If you are a Canadian registered charity, there are complex rules around the receipt and disbursement of property (e.g., gifts). This article covers the pitfalls and opportunities related to that property.
Introduction
Canadian registered charities conduct and facilitate essential community-sustaining and building efforts, both nationally and internationally. This requires the staff and directors of registered charities to have detailed operational knowledge and skills required to deliver charitable programs.
In addition to needing operational knowledge and skills, registered charities are subject to detailed and complex rules and regulations governing their activities, use of funds, and governance. Failure to comply with these rules and regulations can result in significant consequences, including the loss of a charity's status as a registered charity and its ability to issue donation receipts. Accordingly, in addition to needing operational knowledge and skills required to deliver charitable programs, registered charities must be aware of and comply with complex rules and regulations.
The following is a summary of select compliance issues that Canadian registered charities should be aware of to protect their registered status.
Gifting Limits
Registered charities often make gifts to other registered charities. Although this can assist charities in furthering their charitable objects, there are important restrictions on the amount of gifts that charitable organizations may make in a taxation year.
Charitable organizations may not make disbursements of income by way of gifts to other registered charities in excess of 50% of the income of the gifting charitable organization for that year. An exception to this restriction is when the gifting charitable organization and receiving registered charity have been designated as associated charities by the Minister.
Accordingly, when planning gifts to other registered charities, it should be determined whether this limitation would be exceeded. If so, the charity may need to consider whether to apply to have the relevant charities designated as associated charities.
Non-arm's Length Transfers
Many registered charities are components of larger charitable structures or work closely with other registered charities.
Suppose a charitable organization has received a gift of property (other than a designated gift) from another registered charity with which it does not deal at arm's length. In that case, it must expend the amount of that gift, in addition to its disbursement quota, on charitable activities carried on by it or by way of gifts that are qualifying disbursements to qualified donees or grantee organizations, with which it deals at arm's length, before the end of the next taxation year.
Determining whether two charities are at arm's length can be a complex analysis that often results in uncertainty. Accordingly, care should be taken when structuring the transfer of property from one charity to another.
Acting as a Conduit
Registered charities are not allowed to "act as conduits". Acting as a conduit can be broadly defined as funnelling resources to a non-qualified donee without direction or control.
An example of a charity acting as a conduit is when a charity is asked by a non-profit organization that is not a registered charity to accept donations on its behalf, issue receipts for those donations, and then forward the money to the non-profit organization without having direction and control over the money.
It is possible for charities to partner with non-profits that are not registered charities, including by using the non-profit as an intermediary. However, charities must be careful in structuring these arrangements so as not to act as conduits.
Gifts to Non-Qualified Persons
Registered charities may only expend their resources in two ways:
- on their own charitable activities, and
- on qualifying disbursements.
Accordingly, registered charities must carefully determine whether prospective giftees are eligible to receive the gift under applicable rules and regulations.
Acting Outside of Charitable Objects
Registered charities are required to devote all of their resources to their own charitable activities or to making qualifying disbursements. If a registered charity is a corporation, its charitable objects will be codified in its articles of incorporation.
Registered charities do not have the corporate capacity to act outside of the charitable objects codified in their articles of incorporation. Accordingly, even if an activity is altruistic or positive for a community, a registered charity may not engage in the activity if it falls outside the scope of its objects.
Conclusion
Navigating the rules and regulations applicable to Canadian registered charities can be a challenging and complex task.
McKercher has a team of experienced lawyers who assist registered charities in navigating key compliance issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
