it should consider at the outset whether it will do this through a grant to a grantee, a gift to a qualified donee, or by carrying on its own activities through an intermediary. This decision rests with the charity. The charity can determine what is most appropriate in the circumstances, based on the information and recommendations set out in the relevant guidance. A charity should clearly show which approach it has taken in its books and records. 

15. The CRA recognizes that a charity’s relationship with a non-qualified donee may evolve, and the charity can convert its relationship with the non-qualified donee (for example, from an intermediary to grantee relationship). A charity should document this change in its books and records and must meet all requirements at the time of the change. 

4.0 Making grants to grantees: the Income Tax Act accountability requirements

16. A charity meets the Income Tax Act’s definition of a “qualifying disbursement” to a “grantee organization” if:^{Footnote 11} 

1. the disbursement is in furtherance of a charitable purpose … of the charity,
2. the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and
3. the charity maintains documentation sufficient to demonstrate
   1. the purpose for which the disbursement is made, and
   2. that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity …

17. This means that under the Income Tax Act a charity can make a grant to a grantee if the charity ensures and demonstrates in its books and records that it meets these accountability requirements.

5.0 The grant-making process

18. The CRA tries to adopt a reasonable and flexible approach when determining whether a charity has met the accountability requirements. This guidance focuses on the accountability “tools” that we recommend a charity use to minimize risk and meet the requirements.

19. The accountability tools include:

• a due diligence review of the grantee, which does not necessarily apply to existing relationships
• a description of grant activity, including its intended outcome and charitable purpose
• a written agreement, including minimum standards, milestones, outcomes, and budgets
• monitoring and reporting, including final reports, and interim reports if suitable 
• a transfer schedule, for longer-term or higher-risk grants
• separately tracked funds, such as a separate ledger

20. The accountability tools are described in detail in section 5.3 below. These tools are not exhaustive and their suitability depends on the circumstances of individual grants. If a charity chooses other tools, it can explain the rationale for their use in its books and records.

21. This is the process we recommend a charity follow when making a grant:

1. Establish how the grant furthers the charity’s charitable purposes.
2. Assess the grant’s overall risk level: high, medium, or low risk.
3. Consider the accountability tools the CRA recommends the charity implement, based on the grant’s risk level.
4. Determine how to apply the accountability tools to mitigate risk and meet the accountability requirements.

22. This process is described in detail in sections 5.1, 5.2, and 5.3 below.

23. There may be other ways for a charity to demonstrate accountability. Ultimately, the charity is responsible to ensure it meets the legislative requirements.

24. We understand that charities may need to devote reasonable expenses to administer and manage the grant.^{Footnote 12} The CRA considers these to be necessary and important.

5.1 Meeting the accountability requirements: assessing risk

25. A charity should assess the level of risk at the outset of the grant. The matrix below is a guideline to explain the non-exhaustive risk factors a charity should consider. A charity should weigh the significance of each risk in deciding the grant’s overall risk level and response. For example, two minor medium risks with five low risks may still constitute a low-risk grant. 

26. If there is a significant change in grant conditions, the charity should assess whether the grant’s overall risk level has changed, and whether it is appropriate to work with the grantee to adjust the grant’s terms. For more information, see Appendix A. 

5.2 Meeting the requirements: accountability tools to combat risk

27. “Accountability tools” are ways a charity can mitigate risk and meet the grant requirements. Depending on the grant’s risk level, the CRA recommends using the accountability tools identified in the table below, as applicable.^{Footnote 17} 

5.3 Meeting the requirements: applying the accountability tools

28. This section explains how accountability tools support a charity when it makes a grant, as well as how to apply each tool. 

29.  In addition to risk considerations, the charity should collaborate with the grantee to determine what tools are appropriate in the circumstances.

5.3.1 Due diligence review

30. Learning about a grantee before giving them a grant helps a charity manage risk to ensure the intended purpose of the grant is achieved. This due diligence review allows a charity to determine at the outset whether a grantee is a suitable grant recipient. It also helps to establish rapport and provides a clearer view into the grantee’s operations.

31.  As part of the due diligence review, a charity should assess and document information about the grantee, such as:

• purposes and mission
• programs
• history
• reputation
• staff
• volunteers
• associated individuals or entities
• experience and capacity to carry on the grant activity (for example, personnel and equipment)
• potential use of the charity's resources

32. The review can take many forms, such as:

• independent research
• in-person visits
• virtual meetings
• requesting information from the grantee, such as governance documents and website links related to the grant activities
• reviewing the outcome of past grants
• letter of reference or support

33.  The charity must ensure that its resources are properly applied, but the grantee applies the resources without direction and control from the charity. So, it is in the charity’s best interest to consider whether the grantee will be able to fulfil the grant’s terms. The CRA recommends that a charity perform its due diligence on every grantee before giving them a grant. If a charity has already formed a successful working relationship with a grantee, the review may not need to be extensive. 

34. There may be other reasons why it is not feasible to conduct extensive due diligence. For example, in an emergency relief situation, a charity may not have the time required to conduct a significant due diligence review. Or, if the grantee is a new organization, it may not be possible for the charity to review the grantee’s experience and reputation. In cases like these, a charity may wish to consult with experts, community leaders, or other charities about risk in these circumstances. The charity should document the measures taken in its books and records. A charity may also determine it is more appropriate in the circumstances to carry on its own activities through an intermediary by exercising direction and control.^{Footnote 18}

35. If concerns about the grantee arise, the charity should consider not making the grant, or it should document in its books and records how it intends to address these concerns.

5.3.2 Description of activity

36. Reviewing and documenting the grant activity with the grantee helps to manage risk. Creating a detailed description allows the charity and grantee to collaborate and agree on a shared understanding of the grant’s terms. Including this description in a written agreement provides documentation to refer back to.

37. Here are some considerations:

• charitable activity and the charitable purpose it furthers
• location of grant operations
• start and end dates, and other relevant timelines
• public benefit, and ways to address any unacceptable private benefit 
• deliverables and performance objectives
• partners, contractors, and third parties the grantee intends to use to carry out the grant activity
• accountability tools to satisfy the grant requirements

38. Working through these with the grantee helps a charity further identify the grant’s risk level and corresponding accountability tools.

5.3.3 Written agreement

39. A charity can also mitigate risk by formally settling on the grant’s terms and conditions with the grantee.

40. Creating a written agreement:

• documents the grant, including its charitable purpose and budget
• clarifies expectations, including roles and responsibilities
• confirms the grant terms and conditions
• keeps grant arrangements on track

41. The CRA does not provide a template for written agreements. For a list of the information that could be included in a grant agreement, see Appendix B.

42. A charity is required to maintain grant documentation, including documenting the purpose for which the grant is made. The CRA recommends that a charity enter into a written agreement for every grant.

43. A written agreement may not be necessary for non-recurring grants of $5,000 or less. Also, other documentation may be enough to satisfy the requirements in very low risk circumstances. This documentation could include written communications, email records, and meeting minutes.

44. If a charity expects to make ongoing grants of $5,000 or less to a grantee, annually for example, the CRA recommends the charity have a written agreement with the grantee.

45. There may be other reasons a written agreement is not feasible in the circumstances. If this is the case, the charity should explain why in its books and records and maintain other sufficient documentation. A charity may wish to consult experts or obtain legal advice on what other documentation may be appropriate.

46. When an applicant for charitable registration intends to make grants, it should include with its application a copy of any existing written agreements and a template for future written agreements. This helps the CRA to assess whether the applicant can satisfy the accountability requirements.

47. The CRA recommends that a charity have a system in place to periodically review its granting practices, including the written agreements, to make sure they stay current.

5.3.4 Monitoring and reporting

48. Monitoring and reporting help a charity manage risk by tracking whether the grantee is using the resources as set out in the agreement. 

49. Some examples of monitoring include:

• final reports with supporting documentation 
• interim reports, if appropriate
• expense receipts and financial statements, including bank records
• records of communication by telephone, videoconference, or email
• photographs or videos
• audit reports
• on-site visits from the charity's staff

50. The CRA recommends that every grant require a final written report from the grantee, along with supporting documentation, if appropriate. The charity should document in its books and records that it has reviewed the final report and is satisfied that no further action is required. The CRA also recommends requiring interim reports for longer term and higher risk grants.

51. If requiring a written final report with supporting documentation is not appropriate in the circumstances, a charity may wish to consult experts or obtain legal advice to determine what alternative documentation would be suitable. The charity should document its reasons in its books and records. 

5.3.5 Transfer schedule

52. In longer term or higher risk situations, a charity should consider transferring resources in periodic instalments, rather than in one lump sum. This helps a charity to mitigate any losses if resources are not applied according to the agreement. In these circumstances, a charity should document in its books and records why it chose not to implement a transfer schedule.

53. A charity should include in the written agreement the right to terminate the grant and have the grantee return any unused resources.

5.3.6 Separately tracked funds

54. Asking the grantee to track the charity’s funds is an accountability tool that will help both the grantee and charity properly document the use of resources. Tracking does not mean that the grantee needs to maintain separate books and records or a separate bank account in respect of the grant. 

55. During the description of activity and written agreement stages, a charity should request that the:

• grantee’s books and records contain enough detail to allow it to track the use of grant funds and report back to the charity
• grantee track each grant separately from its other funds in its books and records, if feasible

56. If a grantee is unable to do this, a charity should document in its books and records how it will mitigate any related risks. 

6.0 Keeping books and records

57. Under the Income Tax Act, a charity must keep adequate books and records in Canada, containing enough information to allow the CRA to determine whether the charity is operating in accordance with the Income Tax Act.^{Footnote 19}

58. With respect to grants, a charity’s books and records must allow the CRA to check whether:

• the charity’s grants meet the accountability requirements
• the grantee’s use of resources can be verified
• the grantee continues to use the grant’s resources on the purposes and activities set out in the grant’s terms 

59. A charity that fails to keep adequate books and records risks sanctions under the Income Tax Act, such as suspension of receipting privileges or revocation of its registration.^{Footnote 20}

60. For more information, go to Books and records.

6.1 Supporting documents

61. The charity should be able to obtain from the grantee any grant documents in original or electronic format, such as a photocopy, scanned document, or photograph. 

7.0 Special topics

7.1 Grants inside and outside Canada

62. A charity can carry on its own activities both inside and outside Canada. Similarly, it can make grants to grantees that operate both inside and outside Canada. 

63. A charity’s purposes and activities must always comply with Canadian law. Before making grants to grantees operating outside Canada, a charity should become aware of local laws where the grant activities will take place, and how they would affect the grant. This will help a charity make sure the public benefit provided by the grant is not offset by harm to the grantee, the grant's beneficiaries, or anyone else.

64. Under Canadian law, most activities that are charitable in Canada are also charitable abroad. However, the courts have stated that some activities that are charitable in Canada may not be considered charitable under Canadian law if carried out in a different country. For example, it is charitable to make a grant that would increase the effectiveness and efficiency of Canada's armed forces, but it is not charitable under Canadian law to make a grant that would support the armed forces of another country.

65. Whether grant activities take place inside or outside Canada, they must not be contrary to officially declared and implemented Canadian public policy. For example, see CSP-P13, Public policy, and see anti-terrorism considerations in section 7.2 below.

7.2 Grants and anti-terrorism considerations

66. A charity is responsible for making sure that it does not support terrorist activities, including by making a grant to an individual or group that is engaged in or supports terrorist activities.

67. For more information about a charity’s responsibilities with respect to terrorism, go to Checklist for charities on avoiding terrorist abuse.

68. Under the Charities Registration (Security Information) Act and the Income Tax Act, a charity's registration may be revoked if the charity makes its resources available, either directly or indirectly, to a listed entity, as defined in subsection 83.01(1) of the Criminal Code, or to any other entity (person, group, trust, partnership, or fund, or an unincorporated association or organization) that engages in terrorist activities or activities in support of them.

69. Any charity making a grant to a grantee that is listed as a terrorist organization will lose its charitable registration. The Income Tax Act also prevents individuals with a known history of supporting terrorism from becoming a director, trustee, or similar official of a charity.^{Footnote 21}

70. Charities are also subject to prohibitions on funding or otherwise facilitating terrorism, as contained in the Criminal Code and various regulations enacted under the United Nations Act. For more information, go to Charities in the international context.

7.3 Qualifying disbursement limit – charitable organizations

71. The Income Tax Act requires that a charity that is designated as a “charitable organization” disburse no more than 50% of its income by way of gifts to qualified donees; otherwise, it may be re designated as a public foundation.^{Footnote 22}  There is no such limit on how much of its income a charitable organization may devote to making grants to grantees (non-qualified donees). Making grants to grantees will not affect the designation of a charitable organization.

7.4 Directed donations and acting as a conduit

72. The Income Tax Act stipulates that a charity should not accept a gift that is expressly or implicitly conditional on the charity granting it over to a specific recipient, other than a qualified donee.^{Footnote 23}

73. To avoid any concerns regarding conditional gifts, a charity should clearly communicate the following to its donors: 

• Donors can indicate their program preference for how a charity will apply their donation, but ultimate authority on the use of resources must rest with the charity. 
• If the charity does not use the donation the way the donors prefer, the charity will not return the donation to the donors.

74. For example, this message should be included on the giving page of the charity’s website and in any of its fundraising communications. 

75. Provided a charity ensures it retains authority on the use of its resources, it will not be considered to be engaged in directed giving.

76. This provision is also intended to prevent a charity from acting as a conduit, which can be implicitly or expressly conditional when a donor makes a gift. For example, it will prevent situations where a charity solely exists as a fundraising arm in Canada of an affiliate organization in another country. In these circumstances, the affiliate would make all decisions around the use of resources, and the Canadian charity would not be in a position to act independently.

7.5 Reporting grants

77. The Income Tax Regulations were amended in 2022 to provide:^{Footnote 24}

For the purpose of subsection 149.‍1(14) of the Act, the following is prescribed information for the public information return of a charity in a taxation year:

1. in respect of each grantee organization that received total qualifying disbursements from the charity in excess of $5,000 in the taxation year, the name of the grantee organization
2. the purpose of each qualifying disbursement made to a grantee organization referred to in paragraph (a) in the taxation year
3. the total amount disbursed by the charity to each grantee organization referred to in paragraph (a) in the taxation year

78. This means that if a charity disburses a total of more than $5,000 to a grantee in a taxation year, whether in single or multiple grants, the charity must report all of the following for each applicable grantee:

• the name of the grantee
• the purpose of each grant made to the grantee
• the total amount granted to the grantee in the taxation year

79. This reporting requirement applies to grantees who operate both inside and outside Canada.

80. A charity can apply to the CRA to make a special request that certain information not be made available to the public if its release would place the charity, grantee, their staff, or volunteers in danger. 

7.6 Revocation

81. If the charity cannot meet the accountability requirements in the Income Tax Act, it may be subject to revocation of registration.^{Footnote 25}

7.7 Pooled grants

82. A charity may wish to “pool” its resources with multiple organizations (other grantors) when it makes a grant. The CRA recognizes that joint initiatives such as pooled grants operate differently than one-on-one granting arrangements. While the CRA prefers that a written agreement be in place with all parties when charities engage in pooled grants, we recognize this may not always be feasible or practical. With pooled grants, the CRA’s requirements focus on the charity implementing the following accountability tools:

83. These accountability tools allow a charity to show that it made a responsible grant that was carefully considered and resulted in the furtherance of the charity’s charitable purpose.

84. In addition to the risk factors identified in section 5.1 above, there are unique risk factors when charities pool resources for grants. The higher the risk, the more fully documented the grant should be. Higher risk situations include when the:

• grantors are made up predominantly of non-charitable organizations
• charity grants real property when pooling grants
• grantee has never been the recipient of pooled grants before
• number of grantors is large
• purpose of the pooled grant is a mix of both charitable and non-charitable purposes

85. If it is not possible to apply the accountability tools, the CRA recommends approaching pooled grants cautiously. A charity may wish to consult experts or obtain legal advice before entering into pooled grant arrangements.

7.8 Granting charitable goods

86. If a charity is transferring charitable goods only, this is considered a low-risk activity, and the recommended accountability tools are provided in the table below. To be considered charitable goods, the resources being transferred could only reasonably be used for charitable purposes. For example, medical supplies like antibiotics and instruments will likely only be used to treat the sick, while school supplies like textbooks will likely only be used to advance education.

7.9 Granting real property to a grantee or another non-qualified donee

87. A charity may wish to grant real property to a grantee, which the grantee may then transfer to another non-qualified donee. In most situations, a charity is not permitted to transfer ownership of real property to a non-qualified donee, including a local organization or government body. This is because the land and buildings might be used for non-charitable purposes. However, a transfer of real property might be acceptable as a grant to a grantee if the charity follows all granting requirements and uses the appropriate accountability tools.

88. Granting real property is considered high risk, as it is difficult for the charity to ensure the property will continue to be used for the charity’s charitable purposes once it is granted. The charity should assess the risk that its real property might be used inappropriately. If the risk of inappropriate use is greater than the benefit that may be provided, the charity should not grant real property. Before a charity grants any real property, we recommend contacting the Charities Directorate to discuss available options.

7.10 Information for organizations that want to carry on disaster or emergency relief

89. After a disaster or other emergency, such as an earthquake or flood, organizations often want to provide assistance. In order to help those affected, registered charities may need to amend their charitable purposes to provide disaster relief. Also, non-registered organizations may want to apply for charitable status.

90. Because the situation is usually urgent, the CRA typically assigns priority to these files. However, disaster or emergency relief organizations must still meet all legal requirements. For example, an applicant wishing to make grants should be able to show the CRA that it can satisfy the accountability requirements. Given these pressing circumstances, the CRA will make every effort to be flexible and accommodating within the limits of the law.

91. Applying for registered charity status may not be the most suitable path for a non-registered organization. However, it may be eligible to receive a grant from an existing registered charity to carry on disaster relief.

92. After a disaster or other emergency, local authorities may only grant access to well-established relief organizations. If an organization does not have a background in this type of work, it is often faster and more effective to support existing registered charities or other qualified donees that have the experience, resources, and infrastructure in place to respond. Registered charities can also provide grants to established and capable non-qualified donees. 

Appendix A – What are some examples of changes in a grant’s risk levels?

93. Some examples of increased risk could include:

• financial collapse in a country
• if the grantee’s reporting is low quality
• knowledge of a private benefit concern; for example, the charity learns from monitoring and reporting that the grantee is making profits from the grant activity, and not applying the profits to the charitable purposes of the grant
• change in the grantee’s leadership

94. Some examples of decreased risk could include:

• stabilization or peace established in a country 
• strong track record with a grantee, such as the grantee continues to meet workplans beyond expectations, or a charity establishes strong rapport with a grantee after working together for a considerable amount of time
• decreased value in the charitable resources; for example, it is no longer difficult to access the granted medication 

Appendix B – What could be included in a written agreement?

95. Depending on the nature and circumstances of the grant, a written agreement could include:

1. full legal names and physical addresses of the parties, where possible
2. the signature of directors, trustees, or like officials, authorized to receive the grant
3. the date the agreement was signed
4. a provision that clearly indicates the charity intends to make a grant (as opposed to carrying on its own activities through an intermediary) 
5. a description of the grant activity and the charitable purpose it furthers
6. the location of the activity
7. start and end dates 
8. timelines and frequency of written reports, including financial and progress reports (showing the receipt and disbursement of resources, and progress of the grant activity)
9. a confirmation of the right to inspect the grant activity with reasonable notice, if suitable
10. provisions for transferring resources in periodic instalments based on demonstrated completion, as well as for withholding resources, terminating the grant, and returning unused resources when required (for example, if the charity has concerns, such as the grantee’s failure to apply the grant resources to the charity’s charitable purposes), as appropriate
11. a requirement for the grantee’s books and records to be sufficiently detailed to allow it to track the use of grant funds and provide an accounting to the charity in its reporting; and track each grant separately from its other funds in its books and records 
12. a provision that any resources transferred to the grantee will continue to be used only for charitable purposes in the future
13. effective date and termination provisions